Hong Kong’s banking sector showed resilience in 2020 as total assets grew, finds KPMG

Wealth Management Connect seen as first step toward wider cross-border opportunities.

Wealth Management Connect seen as first step toward wider cross-border opportunities.

  • Wealth Management Connect seen as first step toward wider cross-border opportunities

  • Virtual banks continue to compete with traditional banks on price and offerings

  • Low interest rates weigh heavily on results

15 June 2021, Hong Kong – The banking sector remained resilient in 2020, with continued growth seen in its overall balance sheet despite a challenging year for the overall economy, with low interest rates weighing heavily on results. Cost management remained an essential focus for banks in Hong Kong to monitor and improve profitability, according to KPMG’s latest report.

The 33rd annual KPMG Hong Kong Banking Report 2021 reviews highlights for the sector in 2020 and analyses key metrics for the top 10 locally incorporated banks in Hong Kong. Despite a challenging environment, bank deposits grew, and the total assets of all licensed banks expanded by 8.8 percent from HKD 21.06 trillion in 2019 to HKD 22.9 trillion in 2020. Loans and advances also grew by 3.4%, with commercial loans, mortgage lending and loans for use outside Hong Kong continuing to make up most of the loans portfolio of the surveyed banks. However, consistent with the prediction in KPMG Hong Kong Banking Report 2020, the operating profit before impairment charges for all licensed banks decreased, by 19.3 percent from HKD 287 billion in 2019 to HKD 232 billion in 2020.

Paul-Mcsheaffrey

Paul McSheaffrey, Partner, Financial Services, Hong Kong, KPMG China, comments:

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We anticipate the combination of likely lower interest rates and economic uncertainty, principally from Covid-19, will continue to impact the profitability of banks in 2021. To compensate for the impact, banks have placed a significant focus on reducing the absolute level of costs to manage profitability.

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Total operating costs increased only slightly from HKD 204 billion in 2019 to HKD 205 billion in 2020, compared with the increase of HKD13 billion in 2019. In particular, the total staff cost of the surveyed banks decreased by 2.6% compared to 2019. 

The Greater Bay Area (GBA) is becoming a more integral part of international banks’ business and growth strategy. While many banks started to develop plans for the GBA a few years ago, several institutions turned their plans into action and made sizeable investments in the region last year. For international banks looking for suitable investment opportunities in the GBA, their key consideration is to find the right domestic partner with whom they can cooperate to expand their business. The need to implement a comprehensive digital strategy should be another key consideration for international banks given the high costs of acquiring a physical presence, as well as customers’ strong preference for advanced digital capabilities.

With a prolonged low interest rate environment putting pressure on net interest margins as a key source of revenue for banks, many are seeking to generate income from other avenues such as fee-based wealth management activities. Wealth Management Connect can be viewed as the first step toward bigger opportunities – the successful launch of the scheme could lead to further enhancements in the future such as allowing a wider scope of products, a relaxation on quotas, or more flexibility around customer onboarding. Banks can use the launch of the scheme as a trigger point to expand their digital strategy, such as for their digital wealth management or broader e-banking propositions, to reach a wider audience.

Terence Fong

Terence Fong, Partner, Head of Chinese Banks, Hong Kong, KPMG China, says:

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As an international financial centre, Hong Kong remains both a practical and attractive place for mainland Chinese banks to set up shop as the first step in expanding abroad. The city’s legal and regulatory system, deep and diverse talent pool, international experience and status as fund raising and risk management hub further add to the appeal.

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Hong Kong’s eight virtual banks began operations in 2020. All are yet to turn around a profit as they remain focused on investing and spending on areas including marketing activities to grow their customer base. Looking ahead, these virtual banks will continue to introduce new products and services to customers as well as to compete with traditional banks on price to attract customers and deposits. Meanwhile, traditional banks have responded with enhanced digital offerings to their customers and the pandemic has also acted as a catalyst for these banks to accelerate their digital transformation initiatives, narrowing the digital gap between traditional and virtual banks. Interestingly, the report analysis suggests that target customers will not only include the younger generation, but also the older demographic who in general have more savings and are becoming more accepting of virtual financial services platforms and services.

Amid a challenging year, environmental, social and governance (ESG) issues and sustainable finance continue to be key areas of focus for both regulators and the banking industry in Hong Kong. While initial steps have been taken toward preparing banks to assess and manage climate risks, more needs to be done to integrate ESG into all aspects of the business and to nurture the right talent for the future. 

Pat-Woo

Pat Woo, Partner, Head of Sustainable Finance, Hong Kong, KPMG China, and Global Co-Chair, Sustainable Finance, KPMG IMPACT, says:

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The initial focus on climate risk and the results of the stress test exercise should form part of a bank’s overall ESG roadmap. This entails setting a firm-wide ESG strategy covering all aspects of governance and planning through to disclosure and communication, and embedding this strategy across the organisation.

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Paul-Mcsheaffrey

Paul McSheaffrey concludes:

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If there is good news on the opening of borders in 2021, this will have a favourable impact on the local economy as business returns to normal. We can expect the global economy to grow in 2021, especially China where the economy grew in the first quarter of 2021 compared to the same period last year.

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About KPMG China

KPMG member firms and its affiliates operating in Mainland China, Hong Kong and Macau are collectively referred to as “KPMG China”.

KPMG China is based in 28 offices across 25 cities with around 12,000 partners and staff in Beijing, Changsha, Chengdu, Chongqing, Foshan, Fuzhou, Guangzhou, Haikou, Hangzhou, Hefei, Jinan, Nanjing, Ningbo, Qingdao, Shanghai, Shenyang, Shenzhen, Suzhou, Tianjin, Wuhan, Xiamen, Xi’an, Zhengzhou, Hong Kong SAR and Macau SAR. Working collaboratively across all these offices, KPMG China can deploy experienced professionals efficiently, wherever our client is located.

KPMG is a global organisation of independent professional services firms providing Audit, Tax and Advisory services. We operate in 146 countries and territories and in FY20 had close to 227,000 people working in member firms around the world. Each KPMG firm is a legally distinct and separate entity and describes itself as such. KPMG International Limited is a private English company limited by guarantee. KPMG International Limited and its related entities do not provide services to clients.

In 1992, KPMG became the first international accounting network to be granted a joint venture licence in mainland China. KPMG was also the first among the Big Four in mainland China to convert from a joint venture to a special general partnership, as of 1 August 2012. Additionally, the Hong Kong firm can trace its origins to 1945. This early commitment to this market, together with an unwavering focus on quality, has been the foundation for accumulated industry experience, and is reflected in KPMG’s appointment for multidisciplinary services (including audit, tax and advisory) by some of China’s most prestigious companies.

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