Hong Kong banks to benefit from better margins and incomes although uncertain economic recovery, property sector crisis could drag, says KPMG
- The impact of interest-rate hikes will continue to filter through this year, as China’s reopening benefits lenders in the city, says KPMG’s latest report
- Banks in the city remain sensitive to China’s property crisis, while new business opportunities in ESG, climate risk-management and wealth management seen ahead
Hong Kong banks are expected to benefit from rising interest rates and growing business opportunities after the border reopening this year, although uncertainties around the recovery in mainland China and in the city and the simmering property debt will provide a drag, consultancy firm KPMG said in a report released on Tuesday.
Lenders in the city remain cautious in lending to Chinese property developers, who have struggled in making debt repayments in the past few years, said Paul McSheaffrey, partner, financial services of KPMG China in an interview, while highlighting “the importance of good lending practices.”
“Margins and operating income will go up, but credit costs will still continue to impact results,” said McSheaffrey. “The growth of the sector is still economically [connected], and GDP growth still has not come through as strong as people expected. But I remain optimistic about the second half being quite good.”
He said this outlook follows the decent financial performance by the city’s banks in 2022 despite Hong Kong’s economic contraction of 3.5 per cent. This was largely on account of the interest-rate increases made by the banks.
“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, and in particular the health of its real estate, technology, media and telecoms sectors,” said the report released on Tuesday.
In 2022, total assets of all licensed banks in the city rose by 2.5 per cent to HK$23 trillion (US$2.94 trillion). Their profitability improved, with net interest margin up by 24 basis points to 1.55 per cent, while operating profit before impairment charges increased by 24.3 per cent to HK$220 billion.
“In our view, the higher interest environment is, in general, positive for the banks,” said the report.
Meanwhile, bad debts are expected to rise mainly on account of impairments related to the property sector, according to KPMG. Hang Seng Bank, for example, recorded a 172 per cent surge in the expected credit losses last year from a year ago, primarily related to mainland China commercial real estate loans. Complex restructurings of Chinese developers are expected to continue inflicting losses on banks, as the pressures from bad debt ratios are seen to be sustained, the report said.
“The key lesson for banks from China’s real estate crisis is a reminder of the basic rules of lending: lend (have direct legal recourse) to the entity that legally owns the asset, where the cash will be generated to repay the loan,” said the report. Hong Kong banks have borne losses from defaults and missed payments by home builders while having no direct claim on the companies’ mainland property projects as loans are usually made to the developers’ offshore holding companies.
Yet there are avenues of emerging growth for the industry, ranging from ESG and climate risk management, wealth management services and technological transformation, according to the report. Generative artificial intelligence, for instance, allows banks to improve their customer services, marketing and cybersecurity, although banks need to manage risks emerging from these new technologies.
