S&P Global Ratings expects the Hong Kong banking system to maintain robust capitalization even with extreme valuation shocks, according to a Thursday release.

The value of properties underlying Hong Kong's commercial real estate loans will further decline in 2026 amid dropping rents, which puts continued collateral pressure on banks, S&P said.

Many lenders have reduced exposure to commercial real estate in the past five years, while healthy earnings and capital should suppress possible losses, credit analyst Phyllis Liu said.

Under a stress test done by S&P, banks showed diverging resilience, with larger ones better positioned to absorb shocks because of their diversified portfolios, solid earnings potential, and controlled risk management.

Meanwhile, a group of smaller banks with increased exposure to non-prime commercial assets, smaller earnings base, and greater risk appetite are more susceptible to tail risks, the analyst said.

The rating agency believes the dampened commercial property sector will cause further deterioration in the value of collaterals backing bank exposures to commercial real estate.