Hong Kong banking sector continues to benefit from high interest rate environment with increase in net interest margin in 2023, KPMG report

Hong Kong to strengthen its unique position as a global financial hub as the city is back to business

Hong Kong to strengthen its unique position as a global financial hub as the city is...

13 June 2023

13 June 2023, Hong Kong (SAR), China ("Hong Kong"): Banks in Hong Kong performed well despite the slowing global economy last year, according to KPMG. Moreover, KPMG expects to see further interest rate increases this year, and banks will see the benefits from that as well as the positive lag effect of previous interest rate increases in 2022 on net interest margins (NIM).

KPMG’s report Back to Business, Seizing Opportunities: Hong Kong Banking Report 2023 includes key statistics and analysis of the performance of banks in 2022, as well as expert insights into major trends and topics for banks in the year to come including ESG, virtual assets, wealth management services, digital business transformation and new regulations.

Paul McSheaffrey, Senior Banking Partner, Financial Services, Hong Kong, KPMG China, says:

Hong Kong’s key advantages as an international financial centre remain solid. Hong Kong’s low tax rate and simple tax regime has long been a cornerstone of the city’s success as an international financial centre. Our connections with the Chinese Mainland cannot be replicated by any other city. As the global trade and business landscape evolves, Hong Kong will continue to provide a crucial service as a bridge between the Chinese Mainland and the rest of the world. Looking ahead, Hong Kong should also look to develop its own fintech product innovations related to areas where the city is already strong.

In line with the prediction in KPMG’s 2022 Hong Kong Banking Report, the effect of the rising interest rate environment benefited the earnings of the city’s banks, with an increase in NIM. The NIM for all licensed banks increased by 24 basis points in 2022 to 1.55 percent. Operating profit before impairment charges for all licensed banks increased by 24.3 percent to HK$220 billion in 2022.

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

Looking ahead, the performance of the Hong Kong banking sector in 2023 is likely to be linked closely to the speed and extent of the economic recovery in Hong Kong and also the growth of the Chinese Mainland economy. While the high interest rate environment could bring an opportunity to improve profitability, it is imperative for banks to closely monitor and manage the credit risk of their loan portfolios.

The reopening of the border between Hong Kong and the Chinese Mainland has been a major boost for Chinese banks based in the city, and it is expected that the GBA initiative will pick up pace again as a result. The various “Connect” schemes that facilitate cross-border investment including the new Swap Connect and the Wealth Management Connect continue to be enhanced, while the physical reopening of the border is expected to drive a resurgence in demand this year.

Disruption is becoming a new normal. Business transformation continues to be a key consideration as banks look to operate more efficiently, saving costs while refining their service to clients. New technology and data can help banks to transform but also come with possible exposure to new risks. It is highly likely that AI and other emerging technologies will become even more important to banks across a variety of areas of operation in the next few years. Banks should be preparing now to ensure that they have the risk frameworks in place, as well as the right talent to support them as AI becomes even more critical to banking operations and services.

Banks should also look at operational resilience from the perspective of both acute disruption and ongoing maintenance, and proactively think about what investment is required. Preparations for the Operational Resilience 2 (OR-2) regime will strengthen Hong Kong banks’ ability to withstand disruption to their operations and in third-party service providers.

Data is crucial to ESG and will play a more prominent role in the future, since everything from risk management to performance measurement and reporting is dependent on the availability of good quality data. Banks are faced with a number of ESG data challenges and will need to ensure they have reliable data to meet regulatory obligations. This is especially pertinent where data transparency will be driven by assurance requirements.

In terms of emerging sectors, the Hong Kong government is making significant efforts to promote the city as a virtual assets hub, including through stronger regulations such as the new Virtual Assets Trading Platform (VATP) licensing regime. Besides crypto exchanges, other virtual assets businesses that have moved to Hong Kong recently include some that are interested in developing blockchain applications across the whole virtual assets ecosystem. Regulatory developments in Hong Kong provide greater certainty for global investors.

-Ends-

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