The city's retail lenders suffered an 18per cent aggregate pre-tax profit decline in the first nine months, the Hong Kong Monetary Authority said yesterday.
'The deterioration in the macro environment will present challenges for banks in the year ahead,' it said.
In a submission to the Legislative Council's panel on financial affairs, the HKMA also said banks would incur further impairment charges and investment losses as a result of the global credit crunch.
Separately, Wing Hang Bank said it would make a provision of HK$315 million for HK$377 million worth of bonds issued by two Icelandic banks.
The mid-tier lender said the bonds accounted for less than 0.27 per cent of its total assets and the impairment loss would not have any significant impact on its business.
However, analysts expected the bank's earnings would be dragged down by the provision. The bank reported a first-half profit of HK$938.12 million.
ICBC (Asia) said earlier this week that it decided to make a full provision for about HK$600 million worth of bonds issued by three major Icelandic banks.
For Hong Kong banks, the de facto central bank said the narrowing of net interest margins was part of the factors that dragged down retail banks' pre-tax operating profit.
The net interest margin narrowed to 1.75 per cent in the third quarter from 2 per cent in the first and 1.84 per cent in the second.
There are also signs of deteriorating asset quality as the bad-debt ratio rose to 0.96 per cent in the third quarter from 0.88 per cent in the previous. The ratio of overdue and rescheduled loans also rose, to 0.55 per cent from 0.53 per cent in the second quarter.
'It won't be a surprise to see banks recording a bigger drop in profits for the full year as market conditions in the fourth quarter are even worse,' said Ivan Li, an analyst at Kim Eng Securities.
Mr Li said the poor performance in the banking industry could extend to the first half of next year.
Some, such as Bank of East Asia and Fubon Bank (Hong Kong), have already issued profit warnings.
'But what we are also concerned about is whether their core earnings can be sustained,' Mr Li said. 'Fee income may fall dramatically amid current market conditions.'
The HKMA said higher operating costs and increased loan-loss provisions would also weigh on banks' profitability. It added that it would apply stress tests to assess the resilience of individual banks, taking into account the market developments.
Shrinking margins
Hong Kong banks' net interest margin in the third quarter narrowed to: 1.75%