HONG KONG'S banking sector showed resilience in 2019 despite a challenging year for the overall economy, but it will need to manage the impact of Covid-19 on their financial results and operating models by focusing on costs and strengthening resilience, according to a recent report.   

The report by KPMG, entitled Hong Kong Banking Report 2020, shows the total assets of all licensed banks expanded by 4.8% to HK$21 trillion (US$2.7 trillion) in 2019, with a growth of 6.4% in loans and advances (compared to 3.5% in 2018) and hitting HK$10 trillion for the first time.

The operating profit before impairment charges for all licensed banks increased by 4% from HK$276 billion in 2018 to HK$287 billion in 2019.

The average net interest margin across all surveyed licensed banks increased by 13 basis points to 1.79% in 2019, with that of the top 10 locally incorporated licensed banks with the highest total assets increasing by 2 basis points to 1.71% in 2019, driven by wider customer deposit spreads.

Credit quality also remained strong in 2019 among the surveyed licensed banks, with the impaired loan ratio marginally improved by 1 basis point from 0.51% to 0.50%. 

“There were some difficult times operationally in 2019, but banks generally fared well and profitability was up,” says Paul McSheaffrey, partner, head of banking and capital markets, Hong Kong, KPMG China. “Moving into 2020, the onset of Covid-19 [pandemic], coupled with macroeconomic uncertainty, is likely to have a significant impact on profitability as banks grapple with challenges in generating revenue, as well as rising credit impairment costs that cannot be avoided. To maintain profitability, many banks will need to place an increased focus on costs as the primary lever to manage profitability.”     

Meanwhile, one virtual bank has launched and the remaining seven virtual banks are set to launch in Hong Kong soon. They are expected to compete with traditional banks on price to attract customers and deposits, and could push up the cost of funding.

The full launch of all the virtual banks could cause price competition for term deposits. However, the report notes, deposits at virtual banks as a percentage of total balances are likely to be relatively minor, at around 2% to 3% of the total, at least in the short term. So, the impact on overall margin compression will be limited.

Terence Fong, partner, head of Chinese banks, Hong Kong, KPMG China, says: “We expect banks to increase their focus on automation from a cost and resilience perspective.”

“Ensuring that banks can continue to operate and offer their core services is key, and customers are also increasingly demanding more digital solutions for their banking needs, especially as Covid-19 has led to the increasing use of digital channels,” he adds. “To support this, banks are realising that more of their products and transaction processing will need to be digitalised.”  

The banking landscape continues to rapidly evolve, according to the report, and banks no longer do everything by themselves as there is more reliance on third parties as part of the overall ecosystem to provide not just banking services, but broader lifestyle services to customers.

However, the Covid-19 outbreak has shown that this increasing reliance on third parties can present significant challenges for banks. Going forward, managing third-party risk will become increasingly important in ensuring that banks can continue to offer a seamless service to their clients and can preserve the trust that customers in Hong Kong continue to place in them. 

“Hong Kong’s infrastructure and ability to get back up and running quickly in light of Covid-19 may cause some international banks to consider building up capacity in the city for their global operations to strengthen their resilience,” McSheaffrey notes. “Having global operation centres in Hong Kong, albeit not necessarily on the scale of traditional outsourcing locations, could therefore be an attractive proposition for some banks [as] the value gained from operational resilience is arguably more important than costs.”