Introduction

The early months of 2022 were dominated by the fifth wave of Covid and the Hong Kong (SAR) economy shrank by 3.5% in the year. However, the outlook brightened considerably towards the end of the year as restrictions were eased. 

Despite the slowing economy globally and in Hong Kong, banks in the city performed well in many areas. This was principally due to the interest rate rises during the year. As we predicted in last year’s Banking Report, rising interest rates led to higher net interest margins for banks in the city. This fed through to a significant rise in operating profit during the year. 

However, banks in Hong Kong saw a rise in the impaired loan ratio in 2022, due in part to their exposure to the China property market. In this report we take a look at how the China real estate issues in loan portfolios developed and consider what banks should learn from the experience. We also review the performance of the eight virtual banks in Hong Kong in their second full year of operations, and note how they are seeking to differentiate themselves in a competitive market.

As the Hong Kong banking sector gets back to normal business operations, we look at the city’s role as an IFC and consider how to strengthen our advantages as a financial hub. Key elements of our unique status include our crucial role as a bridge to the Chinese Mainland and our corporate tax system, but we must not be complacent, especially given that we have some ground to make up following the long period of Covid restrictions

We also review some of the key growth areas for banks including ESG and climate risk management, and the growing opportunities in wealth management services. Business transformation continues to be a hot topic as banks look to operate more efficiently while improving their service to clients. New technology can help banks to transform but also comes with possible exposure to new risks.

New regulations and evolving risk also offer challenges and opportunities, and we look at some of the latest development in areas including operational resilience and data analytics that will affect banks in the year ahead. 

We hope you enjoy the information and insights in this report. Please feel free to get in touch if you would like to discuss the financial results or the broader outlook for the Hong Kong banking industry.