The outlook for Hong Kong’s banking system was lowered to negative from stable at Moody’s Investors Service Inc. on lenders’ growing exposure to borrowers in China.

Hong Kong banks are increasingly reliant on the mainland because real interest rates in the city remain low amid surging property prices, the credit-rating company said in a statement yesterday. These circumstances “may contribute to adverse future operating conditions for Hong Kong banks,” it said.

Hong Kong banks are turning to borrowers in the mainland at a time when slower economic growth and efforts to rein in shadow banking are leading to rising bad loans. Non-performing loans at Chinese banks rose for six straight quarters through March 31, the longest deterioration in at least nine years. The increase may accelerate in the coming months, Moody’s said in a separate statement yesterday.

Hong Kong lenders have mitigated risks from mainland lending by requiring collateral and bank guarantees, Moody’s said. The firm rates 17 banks in Hong Kong, which, led by HSBC Holdings Group Plc (5), Hang Seng Bank Ltd. (11), Bank of China (Hong Kong) Ltd. andStandard Chartered Plc (STAN), accounted for 70 percent of the city’s domestic loans at the end of 2012, according to the statement.

The Hang Seng Finance Index rose 0.2 percent at 11:02 a.m., compared with the benchmark Hang Seng Index’s 0.3 percent gain. HSBC fell 0.1 percent to $79.20 and BOC Hong Kong (Holdings) Ltd. slid 0.9 percent. Standard Chartered gained 0.1 percent to HK$168.50, while Hang Seng Bank climbed 1.2 percent.

The one-day repurchase rate in China touched an unprecedented 13.91 percent on June 20 before tumbling on signs targeted injections of funds are being used to ease a cash crunch that threatens to worsen the economic slowdown.

Source:Bloomberg