KPMG 2008 Banking Survey Report

KPMG 2008 Banking Survey Report


Media contact

Media contact

Director, Media and Publications

KPMG in China


Related content

  • Hong Kong authorised institutions (AIs) have not been immune from the global financial crisis. Overall, net profit after tax for surveyed AIs decreased by 42%, while return on equity fell to 14.5% for the surveyed locally-incorporated AIs.
  • Net interest income grew by 10.4%, benefiting from loan growth.
  • Volatility in global equity markets and an unfavourable investment sentiment caused non-interest income to drop by 34%.
  • Generally, loan asset quality has worsened in the credit crunch. The amount of impaired advances surged by 88%, and the overall impaired loan ratio rose 0.4% to 0.99%. The overall net loan impairment charges increased by 217% to HKD 24.6 billion due to a combined effect of rising new impairment charges and lower write-backs.
  • Capital adequacy remained strong under BASEL II, with an overall industry average of 14.8%.


KPMG will soon issue its 21st annual survey report, based on the results of 134 of the 200 Hong Kong AIs for periods ended in 2008. This report aims to provide an overview of the performance of locally-incorporated AIs and foreign bank branches in 2008; their financial position; and the economic environment in which they have been operating. The report also provides a reference point for their detailed financial information. Below is a summary of the key findings.  


  • Hong Kong's economy expanded by 2.4% year-on-year in 2008, after growth of 6.4% in 2007.
  • Property and rental prices both dipped in the final quarter of 2008. The decline in property markets was among the highest recorded since the fourth quarter of 1997, when measured quarter-on-quarter. The sliding trend extended into early 2009 for retail and office properties, while residential property prices subsequently saw some recovery due to the limited supply of new residential units.
  • Fund raising activity, stock trading volume and the Hang Seng Index plunged amid the uncertain global economic outlook. Total funds raised in 2008 were about one quarter of those raised in 2007, and most of the funds were raised in the first half of 2008. Stock trading turnover dropped 19.9% in 2008 compared with 2007 and has fallen every quarter since reaching its peak in the fourth quarter of 2007.
  • The year-on-year inflation rate was 4.3% in 2008 due to a surge in world food prices and rise in private housing rental in early 2008. The fall in global food and energy prices as well as domestic hosing prices in late 2008 eased inflationary pressure in Hong Kong. The year-on-year growth in the CPI came down from a peak of 6.3% in mid-2008 to 2.1% in December 2008.
  • The unemployment rate rose from a decade-low of 3.2% in the summer of 2008 to 5.3% in April 2009, the highest level in 41 months. Nominal payroll reversed its rising trend to a drop of 2.1% in the fourth quarter of 2008, causing real wages to fall by 0.1% from a year earlier in December. 


  • Hong Kong banks followed the US Federal Reserve to cut the prime rate by 525 basis points during 2008. This reduction was even higher than the cut in US federal rates because the HKMA adjusted the base rate calculation formula. Commercial banks in Hong Kong cut the prime rate by 150 bps in the first quarter of 2008 and by another 25 bps in November.
  • The net interest margin for retail banks fell from 1.90% in 2007 to 1.84% in 2008. While spreads from HIBOR-based lending widened when HIBOR rose in the third quarter, lower spreads from prime-priced lending continued to put significant pressure on overall margins.
  • Lending grew by 10.9% in 2008 and growth was generally broad-based. Customer deposits slightly increased by 3.2%. Last year, both loans and deposits grew by 20% or more.
  • The strongest loan growth was seen in loans for use outside Hong Kong and commercial loans, which increased by 16.5% and 15.0% respectively. The growth momentum for loans for use outside Hong Kong slowed after climbing more than 30% annually over the last two and a half years. Commercial loan growth was slightly lower than the 19.7% achieved in 2007. As the global financial crisis intensified after the collapse of Lehman Brothers, banks generally became more cautious in lending.
  • Renminbi deposits reached RMB 56.1 billion at the end of 2008, up 68% year-on-year. The growth of Renminbi deposits reversed in May 2008, due to a widening spread in the Renminbi exchange rate as the China Foreign Exchange Trade System (the foreign exchange trading platform for the interbank market) increased the transaction fees for currency conversions between the Hong Kong dollar and Renminbi. 


