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      3 July 2024, Hong Kong (SAR), China ("Hong Kong") – Banks in Hong Kong saw moderate balance sheet growth last year with notable increases in net interest margins (NIM) and operating profit amid higher interest rates. In line with KPMG's prediction in its 2023 Hong Kong Banking Report, the higher interest rate environment continued to benefit banks in improving profitability with a notable increase in NIM. In 2024, the firm expects banks in Hong Kong will lay the groundwork for the sector’s future development, despite the challenging conditions.

      KPMG's report Getting Set for the Future of Banking: Hong Kong Banking Report 2024 includes key statistics and analysis of the performance of banks in 2023, as well as expert insights into some of the major trends and key topics affecting banks, from the advance of new technology to evolving climate risk.

      Paul McSheaffrey Paul McSheaffrey, Senior Banking Partner, Hong Kong, KPMG China, says:
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      Despite the uncertain external environment, the banking sector saw strong performance on margins and moderate growth in its overall balance sheet during the year. Looking ahead, banks will continue to benefit as interest rates may stay at higher levels than forecast. However, the timing and pace of a rate cut are still subject to uncertainties, so banks should plan their strategies accordingly.

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      In 2023, the total assets of all licensed banks expanded by 2.7% to HKD 23 trillion. In line with KPMG's prediction, the higher interest rate environment continued to benefit banks in improving profitability with a notable increase in NIM. The NIM for all licensed banks increased by 30 bps in 2023 to 1.84%, while operating profit before impairment charges for all licensed banks increased by 34.7% to HKD 295 billion.

      For banks with more exposure to capital markets, KPMG sees that a shift to a lower interest rate environment will provide supporting tailwinds as it would benefit those with investment banking and wealth management operations as equities become more attractive. Capital market activities, equity risk premiums, businesses leveraged to cost of funding as well as the inevitable cash risk premium 'opportunity cost' are additional factors that will impact each bank differently as the interest rate cycle shifts.

      Jia Ning Song Jia Ning Song, Head of Banking and Capital Markets, Hong Kong, KPMG China, says:
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      While Generative AI is the trending topic in 2024, it will likely take some time for use cases to emerge, and true adoption and productivity gains from GenAI will probably become the story of 2025 and beyond. Many banks in Hong Kong are now exploring ways to leverage GenAI while also balancing the risks involved. Banks will need to take steps to ensure the responsible use of GenAl and take into account the regulator's expectations around the use of this type of technology. Hong Kong is also well placed to make use of advances in technology to help banking clients to manage the risks related to climate change.

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      Climate risk is a major ESG-related concern for banks in Hong Kong, and the unprecedented extreme weather in the city last year highlighted the urgency of climate change. The financial services sector plays a crucial role in mitigating climate-related risks and helping Hong Kong achieve its goal of carbon neutrality by 2050. Over the past year, banks have been preparing for the HKMA's Climate Risk Stress Test, due in June 2024. This aims to provide the regulator with a comprehensive understanding of banks' climate resilience, focusing on both physical risk and transition risk.

      Cost optimisation is another key area of focus. KPMG expects that in the next few years banks will be focused on consolidating common capabilities, the elimination of non-value add activities, digitising key functions, reducing labour costs, critically linking process metrics to customer outcomes, and managing credit risk.

      Siew David Simon Shum, Partner, Financial Services, Head of Digital Assets, Hong Kong SAR, KPMG China, says:
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      As higher interest rates will continue to improve profitability, banks need to be vigilant in managing the credit risk in their loan portfolios. The anticipated reductions in rates along with a continued increase in cost, means that the challenge for managing costs and creating headroom for continued investment has become an imperative.

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      Going forward, the key focus for the credit quality outlook will be the exposures to the Chinese Mainland real estate sector and Hong Kong's SMEs. Any further measures taken by the Chinese Mainland authorities to contain and manage the issues arising from the real estate sector will be crucial in stabilising the market and limiting defaults among borrowers. Separately, the pace and strength of Hong Kong's economic recovery from the lingering impacts of Covid will be another key factor, as a robust rebound in the city's economy will contribute to improved credit conditions, especially for SMEs.

      Talent retention and acquisition remained challenging for the banking industry in general, the total staff costs of the surveyed banks stayed broadly consistent with a slight increase of 3.2% in 2023. Talent schemes under the Fintech 2025 platform include the Fintech Career Accelerator Scheme, which has a variety of programmes for students and graduates, and the Industry Project Masters Network for post-graduates, which should help ease the talent shortage in this key area.

       

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