Fitch Ratings says in a new report that the impact on Hong Kong banks from global monetary tightening should be manageable. Robust deposit composition, a high proportion of liquid assets and low dependency on capital market and foreign bank funding provide stability and mitigate liquidity risks. However, the banks' loans and other claims in mainland China have been growing quickly, which increases their sensitivity to spill-over effects from stresses on the mainland banking system.

Fitch expects the Hong Kong banks to maintain sound funding structures by limiting deposit concentrations and increasing longer-term funding. Fitch-rated banks should easily withstand more volatility as retail and resident deposits dominate and reliance on foreign bank funding will remain stable.

Their expanding open position to mainland China resulting from tighter liquidity conditions in China and buoyant cross-border activities render Hong Kong banks more susceptible to liquidity risks in China. Fitch views the imbalance between Hong Kong banks' claims on mainland banks and funding provided by the latter as an increasingly structural feature.

Hong Kong banks' large liquidity buffers should bode well for the regulatory liquidity stress test in the coming year. Among Fitch-rated banks, Industrial and Commercial Bank of China (Asia) (ICBC Asia; A/Stable), China CITIC Bank International (CNCBI; BBB/Stable) and DBS Bank (Hong Kong) (DBSHK; AA-/Stable) have improved their liquidity buffers the most during 2009-2013. For these three banks, short-term interbank assets accounted for the bulk of liquefiable assets.