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Louis Beckerling

Hong Kong's small family-owned banks will come under growing pressure to surrender their independence and accept merger or consolidation to survive in an increasingly competitive market.

This forecast came yesterday from Paul Tsang, banking partner with consultants KPMG.

Presenting the annual KPMG survey of banking results, Mr Tsang said all the evidence collected during the survey pointed to an accelerated process of consolidation in the sector.

'Those banks that are very efficiently run, with the highest risk-management models, good customer retention profiles, and good information technology strategies and platforms, will succeed in the current competition,' Mr Tsang said.

For the rest, the process of consolidation that began last year was likely to continue, he said.

'I do not think that things will just stop there. This is happening too in Singapore and it will follow in the region - reflecting what has been going on globally,' he said.

Previously family shareholdings had presented an obstacle to consolidation in Hong Kong, said Mr Tsang.

'However, recent examples we have seen suggest this scenario may be changing.

'Even family-owned banks will now have to think twice about their strategy.

'They might have to team up with bigger players - consolidate or merge with some other players, in order to survive in the banking market.'

Echoing this refrain, fellow banking partner Babak Nikzad said slowing economic growth meant that banks faced deteriorating asset quality for the rest of this year and this would ultimately affect bank profits and return on equity.

'We will see deteriorating asset quality in the coming months because of the economic downturn and on the demand side there will be less appetite for loans, while on the supply side banks will be tightening their lending criteria,' Mr Nikzad said.

With the striking exception of credit card lending, there was also likely to be flat or low growth in consumer lending in the year ahead, said Mr Nikzad, 'and so we will essentially see a negative impact on bank performance because of the economic downturn'.

Against this background, net interest margins earned by banks on their lending were unlikely to return to pre-crisis levels and banks were unlikely to generate the high return on equity that they had previously enjoyed.

'Of course this will enhance consolidation,' said Mr Nikzad.

The KPMG survey of 2000 results underlined that although industry profits were up about 30 per cent, bringing aggregate profit back to pre-crisis levels, this was driven primarily by reduced bad debt charges. 'Continued fierce competition in the mortgage market, forthcoming deregulation of interest rates, and the likely introduction of deposit insurance will all present major challenges,' he said.

The scrapping of the interest rate ceiling on savings' accounts next week was in line with the determination of the Hong Kong Monetary Authority to raise banking in the SAR to global best practice levels, said Mr Tsang.

Deregulation would force banks to reposition themselves and this had already led to the introduction of new fees and charges, as well as new products.

'We will now be seeing banks compete for customer deposits based on their own customer portfolios and strategy,' Mr Tsang said.

Bigger banks, with bigger customer branch networks and larger deposit bases were net lenders in the interbank money market, he said, whereas smaller banks - or foreign banks without branch networks - were obliged to raise their funds on the interbank money market.

'This will be a significant factor in determining the pricing strategies on deposits after deregulation,' he said.

'The larger banks will probably set the minimum savings interest rates at a lower level than smaller banks that would like to attract customer deposits.

'The bottom line is that as long as their cost of funds from such savings and current accounts is lower than the price at which they would have to borrow from the interbank market, it will benefit them to offer higher deposit rates.'

Graphic: atmgbz



Family-owned institutions face more pressure to accept mergers