Hong Kong banks urged to ‘think strategically’ to remain profitable

KPMG’s annual report on the sector highlights US elections, China’s growth prospects and on-going concerns surrounding Brexit as areas of concern

PUBLISHED : Tuesday, 19 July, 2016, 4:08pm
UPDATED : Tuesday, 19 July, 2016, 10:58pm

Hong Kong’s banks are facing troubling times, as revenues fall and costs rise, according to KPMG’s latest annual study on the sector.

Launching the 2016 Hong Kong Banking survey on Tuesday, KPMG’s Paul McSheaffrey said the banks must now think strategically about costs.

He added “Banks’ revenues are not growing, so the real lever is whether you can reduce your costs enough, such that you remain profitable.”

McSheaffrey, KPMG’s head of banking in the city, said lenders are facing “continued pressure on revenue, while credit costs are returning to more normal levels from a low base”.

He added that spending on regulatory and compliance activities was the most significant contributor to cost increases, while wages and infrastructure costs were also factors.

In June, Bank of East Asia closed all the branches in its securities arm, resulting in 180 job losses, and said that it would now service those customers online or by telephone.

Global developments are also adding to the risks for banks in Hong Kong.

Banks’ revenues are not growing, so the real lever is whether you can reduce your costs enough, such that you remain profitable
Paul McSheaffrey, KPMG’s head of banking in Hong Kong

“Another potential challenge is undoubtedly the significant level of uncertainty around the global economy,” said McSheaffrey, citing the upcoming elections in the US, China’s growth prospects and the on-going concerns surrounding Brexit as possible areas of concern.

However, “at this stage it is too early to see what impact Brexit will have on banks in Hong Kong”, he said.

Banks in the city have already been responding to concerns about a slowdown on the mainland.

Last year, KPMG’s figures showed international and local Hong Kong banks registered here saw overall declines in their non-banking mainland China exposure, while the sector as a whole saw its mainland non bank exposure fall to 1.1 per cent down from 2.1 per cent the year before.

This smaller increase was driven by subsidiaries of Chinese banks incorporated in Hong Kong increasing their mainland lending.

Nonetheless, the latest survey suggests opportunities do exist for banks in Hong Kong related to the Belt and Road Initiative, the continued development of financial technology, and in enhancing their customer experience offering.

“If the banks can harness these, the potential is there for the opportunities to outweigh the challenges they are facing,” McSheaffrey said.

Last year, overall profit in Hong Kong’s banking sector fell by one per cent to HK$178 billion, if the one off gain from Hang Seng Bank’s partial disposal of its shares in Industrial Bank is excluded.

Total loans issued by Hong Kong banks dropped by three per cent, and net interest margins (NIM) declined by 10 basis points.

The KMPG survey found that the decline in NIM should be attributed to lower average interest spreads on lending (the difference between the interest rates banks offer lenders and savers), and the narrowing interest yield on investments.

Last year across all Hong Kong banks net interest margins provided 57 per cent of banks’ revenues.