In the three months from March to May, property prices are estimated to have fallen by 8%, according to the Deputy Chief Executive of the Hong Kong Monetary Authority.

In a speech for the Asia Pacific Loan Markets Association, David Carse said the banks' negative-equity figures reported to the authority have shown a significant increase from the 83,000 cases - representing $135 billion in loans - recorded at the end of March.

The heavy reliance of the banks on property lending is well known: residential mortgage lending, in particular, accounts for 35% of the retail banks' total domestic loans.

Banks had good performance in Q1

However, despite the underlying economic difficulties, the banks actually managed to turn in quite a good performance in the first quarter of the year, he said.

Retail banks' profits in aggregate rose compared with the same period of 2002, helped by increased fee income, higher treasury profits, reduced operating costs and a lower bad-debt charge.

From mid-May, however, the banks' operating environment improved as SARS was brought under control.

"However, the full effects on asset quality may take some time to show through. But most of the banks that we have talked to are now saying that the impact of the specific factor of SARS on their results for 2003 is expected to be relatively mild," he added.

Mortgage delinquency ratio edges up

Although the overall mortgage delinquency ratio has edged up in recent months, it remained at a relatively comfortable 1.16% at end-May, Mr Carse said.

Credit-card charge-offs did increase during the SARS crisis as rising unemployment prompted a renewed increase in bankruptcy petitions. But the latest news on this front is somewhat more encouraging.

"The number of petitions continued to rise going into the first week of June, but has since fallen back and the daily average for June as a whole was back to around the levels that we saw before the SARS outbreak," he said.

"If this improvement can be sustained, it would have a positive impact on profitability in 2003."