Hong Kong's banking sector benefits from substantial capital reserves, which are sufficient to absorb near-term volatility for their viability ratings, Fitch Ratings said in a recent release.

However, the viability ratings of several institutions could face sustained downward pressure if the stress in local commercial real estate (CRE) intensifies and the market recovery remains slow, Fitch said.

Loan quality deterioration is divergent, with banks highly exposed to vulnerable small- and mid-sized CRE borrowers expected to show greater strains, according to the rating agency.

Cautious underwriting has prompted banks to increase holdings of non-loan assets, which are typically high-quality and provide a defense against overall asset risk.

Furthermore, ample liquidity and robust offshore investment flows from mainland China serve as strengths for the banking sector, Fitch said.