Why Hong Kong’s banks are targeting growth again after years of cost-cutting
Rising interest rates and potential cost savings from technology offer opportunities for increased revenues
“We’re now poised for growth,” said Standard Chartered group chief executive Bill Winters during a call with analysts last Tuesday, after the bank announced a rise in profits for 2017.
His statement exemplifies a sudden change of tack among Hong Kong’s big lenders after years of focusing on cost-cutting and balance sheet reduction.
Standard Chartered was one of four major Hong Kong high street banks to report their full-year profits in the last two weeks, and whose management has finally started to talk about growth again, along with across-the-board increases in their earnings.
“Both in Hong Kong and globally there is a sense that we have reached a tipping point as banks have shrunk to beautify themselves, and can now start thinking about growing again,” said Keith Pogson, senior partner for financial services at EY. “CEOs also like talking about growth, and they are fed up with discussing cost controls, capital and compliance.”
In November 2015, Standard Chartered launched a three-year plan to remove US$2.9 billion of costs from its business as it reported a loss for the third quarter thanks to ill-judged expansion. The bank said in its 2017 results that it had realised 85 per cent of those savings.
A similar story applies at Bank of East Asia, even though its footprint, based largely in Hong Kong and mainland China, is very different from Standard Chartered’s broader emerging-market focus.
BEA’s management said when they published their results in mid-February that the bank was 83 per cent of the way through its HK$700 million cost saving plan, announced in 2016, and would now start to look to expand by targeting consumer lending in the mainland. In 2015 and 2016, profits at BEA dropped sharply on the back of increased bad loans, especially on the mainland.
What happens in Hong Kong is important for all the banks here, even the global players, as Hong Kong is the largest market by revenue for both HSBC and Standard Chartered.
There is also potential for all the bigger banks to make even more money in the city.
“Interest rates are likely to rise this year, which should help the larger banks whose margins have been squeezed in the low-rate environment,” said Pogson, who estimated that banks’ net interest margins could rise by as much as 70 basis points as rates go up.
Another factor will be the new digital initiatives coming to Hong Kong, most notably the faster payments system, which is expected to come online in September.
“The larger banks, who have more money to invest, and a larger existing customer base, are hopeful that they can grow their market share, as digitisation comes, or at least hold it where it is, and reduce some costs,” said Pogson.
This was another oft-mentioned topic among the banks’ senior management in their remarks accompanying the results.
“We will launch more fintech initiatives that align with our customer-centric business strategy to help drive in a new era of ‘smart banking’ in our city,” said Louisa Cheang, Hang Seng Bank’s chief executive.
Nonetheless, the global banks will still need to see sizeable revenue growth to hit their targets.
HSBC is aiming to achieve a return on equity, an important measure of profitability, of 10 per cent. In 2017 it achieved 5.9 per cent, up from 0.8 per cent in 2016.
Standard Chartered has a medium-term return on equity target of 8 per cent. Last year, it only managed 3.5 per cent, still an improvement on 2016’s 0.3 per cent.
To achieve these targets the banks will need to increase revenues sharply while keeping costs under control, and that, according to management, is the plan.
“We’re going to run the business more efficiently, absorbing inflation and as much of the cost of investment as we reasonably can,” said John Flint, HSBC’s incoming group chief executive.
Hong Kong’s second largest lender, Bank of China (Hong Kong), will report its 2017 results along with its mainland parent later this month, as will the Hong Kong operations of the other mainland banks.