Fitch Ratings said in a report on Monday that Hong Kong banks are facing intensifying competition from foreign banks, in particular from aggressively expanding counterparts from the Chinese mainland.

Foreign and Chinese banks account for about 95 percent of the Hong Kong banking system, as they continue to invest in the territory to tap one of the highest-growth markets.

In particular, Chinese banks significantly increased their presence in Hong Kong to about 15 percent of system-wide assets at the end of the first half in 2012 from 9 percent at the end of 2009.

"The foreign bank-dominated market with significant cross-border exposures also renders the system-wide liquidity vulnerable to stress in other banking systems and economies," Fitch said.

The system's cross-border claims and liabilities accounted for 51.4 percent and 37.7 percent, respectively, of their total assets/liabilities by September. Claims on the Chinese mainland increased substantially to 13.8 percent at end of September from 4.3 percent at the end of 2008, while claims on Europe declined.

Foreign banks may view the small Hong Kong banks as takeover targets as they look to boost market presence via these banks' established branch networks, Fitch said, adding that Chinese banks will continue to expand their Hong Kong operations and use them as an offshore banking platform to source United States and Hong Kong dollar funding.