Based on the rating agency’s stress scenario study, "impairment charges are likely to rise from current low and unsustainable levels but Hong Kong banks are well-positioned to withstand the headwinds," said Sabine Bauer, director in Fitch's Financial Institutions Team, in the report.

"This is despite conservative loss assumptions to reflect rising risks from an increasing portion of banks' exposure directly and indirectly related to China,” she added.

Fitch believes that the growing links between Hong Kong and China and the banks' expansion in the mainland Chinese market, will differentiate future downturns from the 1997 Asian crisis, the SARS crisis in 2002 and the global financial crisis in 2008-2009, by potentially leaving a more pronounced impact.

The agency used two scenarios for the study, incorporating a mild and a severe downturn in China.

The latter is a plausible prospect but not Fitch's base case. Fitch's central case is a mild stress that reflects a moderately deteriorating operating environment characterised by continued volatile capital markets, slower but still healthy growth in China, a weaker domestic property sector and moderating global trade.

Fitch's stress-loss assumptions in the severe scenario result in average expected impairment charges of 4.3 per cent of exposures over a three-year period, ranging up to 5.1 per cent for the worst affected. Pre-tax losses in such a scenario could on average reach 14 per cent but could be over 30 per cent, if banks do not take sufficiently mitigating actions, said the agent.

Domestic property exposures remain mild as long as single-name concentrations are not prevalent and a conservative approach to risk remains the norm. A mitigating factor is the Hong Kong Monetary Authority's tight regulation for property lending and low loan-to-value ratios. Fitch's three-year stress-loss assumption for mortgages is 1.6 per cent in the severe scenario, based on data derived from historical peak losses for the industry in 2000-2002. For secured commercial property loans, Fitch assumes a 4 per cent stress loss.

Fitch considers that future losses on corporate loans could reach 6 per cent over a three-year horizon. This is likely to exceed most banks' internal assumptions, and reflects an increasing portion of loans related either directly or indirectly to China, a market for which losses have been limited so far. Loans specifically identified for use outside of Hong Kong, the majority being direct lending to China, are subject to up to 10 per cent stress-losses.

Minority stakes in Chinese financial institutions are a concentration risk for HSBC , its subsidiary Hang Seng Bank , Standard Chartered and Dah Sing Bank .

Fitch's stress scenarios assume that the value of these stakes could decline by up to 65 per cent, a steep decline which is, however, not inconsistent with the historical performance of comparable listed companies.