Balance sheet

  • The overall balance sheets and loan books of the AIs covered in the survey expanded by 3.2% and 9.2% respectively during the year, compared with the 27% and 22% growth achieved in 2007. Licensed banks (LBs), restricted licensed banks (RLBs), and deposit-taking companies (DTCs) still saw some growth in balance sheets and loan books. They recorded growth of 7.0%, 9.8% and 17.2% respectively in their total assets and 8.8%, 14.9% and 9.9% in their loan books. On the other hand, FBB's balance sheets contracted by 3.3% while their loan books grew by 10.3%.
  • Commercial loans, accounting for 39% of AIs' loan books, recorded a 15.5% increase. Mortgages, accounting for 16.4% of total loan books, increased by 4.3%. High yielding credit card advances and other unsecured personal loans increased by 0.5% and 17.8% respectively. Furthermore, loans for use outside Hong Kong increased by 5.8% year-on-year with their proportion of the total loan books rising to 31%.
  • LBs saw increases in their commercial loans, credit cards and other personal loans, loans for use outside Hong Kong, and mortgage loans, while FBBs achieved strong growth in credit cards and other personal loans, trade finance loans and commercial loans. RLBs also saw similar growth in commercial loans, but loans for use outside Hong Kong and mortgage loans in RLBs showed stronger growth than credit card and other personal loans. Trade finance saw a 60% drop. DTCs saw strong growth in mortgage loans and credit card and other personal loans. Commercial loans and trade finance both grew mildly, while loans for use outside Hong Kong reported a drop.
  • AIs' customer deposits increased by 4.0%, compared with 25% in 2007. Investment losses and write-offs raised cautiousness over investment. The investment books fell by 1.7% to 17.5% of total assets, compared to 19.2% of total assets in 2007.


  • Overall net profit after tax fell by 42% compared with a 46% increase in 2007. LBs and DTCs saw falls of 31% and 14.1% in the net profit after tax respectively while FBBs and RLBs suffered a larger drop of 82% and 93% respectively.
  • Net interest income remained the main component of income, rising by 10.4% on the back of loan growth. LBs and FBBs saw their average net interest income rise by 6.4% and 40% respectively. RLBs and DTCs also recorded modest growth in net interest income, but they accounted for less than 3% of the total net interest income for all AIs.
  • Non-interest income, including investment losses and write-downs, was affected by the global financial crisis. AIs on average saw a 34% drop in non-interest income, with FBBs taking a 50% dip, followed by LBs, RLBs, and DTCs which saw a decrease of 24%, 37% and 4.5% respectively. Net fee and commission income fell 25% overall due to slower stock trading activities and lower demand for wealth management products. Volatility in global equity markets and unfavourable investment sentiment led to a decline in sales of investment products.
  • Total operating income dropped 12.9%, compared with a 35% increase in 2007. The share of non-interest income to total operating income decreased to 39% from 52% in 2007, with the ratio varying from between 55% and 83% in FBBs and RLBs to 33% and 29% in DTCs and LBs. 
  • Operating expenses rose by 6.5% on the back of higher rental costs. As operating income fell and operating expenses rose, the cost to income ratio deteriorated from 45% in 2007 to 55% in 2008.
  • Overall, core operating profit before impairment charges decreased by 29%, compared with 42% growth in 2007. The contributions from associates and jointly controlled entities in LBs fell. This was mainly attributable to a one-off gain on the dilution of investments in mainland banks in 2007 not being repeated.

