Fitch Ratings has released a report on banks in Hong Kong which claimed they are well-positioned to weather the economic downturn given their sound balance sheet profile and strong capitalisation.

In a special report reviewing Hong Kong banks' full year 2008 financial results and outlook for the industry, Fitch noted the banks' declining profitability, slowing loan growth and deteriorating loan quality as the local economy entered recession amid a slowdown in the major economies around the world.

In its predictions for 2009, the agency believes that the operating environment remains challenging with trade flows staying subdued amid a continuing decline in overseas demand. It also lists rising unemployment and weaker consumer spending amid heightened investor risk aversion as issues that will be exacerbated by elevated credit costs as loan quality deteriorates.

Nevertheless, Fitch concluded Hong Kong banks are expected to maintain sound financial profiles as they entered the downturn in relatively good financial health, with good loan/asset quality (thanks to their historically prudent credit culture), reasonable profitability, and sound liquidity and capital positions.

Sonny Hsu, associate director with Fitch's Financial Institutions team, said: "Although profitability and loan quality are both expected to deteriorate further, Hong Kong banks should retain their relatively strong balance-sheet profiles.

"Limited future loan growth and further shifts into lower risk investments are expected to support the banks' capital adequacy in 2009."