Banks in Hong Kong are optimistic on their financial performance in 2022 with higher interest rates likely to improve margins, global business consultancy KPMG said in its latest report. Non-interest revenue should also increase as initiatives such as the Cross-Boundary Wealth Management Connect scheme offer new growth opportunities. Paul McSheaffrey, Partner, Financial Services for KPMG China, extracts the key trends, opportunities and challenges identified in the KPMG Hong Kong Banking Outlook 2022 report.
How did Hong Kong banks fare in 2021?
The loan books of banks have shown to be quite resilient in the face of a challenging year and, as such, we do not expect to see a significant increase in non-performing loans in 2022. Indeed, over the year ahead, signs of improved economic sentiment could feed into loan growth, although the impact of the fifth wave of COVID-19 could temper this. KPMG predicts net interest margins are likely to have bottomed out and, with inflation starting to rear its head, several interest rate increases are expected in 2022.
What was the biggest trend identified in your report?
Banks in Hong Kong have continued to increase their focus on digital transformation. Technology is being used to improve operational efficiency and reduce costs, including in areas such as KYC (know your customer) and AML (anti-money laundering). On the customer side, demand has risen for more seamless digital experiences and banks are being pushed to improve their offerings. Digital transformation, which is critical for Hong Kong to retain its position as a leading international financial centre, is expected to remain a key pillar of growth.
How are virtual banks developing?
Virtual banks in Hong Kong have completed their first full year of operation. While a few have performed well, most are struggling to find a clear path to growth and looking for ways of customer acquisition at lower costs. These banks are also facing stiffer competition from traditional banks that have strengthened their own digital offerings in response to the arrival of the virtual banks.
How are Mainland Chinese banks performing?
Mainland banks, which have been a growing force in the sector for the last few years, have been focusing on stabilising their operations in Hong Kong. They’re looking forward to increased fee and commission income in 2022, particularly since mainland banks have a large retail customer base here. While risk appetite has decreased over the last year, mainland banks will be looking to develop new income streams and increase the level of digitalisation and collaboration between their mainland and Hong Kong operations.
What other trends have you identified?
The year of 2021 was one in which environmental, social and governance (ESG) became mainstream. We predict that ESG will become important for all stakeholders in a bank, investors, customers, employees and increasingly the regulators too. ESG will change how banks are operating internally, but also how they interact with customers externally. It needs to be factored into everything a bank does and not be restricted to the development of new ESG-related products and climate risk testing. The increased importance of ESG calls for a different approach to tackle this issue and we are looking forward to seeing how banks in Hong Kong respond. The importance of managing ESG data cannot be underestimated. While the major banks have plans in place to manage this, smaller banks are taking a wait-and-see approach and watching how their larger competitors handle compliance issues.
What challenges lie ahead?
Senior management at many banks highlighted the attraction and retention of talent as a key concern. Since the second half of 2021, there has been an acute contraction in talent in the financial services industry. Our clients have told us that the shortage of talent is proving to be more severe than in previous years and they are facing difficulties in obtaining specialist expertise. The attraction and retention of talent will therefore be a major priority for banks. In addition, all banks in Hong Kong are keeping a careful eye on any fallout from credit challenges associated with the mainland real-estate sector. The full impact of any defaults has yet to be felt, but this will be an area to watch in 2022.