KPMG China expects Hong Kong banking sector’s net interest margins to improve amid rate hikes

Risks and uncertainties fuel caution

Risks and uncertainties fuel caution

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14 June 2022, Hong Kong – Hong Kong banks are likely to see their revenues rise in 2022 as net interest margins improve amid expectations of higher inflation and multiple interest rate hikes, according to the 34th annual KPMG Hong Kong Banking Report. However, credit risk and other uncertainties are likely to make the lenders cautious, the report finds. 

Paul McSheaffrey

Paul McSheaffrey, Partner, Financial Services, KPMG China, says:

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The forthcoming interest rate increases by the Fed in 2022 are likely to raise revenues at Hong Kong banks. But a slowdown in economic activity could cloud the outlook for the entire sector and loan growth may be impacted by the confidence of corporations to invest.

We expect retail spending to bounce back quickly following the end of the fifth wave of the pandemic due to progressive relaxation on social distancing measures and the Consumption Voucher Scheme. However, the confidence of corporates in Hong Kong and China to borrow and invest is less certain and will have a bigger impact on loan growth in 2022.

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Going forward, KPMG China expects ESG to remain a key theme for Hong Kong banks. While much of the current focus has been on risk management and climate resilience, banks also need to consider the opportunities in areas such as transitional and sustainable finance.  At the same time, efforts made by banks to transform will continue to help reduce costs, enhance customer experience, improve risk management and boost compliance. 

The report also reviews highlights of the performance of Hong Kong’s banking sector in 2021 when the sector’s overall balance sheet continued to grow. Deposits rose and the total assets of all licensed banks expanded by 4.9% to HK$24 trillion, with loans and advances increasing by 6.6%.

Meanwhile the combined effect of the prevailing low interest rate environment and economic uncertainty continued to impact profitability. Operating profit before impairment charges for all licensed banks fell by 15.4% to HK$196 billion in 2021. The low interest rate environment throughout 2021 weakened the aggregate net interest margin for all licensed banks, which shrank by 9 basis points from 2020 to 1.31%. 

Following the trajectory of 2020, total loans and advances of all surveyed banks increased by 6.6% to over HK$11 trillion at the end of 2021. 

Amid the recovery of global economy, the credit quality of the Hong Kong banking sector slightly deteriorated with the impaired loan ratio for all surveyed banks slightly increasing from 0.78% to 0.86%. 

Terence Fong

Terence Fong, Head of Chinese Banks, Hong Kong, KPMG China, says:

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As the city celebrates the 25th anniversary of the establishment of the Hong Kong Special Administrative Region, it remains a vibrant international financial centre, playing a vital role connecting mainland China with the rest of the world. Mainland banks in the city have recorded remarkable growth in terms of market share over the past 10 years, benefitting from significant support from their parent banks in terms of capital and customer referrals.

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As for total loans and customer deposits, mainland banks have outpaced the sector over the past decade, recording a total loan growth of nearly 2.9 times between 2011 and 2021. Customer deposits at mainland lenders in Hong Kong have also secured a 2.8 times growth over the past decade, outperforming the sector.

“We expect mainland banks in Hong Kong to continue to focus on key initiatives such as the Greater Bay Area (GBA) to maintain their growth momentum over the coming years as the city continues to position itself as an international financial centre offering significant cross-border opportunities,” Mr. Fong adds. 

2021 also marked the first full year of operation for Hong Kong’s eight virtual banks. These banks experienced modest growth last year in terms of the number of accounts opened and their market share, attested by the growth in total combined customer deposits and net loans. Given the stiff competition in the market and uncertain path to profitability, KPMG China expects some virtual banks may quietly cease operations or consolidate them over the next few years. 

Virtual banks continue to face heighted competition from traditional banks, which further invested in their digital banking capabilities and reduced fees in 2021. Growth momentum of new virtual banking customers tempered in the second half of 2021 while total customer deposits held in virtual banks stood at about HK$25 billion as of December 2021, accounting for only 0.17% of the entire banking sector.

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About KPMG China

KPMG China has offices located in 31 cities with over 15,000 partners and staff, in Beijing, Changchun, Changsha, Chengdu, Chongqing, Dalian, Dongguan, Foshan, Fuzhou, Guangzhou, Haikou, Hangzhou, Hefei, Jinan, Nanjing, Nantong, Ningbo, Qingdao, Shanghai, Shenyang, Shenzhen, Suzhou, Taiyuan, Tianjin, Wuhan, Wuxi, Xiamen, Xi’an, Zhengzhou, Hong Kong SAR and Macau SAR. Working collaboratively across all these offices, KPMG China can deploy experienced professionals efficiently, wherever our client is located.

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