Asset quality

  • The weakening economy led to more credit downgrades in loan portfolios, raising impaired advances by 88%, albeit from a very low base. The overall impaired loan ratio rose 0.4 of a percentage point to 0.99%. The only exception was RLBs, which saw no major increases in impaired advances. 
  • For locally-incorporated AIs, the ratio of loans that were past due but not impaired decreased from 2.20% to 1.76% by the end of 2008. Excluding HSBC, this fell from 1.90% to 1.53%. Whether loan assets will continue to deteriorate or not will depend on the recovery of the Hong Kong and global economies.
  • The overall impairment charge increased by 217%. New impairment charges rose, while releases and recoveries fell as significant recoveries that were recognised in the previous year did not recur in 2008. Loan impairment charges increased across all AI segments. For locally-incorporated AIs, the net individually assessed loan impairment charges increased 6.5-fold while net collectively assessed loan impairment charges grew by 59%.
  • Overall, credit costs remained at a very low level of 0.60% (2007: 0.21%) as measured by the ratio of loan impairment charges to gross loans and advances.  

Capital adequacy

  • AIs in Hong Kong have adopted the revised capital adequacy framework (Basel II) since 1 January 2007. Capital adequacy remained strong under Basel II with an overall industry average of 14.8%. The ratio was generally lower than that calculated under Basel I, largely due to capital charges on operational risk.  

Commenting on the banking survey report, Martin Wardle, partner in charge of KPMG's Financial Services practice in Hong Kong, said:

"Hong Kong has not been immune from the global financial crisis. The net profit after tax decreased by 42%, mainly driven by lower fee and commission income, higher investment losses, and higher impairment charges and write-downs of loan and investment assets. Net interest margins continued to be under pressure in the low interest rate regime, though net interest income still rose by 10.4% for surveyed AIs. Loan growth was broad-based, with the strongest growth recorded in commercial loans, which maintained the largest loan segment.

Moving into 2009, the net interest margin has narrowed notably, due to significant reductions in the interest margin of HIBOR-based lending as a result of ample liquidity in the interbank market, though this is somewhat offset by the widened net interest margin on prime-based lending.

On the non-funded income side, non-interest income fell by 34%, primarily due to investment losses and write-downs as well as lower fee and commission income on wealth management products. However, in the second quarter of 2009, global equity markets began to revive, with an uptick in trading volume and share price."

Walkman Lee, a partner in KPMG's Financial Services practice, added:

"The rapid downturn since the second half of 2008 led to some corporate failures. Exporters in Hong Kong were affected by significantly reduced demand from the US and other developed countries. Impaired advances for all AIs increased by 88%. The overall impaired loan ratio rose 0.4 of a percentage point to 0.99%.

Although the delinquency ratios for AIs are currently not high by historical standards, there are increasing signs of deterioration. The classified loan ratio for retail banks rose from 1.24% at the end of December 2008 to 1.47% at the end of March 2009. The credit card charge-off ratio has also picked up in first quarter of 2009. Lenders should stay on guard against any further acceleration of the downturn in the global and local economy and dynamic credit risk management is critical. Loan officers should keep in close contact with high risk customers and be alert for signs of liquidity problems.

Last but not the least, we are delighted to see the launch of pilot scheme for the use of Renminbi in settling cross-border trade transactions between Hong Kong and mainland cities. Hong Kong banks can now conduct Renminbi trade finance services. The scheme should also widen the scope of mobility of Renminbi funds between the mainland and Hong Kong."


- Ends -



About KPMG 

KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 144 countries and have 137,000 people working in member firms around the world.

The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. Each KPMG firm is a legally distinct and separate entity and describes itself as such. 

KPMG China has 12 offices (including KPMG Advisory (China) Limited) in Beijing, Shenyang, Qingdao, Shanghai, Nanjing, Chengdu, Hangzhou, Guangzhou, Fuzhou, Shenzhen, Hong Kong and Macau, with more than 8,500 professionals.

© 2022 KPMG Huazhen LLP, a People's Republic of China partnership, KPMG Advisory (China) Limited, a limited liability company in Mainland China, KPMG, a Macau (SAR) partnership, and KPMG, a Hong Kong (SAR) partnership, are member firms of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation.

For more detail about the structure of the KPMG global organisation please visit


Connect with us