With the financial performance of Hong Kong’s banking sector remaining relatively stable in 2016, China’s 13th Five-Year Plan and Belt and Road initiative, as well as advancements in innovative technologies, offer major opportunities for banks in the city to perform strongly in the future, KPMG’s latest annual survey finds.
KPMG’s 29th 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 2016.
Paul McSheaffrey, KPMG Partner and Head of Banking for Hong Kong, says: “There has generally been muted loan growth and margins have been relatively flat, but costs have stayed flat and credit problems appear under control, which has left the overall profitability of the sector relatively unchanged.”
As at the end of 2016, total loans and advances of the surveyed banks increased by 3.4 percent from a year ago to HKD 7,357 billion. On average, net interest margin dropped by a marginal 1 basis point to 1.58 percent, while the cost-to-income ratio stood relatively stable at 48 percent. The average impaired loan ratio increased from 0.52 percent to 0.64 percent at the end of 2016.
While overall profitability of the sector remains relatively stable, the future of Hong Kong’s role as an international finance centre is bright, with a number of opportunities for banks.
Andrew Weir, Regional Senior Partner of KPMG Hong Kong, says: “Looking at the details of the China’s 13th Five Year Plan, opportunities for Hong Kong banking and the broader financial services industry lie in the development of the Greater Bay Area and the opening up of Southern China with closer integration of Hong Kong, Macau and Guangdong.”
“Also, Hong Kong’s role as a global offshore RMB finance and service hub gives it a prominent role in the Belt and Road initiative. As part of that, the deepening of the bond market, the development of project finance, and the general facilitation of Belt and Road investments provides Hong Kong with significant opportunities. With the Belt and Road initiative a major driver for the region, this is likely to lead to more demand for green bonds and green-related financing, innovative project financing and supply chain financing.”
In addition, Hong Kong’s connections with China’s stock markets and its continued development as a wealth management hub present new avenues for growth, the survey highlights.
The survey also notes that digital innovation such as artificial intelligence (AI), cognitive computing and robotics are emerging disruptors which could help facilitate growth.
For banks, front-office trading has become more efficient through the use of algorithms. Adoption of robotics and cognitive solutions help the middle and back-office functions to enhance operational efficiency and profitability rather than offshoring.
These technologies are also changing how banks interact with their customers, and redefining the role of the banker. This is particularly important as millenials are heralding a shift in consumer expectations, and setting a new standard for digital and customer experience.
Banks are starting to use AI technology to gather social, economic and other relevant data to help create customised products and services. They can also utilise unstructured data to gain valuable insights into their customers’ behaviours and preferences. The survey highlights that the banks that are quicker to embrace this change and focus on digital innovation across their entire organisation will be the ones that will have a competitive advantage over time.
Meanwhile, risk and regulation undoubtedly continues to be a major focus for banks in Hong Kong.
Dickson Lee, Partner, Financial Services, KPMG China, says: “In recent years, global and local authorities have increased their regulatory scrutiny in the industry, introducing various guidelines and regulations covering areas including anti-money laundering, corporate culture, risk management, cybersecurity and non-financial regulatory reporting. We are also seeing a greater focus on conduct and the fair treatment of customers across all aspects of banking.”
An important event on the horizon is the Financial Action Task Force’s (FATF) next mutual evaluation of Hong Kong in mid-2018. We expect Hong Kong’s regulators to ramp up their supervision of anti-money laundering and know-your-customer matters in the next 12 to 18 months.
McSheaffrey concludes: “However, it is important to note that the pace of new regulation is slowing, and the main focus for banks going forward will be on ensuring that existing regulations are implemented effectively.”
KPMG China operates in 16 cities across China, with around 10,000 partners and staff in Beijing, Beijing Zhongguancun, Chengdu, Chongqing, Foshan, Fuzhou, Guangzhou, Hangzhou, Nanjing, Qingdao, Shanghai, Shenyang, Shenzhen, Tianjin, Xiamen, Hong Kong SAR and Macau SAR. With a single management structure across all these offices, KPMG China can deploy experienced professionals efficiently, wherever our client is located.
KPMG is a global network of professional services firms providing Audit, Tax and Advisory services. We operate in 152 countries and regions, and have 189,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
In 1992, KPMG became the first international accounting network to be granted a joint venture licence in mainland China. KPMG China was also the first among the Big Four in mainland China to convert from a joint venture to a special general partnership, as of 1 August 2012. Additionally, the Hong Kong office can trace its origins to 1945. This early commitment to the China market, together with an unwavering focus on quality, has been the foundation for accumulated industry experience, and is reflected in the Chinese member firm’s appointment by some of China’s most prestigious companies.