Fitch Ratings expects stress on Hong Kong banks' asset quality from exposure to commercial real estate to ease in the second half of 2026, according to a recent release.

Banks have already accounted for bad CRE loans as impaired over the past years, Fitch said.

The development anchors the banking sector's neutral outlook for the year, which improved from deteriorating at mid-year, Fitch said.

The rating agency still sees a gradual recovery for weak CRE loans, as the most-exposed banks face heightened credit costs due to protracted collateral disposals.

CRE loans, which have weighed on Hong Kong banks' asset quality in recent years, have led to downward shifts in several lenders' asset quality scores and viability rating downgrades for the most impacted, Fitch said.

Better macroeconomic conditions and a healthy IPO market will narrow further erosion in domestic CRE loans, the rating agency said.

Banks' solid capital buffers amid modest loan growth and strong earnings should offset losses from higher credit costs as valuation for distressed CRE assets continues to drop, Fitch said.