Standard & Poor's Ratings Services said Friday that the profitability of Hong Kong's banking sector continues to improve, but added that the improvement is largely a result of lower loan loss provision expenses.

A new report entitled "Banking Industry Risk Analysis: Hong Kong" notes that the city's banking system is characterized by high liquidity, sound capitalization and a strong regulatory regime.

"While the profitability of Hong Kong's banks improved in 2004 as a result of decreasing loan loss provision expenses and growing noninterest income, competition continues to put pressure on net interest margins," said Standard & Poor's credit analyst Ryan Tsang.

The asset quality of most domestic banks is also improving in line with general recovery in the domestic economy and the rebound on the property market, the report said.

But the report sounded a cautionary note, noting that increasing exposure to the Chinese mainland may entail some increase in risk in the loan books of the city's banks. It added that any negative impact in this respect is likely to be relatively insignificant because of the limited amount of such exposure in comparison with total lending.

Source: Xinhua