Moody's, a global credit researcher, said in its latest report that SARS' impact on banks of China's mainland, Hong Kong and Taiwan may prove transient while noticeable.

The report said SARS is weakening consumer sentiment as the local economy continues to reel from several years of deflation.

At the same time, Hong Kong's banks are well-capitalized liquid institutions that have successfully managed themselves through previous downturns, the report said.

It said Moody's believes SARS is likely to exert a minor but noticeable impact on bank earnings and asset quality.

The exact extent of the impact will differ from institution to institution, but ultimately, the situation will prove recoverable, assuming the disease can be controlled. Furthermore, the pace of recovery will depend on the process of Hong Kong's economic re-structuring, the global economy and growth in China, the report said.

Regarding the mainland, the report said the government is now trying to deal more forcefully with SARS to regain consumer and investor credibility. If it is effectively contained, the impact on the economy and bank credit quality would be minor.

Moody's said SARS has so far not exerted as serious an impact on Taiwan as it has on the mainland and Hong Kong. If the disease is contained in a relatively short time, its impact should be minimal, the report said. However, if it becomes a longer-term issue, it could exacerbate the banking system's negative structural issues. In particular, any diminution of earnings could delay the current efforts of Taiwan's banks to improve asset quality and economic capital.

The report said that in all the above systems, bank profitability and asset quality are expected to deteriorate in the coming months as a result of SARS.

On the other hand, liquidity should strengthen due to the uncertainties the illness is generating and the resultant fall in consumption. But the extent of the negative impact depends on SARS' severity and duration, said the report.

(Xinhua News Agency May 4, 2003)