Nascent virtual banking landscape set to transform customer service and usher in the future of banking

HONG KONG, June 13, 2019 /PRNewswire/ -- Hong Kong's banking sector showed resilience in 2018, with stable capital and liquidity performance, as well as strengthening profitability, according to KPMG's latest Hong Kong Banking Report.

The total assets of all licensed banks grew by 3.6 percent compared to the 8.1 percent seen in 2017. The operating profit before impairment charges of all licensed banks improved slightly on the year before, rising by 15 percent in 2018 in comparison with 13 percent in 2017 and amounting to HKD 268 billion in 2018 from HKD 234 billion in 2017.

Given the rise in the HKMA's Base Rate, the average net interest margin (NIM) across the surveyed licensed banks increased by 11 basis points to 1.75 percent. The average NIM for the top 10 licensed banks rose to 1.69 percent in 2018 compared to 1.54 percent for 2017. Nine out of the top 10 banks posted an increase in NIM.

Paul McSheaffrey, Hong Kong Head of Banking & Capital Markets, KPMG China, says: "After many years of reducing or stagnant interest margins, 2018 was the year when US and Hong Kong interest rates started to rise, which flowed through to stronger income for Hong Kong banks. However, recent global uncertainty has changed sentiment and further rises in rates are unlikely, with the possibility that some of the improved net interest margin could reverse in 2019."

The average cost-to-income ratio of the surveyed banks meanwhile stood at 44 percent for the year ended 2018, an increase from 42.5 percent in 2017 but not as high as the 47.9 percent seen in 2016. For the top 10 surveyed banks, the ratio improved to 39.06 percent as at the end of 2018 from 40.86 percent in 2017.

In terms of costs, KPMG predicts technology spend among banks will increase in 2019, to boost innovation-driven growth and a sustainable reduction in operating costs, an imperative for driving further profitability.

McSheaffrey continues: "Digital innovation is increasingly a strategic focus for Hong Kong's banking sector. The HKMA has so far granted 8 new virtual banking licenses. Initially focusing on retail customers and small and medium enterprises, we expect that the services provided will quickly become more sophisticated and that traditional banks will respond. This will bring about a much more competitive and innovative environment."

Meanwhile, due to global economic uncertainty, total growth in loans and advances decelerated after a strong improvement in 2017. As at the end of 2018, the total loans and advances of the surveyed banks increased by 3.5 percent to HKD 9,028 billion, compared to 14.9 percent growth and a total of HKD 8,725 billion in 2017. Amongst the top 10 surveyed banks, gross loans and advances increased from HKD 7,644 billion in 2017 to HKD 8,068 billion in 2018, a rise of 5.55 percent.

Terence Fong, Partner, Financial Services, KPMG China adds: "The impaired loan ratio among Hong Kong banks remained stable on the whole in 2018, with the average impaired loan ratio improving slightly from 0.51 percent in 2017 to 0.50 percent as at the end of 2018. For the top 10 surveyed banks, the average impaired loan ratio stood at 0.63 percent for 2018, which showed continued stability but represented a slight decrease from 0.68 percent in 2017."

The exposure to non-bank Mainland China-related business of the surveyed banks increased by 4 percent as at the end of 2018, which reflected decelerated growth in 2018 compared to 15 percent growth in 2017. In aggregate, non-bank Mainland China exposure for the top 10 surveyed banks grew by 2 percent in 2018, with most recording growth in non-bank Mainland China exposure.

Looking forwards, the advent of the virtual banks is set to provide new opportunities for the sector. McSheaffrey concludes: "These new players are expected to broaden the selection of banking options, foster innovation and enhance customer experience in the city. New entrants will be vying to increase their market share and customer base, while the incumbent traditional banks will seek to maintain their standing in the market."

The Top 10 licensed banks are:

1. Hongkong And Shanghai Banking Corporation Limited (The)
2. Bank of China (Hong Kong) Limited
3. Hang Seng Bank, Limited
4. Standard Chartered Bank (Hong Kong) Limited
5. Industrial And Commercial Bank of China (Asia) Limited
6. Bank of East Asia, Limited (The)
7. China Construction Bank (Asia) Corporation Limited
8. Nanyang Commercial Bank, Limited
9. DBS Bank (Hong Kong) Limited
10. China CITIC Bank International Limited

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 22 offices across 20 cities with around 12,000 partners and staff in Beijing, Changsha, Chengdu, Chongqing, Foshan, Fuzhou, Guangzhou, Haikou, Hangzhou, Nanjing, Qingdao, Shanghai, Shenyang, Shenzhen, Tianjin, Wuhan, Xiamen, Xi'an, 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 network of professional services firms providing Audit, Tax and Advisory services. We operate in 153 countries and territories and have 207,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such. 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 multi-disciplinary services (including audit, tax and advisory) by some of China's most prestigious companies.