The lifting of renminbi-related regulatory requirements is positive for Hong Kong banks' growth and profitability prospects, as it removes a constraint on renminbi lending and could reduce competition for renminbi deposits, Fitch Ratings says.

The Hong Kong Monetary Authority announced on Thursday that it was removing the 20 per cent renminbi net open position limit (which had previously been relaxed for some banks, subject to the HKMA's approval). The limit had restricted banks to maintain their renminbi net open positions within 20 per cent of total renminbi assets or liabilities, whichever was the larger. It had also fuelled competition for renminbi deposits by banks active in trade finance. Lifting the cap could mean higher profit from renminbi lending as portfolios expand, according to statement released by Fitch on Friday.

“However, we do not foresee a significant pick-up in renminbi loans over the next two to three years, so any benefit for Hong Kong banks from the change in regulation is only likely to be modest,” said  Sabine Bauer, senior director, financial institutions, at the ratings agency.

Demand for renminbi loans from outside China remains subdued due to currency risks and restrictions on cross-border renminbi lending. The bulk of renminbi deposits is yet to be deployed, with the system-wide renminbi loans/deposits ratio still low at 13 per cent as of end-2012. A few banks, which operate at substantially higher levels, are normally active in short-term trade finance, according to the statement.

“We believe FX or liquidity risks are unlikely to rise substantially, as the banks are generally conservative in their approach. The regulator will still monitor the risks closely after having also relaxed the treatment of - and reporting requirements for - renminbi for liquidity management,” Bauer continued.

According to Fitch, liquidity risk is also mitigated by a facility which the HKMA provides via a bilateral CNY400 billion swap line with China. The settlement time was shortened by one day to T+1 in January to enhance the effectiveness of the facility. This helps to cushion the rise in liquidity risk as Hong Kong banks expand their renminbi franchises.