Chinese banks continue to expand in Hong Kong in terms of asset growth, improving net interest margins (NIM) and cost income ratios, according to KPMG’s latest annual report.
KPMG’s 25th annual publication of the sector finds the outlook remains mixed. While the financial performance of the sector was strong, there remain a number of issues and challenges the banks are currently dealing with. Overall banks’ profits rose by 16 percent compared with 2011, which is attributed to overall higher net interest and non-interest income. Many of the larger banks such as HSBC, Hang Seng Bank and Standard Chartered have balance sheet growth close to an average of 8-10 percent, the report notes.
Paul McSheaffrey, Partner, Financial Services, KPMG China, says: “New regulations, many of which are globally driven, are a key issue for many banks, and go beyond the challenge of implementation. As a result, many banks are questioning whether they should remain in certain business lines or markets. Additional challenges include historically low net interest margins (NIM) and a highly competitive funding environment, which require that banks look for alternative sources of revenue and further improve cost efficiencies.”
KPMG analysis shows that all of the top Chinese banks experienced some growth in their NIM during 2012, with the exception of ICBC (Asia) which decreased by a modest five basis points. Local banks in general exhibited higher NIMs than Chinese banks and international banks in Hong Kong. However, on a year-on-year (YoY) basis, the results were mixed – despite their income growth, Bank of East Asia and Chong Hing Bank showed a faster increase in interest expense and hence NIM compression.
Rita Wong, Partner, Financial Services, KPMG China, says: “Banks continue to look for opportunities to grow their income from sales of wealth management products. However the current regulatory environment, especially for more complex structured products, means there are increasing burdens for banks associated with these sales, including higher operational and reputational risks. These will continue to limit growth.”
The loan portfolio of banks continued to grow in 2012. Interest income continued to contribute more than half of the income in most of the banks surveyed. The income mix varies among the largest banks surveyed. Overall balance sheets continue to experience healthy growth, with six of the top 10 Chinese banks enjoying double-digit expansion during the year. Local banks had reasonable growth rates ranging from 4-13 percent, whereas international banks had varying results.
Local financial institutions have exhibited a relatively stable income mix trend since 2011, while foreign banks have a more diversified non-interest income stream, with generally more trading and investment banking requirements, compared to the local or Chinese banks.
The majority of the largest Chinese and international banks were able to maintain or improve their cost efficiency ratios, with aggregated results showing an improvement of 257 and 216 basis points respectively. Paul McSheaffrey concludes: “Banks appear to have achieved improved
cost ratios not by scaling down their businesses, but by finding ways to do business more efficiently and with improved margins. For many of these banks, costs have remained relatively stable while net interest income has seen good growth, leading to overall improvement in cost to income ratio.”
“While lending balances have continued to see growth, this might be moderated by the implementation of new capital rules. This is likely to put more pressure on banks’ ability to lend. This may force them to put an even sharper focus on growing strong assets to maximise their use of capital and funding.”
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KPMG China has 14 offices (including KPMG Advisory (China) Limited) in Beijing, Shanghai, Shenyang, Nanjing, Hangzhou, Fuzhou, Xiamen, Qingdao, Guangzhou, Shenzhen, Chengdu, Chongqing, Hong Kong SAR and Macau SAR, with around 9,000 professionals.