With Hong Kong’s banking sector feeling the pressure on revenue growth as a result of global economic uncertainty, innovation and effective cost management are key priorities, KPMG’s latest annual survey finds.
KPMG’s 28th annual Hong Kong Banking Survey reviews the overall sector performance and provides an analysis of key performance metrics for the top 10 locally incorporated banks in Hong Kong in 2015.
The survey notes that overall, the surveyed banks’ total assets grew by only 2 percent in 2015, down from 8 percent in the last two years. Excluding the one off gain of HKD11 billion recognised by Hang Seng Bank’s partial disposal of its shares in Industrial Bank, overall profit dropped by 1 percent in 2015. The sector’s average net interest margin (NIM) dropped 10 basis points to 1.59 percent in the end of 2015 as the low interest rate environment persisted globally.
Continual investment in more regulatory and compliance initiatives, rising wage and infrastructure costs pushed up the average cost-to-income ratio by 1.6 percentage points to 48.7 percent.
Paul McSheaffrey, KPMG Hong Kong’s Head of Banking, says: “Banks in Hong Kong are facing continued pressure on revenue, while credit costs are returning to more normal levels from a low base. With revenue growth under pressure and the spectre of a ‘lower for longer’ interest rate environment becoming more of a reality, costs remain the main lever for profitability. However, as we examine the Hong Kong banking outlook for 2016 against this backdrop, there are opportunities. The question is whether the opportunities outweigh the threats.”
“A potential challenge for banks is undoubtedly the significant level of uncertainty around the global economy. Furthermore, banks in Hong Kong will be keeping a watchful eye on China’s growth, while Brexit concerns and the upcoming US elections in November could have global ramifications,” McSheaffrey adds. “Despite the fierce competition, we see banks are looking at alternate ways to improve their profitability.”
The survey notes that some banks are focusing on enhancing their customer experience offering, as well as their mobile and other payment service channels to improve top-line growth. Others might look at managing costs optimally by harnessing data to improve regulatory reporting, or by implementing a cost management structure as part of a broader Enterprise Performance Management framework.
Meanwhile, as financial institutions are increasingly viewing FinTech as complementary rather than direct competition to their business, and with the Hong Kong government actively promoting and encouraging entrepreneurship in the industry, banks are looking at FinTech solutions to improve their profitability, the survey notes.
Some banks are innovating with new branch models that are digital and automated, bringing cost benefits and also improved customer experience. The stored value facility (SVF) market is also rapidly expanding, making payments easier and more efficient than ever before. The Hong Kong Monetary Authority is seeking to enhance consumer protection and minimise risk around SVF deposits and payments, and has enacted an ordinance that requires all multi-purpose SVF issuers to obtain a licence to operate in Hong Kong.
Edwina Li, KPMG’s Head of Financial Services Assurance, says: “Merchants and vendors will benefit from more consumer flow via this method, while SVF customers will find it easier to conduct transactions, and with greater confidence knowing that robust regulations are in place.”
“While banks could come under threat from SVF issuers, the new legislation also presents several opportunities for them. As a medium to long-term strategy, banks could consider investing in a developed SVF issuer to gain a competitive advantage in the market by broadening their customer base and enhancing their consumer offering.”
Separately, the survey highlights that regulatory issues remain a priority for Hong Kong banks. A number of new regulations and initiatives around Anti-Money Laundering, Basel III, cybersecurity and Common Reporting Standards are expected in the near future. Furthermore, with non-performing loans in China potentially affecting financial institutions in Hong Kong, banks should seek to review and bolster their risk management framework.
Li says: “The credit quality of the loan books in Hong Kong will continue to be exposed to China’s economy, both directly for loans to Chinese counterparties but also indirectly given the geographic and economic proximity of Hong Kong to China.”
The impaired loan ratio among the surveyed banks increased by 23 basis points year on year to 0.55 percent in 2015, though it is still considered relatively low. Exposure to non-bank mainland China-related business continued to increase but the growth has slowed down to 1.1 percent, which is also lower than the 2.1 percent growth in total assets for the same period.
McSheaffrey concludes: “Only by making sure that loan applications are properly vetted and by working closely with ailing borrowers to minimise the possibility of default will Hong Kong banks be able to continue to grow their balance sheets successfully in China. While some Hong Kong banks may have previously focused their attention exclusively on credit expansion when seeking to increase their footprint in China, these banks increasingly need to develop a more comprehensive risk management strategy that covers all aspects of the lending cycle from pre-loan assessments to post-lending management.”
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