Despite the slowdown in global economic growth in 2022, banks in Hong Kong outperformed as they benefited from high lending rates.
The Hong Kong Monetary Authority expects borrowing costs in the city to remain high for a while even after the Federal Reserve on June 14 left the key interest rate unchanged for the first time in more than a year. The US central bank indicated that two more quarter-point hikes are likely this year.
According to KPMG’s latest Hong Kong Banking Report, the net interest margin (NIM) for surveyed banks increased by 24bp to 1.55% last year. Operating profit before impairment charges for all licensed banks in the city rose 24.3% to HK$220 billion (US$28 billion) in 2022.
Among the top 10 licensed banks in the city, DBS Bank (Hong Kong) Limited (DBS), Hang Seng Bank and The Hongkong and Shanghai Banking Corporation Limited (HSBC) recorded the largest NIM during the period.
DBS recorded the largest NIM increase of 46bp at 1.79%. Net interest income also increased as loans and investment securities expanded by 15.4% and 68.3% respectively.
Chinese banks in the city have seen their income bolstered by the border reopening, and are in a particularly good position to benefit from a series of initiatives aimed at increasing cross-border activities in the Greater Bay Area.
Chinese banks are also looking to develop their retail service locally, including expanding their physical branches and upgrading their websites to improve customer experience, though they remain less competitive than their local counterparts such as Hang Seng Bank and HSBC, the report says.
Neobanks continue to struggle
Virtual banks continued to see growth in the number of account openings, reaching 1.7 million as of October 2022. In terms of financial performance, however, all the virtual banks remained in the red. Six of the eight recorded slight improvements in their results, with only Livi Bank and Fusion Bank experiencing bigger losses before tax than in the previous year.
Ping An OneConnect Bank and Airstar Bank posted the smallest losses before tax in absolute terms, and the largest percentage decreases in loss before tax compared to 2021 at 27% and 18%, respectively. Their outperformance was largely due to higher net interest margins.
Virtual banks are also trying to differentiate themselves by launching more initiatives. ZA Bank, which aims to become the go-to bank for Web3 crypto start-ups, is looking to offer token-to-fiat currency conversions for licensed exchanges.
Livi Bank offers a market-first, fully digital account opening process 24/7 on its app without the need for documents in most cases. It also says small and medium-scale enterprises can open a business account with the bank in one working day.
To fend off the neobanks’ challenge, traditional banks are accelerating their digital transformation. HSBC’s mobile banking application saw a 90% net growth in the number of active millennial users.
“Looking ahead, the performance of the Hong Kong banking sector in 2023 is likely to be linked closely to the speed and extent of the economic recovery in Hong Kong and also the growth of the Chinese mainland economy,” says Terence Fong, Partner, head of Chinese banks, Hong Kong, at KPMG China. “While the high interest rate environment could bring an opportunity to improve profitability, it is imperative for banks to closely monitor and manage the credit risk of their loan portfolios.”
