Feeling optimistic: Monetary Authority Deputy Chief Executive William Ryback is optimistic about the banking sector's outlook for 2004.

Local banks are generally optimistic about the outlook for 2004, the Monetary Authority says, adding that a mild increase in profits and an improvement in asset quality is expected.

Authority Deputy Chief Executive William Ryback said classified loans might fall to below 4% of total loans in the coming year.

He said banks also expect to see mild growth in their loan books on account of business opportunities brought by CEPA, Mainland visitors and the launch of renminbi business in Hong Kong.

"While the prospects for the economy suggest a more favourable economic environment for the banks, several other factors, such as increasing competition and uncertainty over interest rates, suggest that the operating environment will remain challenging," he said.

Outlining the authority's job priorities in 2004, Mr Ryback said it will continue its close monitoring of authorised institutions' financial position and performance as well as enhancing its regulatory framework.

"We will further refine our risk-based approach and continue to increase the focus on non-banking risks, for example, securities, insurance," he said.

"A memorandum of understanding has been signed with the Insurance Authority and we will conduct reviews to ensure that proper internal controls are in place. We will also focus on private banking activities and work with the industry on the development of contingency plans."

On personal renminbi business, the authority will monitor developments closely and take necessary action to ensure that banks have appropriate procedures in place.

Other major tasks include:

* further enhancing prudential guidelines in respect of major risk areas;

* putting more focus on institutions' management of their interest rate and market risks;

* improving the e-banking and technology risk supervisory framework and to work with Police and the industry to counter e-banking fraud;

* ensuring the initiatives on the Commercial Credit Reference Agency and the use of positive (personal) credit data progress satisfactorily;

* taking forward the initiative to establish a Deposit Protection Scheme;

* finalising its Anti-Money Laundering & Terrorist Financing Supplement and Interpretative Notes; and,

* continuing with the preparatory work for the implementation of 'Basel II' in Hong Kong.

Notwithstanding the impact of SARS in the second quarter, the authority said local banks performed quite well in 2003.

"Most recorded a positive growth in their profit after tax compared with 2002. This was mainly due to improved asset quality and increased investment income," Mr Ryback said.

The sector's customer deposits grew strongly (an increase of 7.5% in 2003 cf. -2.6% in 2002). Loans and advances to customers inside Hong Kong continued to contract, but by less than in 2002 (a decline of 1.3% in 2003 cf. 2.4% in 2002).

The amounts outstanding of both residential mortgage lending and credit card lending fell between December 2002 and September 2003 (by 2.5% and 8% respectively). However, new residential mortgage lending picked up towards the end of the year.

The net interest margin contracted to 1.89% (Q3 2003 annualised) from more than 2% in 2002.