Difficult time: Monetary Authority Deputy Chief Executive YK Choi (second right) urges prudent banking and investing in 2010.

Monetary Authority Deputy Chief Executive YK Choi says although financial markets are stabilising, the banking sector's operating environment will remain difficult in 2010.

He today said the timing in the exit of quantitative easing strategies adopted by major economies is one of the major uncertainties. Funds flow might also increase market volatility and the risk of asset bubbles.

He reminded banks to be vigilant in risk management and they should maintain adequate capital and liquidity to cater for potential market volatility. Due consideration should be given to the impact of a reverse of funds inflow and interest movement.

Investors should beware of the highly uncertain market environment in making investment decisions while homebuyers should consider their loan repayment affordability if the current interest rate returns to a normal level.

Banking sectors' performance

The pre-tax operating profit of retail banks dropped 9.7% in this year's first three quarters compared with the same period last year. The net interest margin of retail banks narrowed to 1.5% in the first three quarters compared to 1.84% in 2008 - an historically thin level.

The capital adequacy ratio rose notably from 14.7% at end-2008 to 16.6% at end-September 2009. The liquidity ratio rose from 45% in 2008 to 47.5% in this year's third quarter.

The loan-to-deposit ratio for the Hong Kong dollar dropped from 69.4% in 2008 to 62.7% in October. Deposits for all retail banks grew 8.2% in October while loans rose 1.8%. The classified loan ratio rose from 1.24% at end-2008 to 1.42% at end-September.

Job priority

The authority will enhance protection under the Deposit Protection Scheme by the end of 2010 and will continue to monitor authorised institutes' readiness for the uplift of a full deposit guarantee.

It will continue to participate in the work of international standard setters and will complete legislative amendments for Basel II enhancements. It will also participate in a quantitative impact study on Basel's enhancements and finalise guidance on liquidity risk management.