“The change in outlook reflects Moody’s concerns over persistent negative real interest rates and potential property bubbles in the territory, and banks’ growing exposures to Mainland China, all of which may contribute to adverse future operating conditions for Hong Kong banks,” said the ratings agency in a statement.
While Moody’s noted Hong Kong banks are sufficiently liquid and well-capitalized, conditions the agency expects will persist, the firm highlighted the growing mainland China exposure of Hong Kong banks along with soaring property prices in Hong Kong.
“Residential, commercial, and industrial property prices in Hong Kong have all more than doubled since 2009 and are currently at historically high levels. There is growing integration between Hong Kong’s economy with that of the Mainland. While the economic integration creates business opportunities for banks and their customers, it also entails risks,” said Moody’s.
Making the outlook all the more murky for EWH is Moody’s prediction that bad loans at Hong Kong banks will rise and that the territory’s peg to the U.S. dollar is “is likely to be one trigger for a cyclical deterioration in asset quality.”
EWH is not the only Hong Kong ETF that could be bit by slumping bank shares. The iShares MSCI Hong Kong Small Cap Index Fund (NYSEArca: EWHS) has an almost 21.2% weight to the financial services sector.
iShares MSCI Hong Kong Index Fund
ETF Trends editorial team contributed to this post.