Hong Kong’s persistent low-interest-rate environment, coupled with the pandemic-related economic uncertainty, will continue to adversely affect the profitability of the Hong Kong banking sector this year, according to a report on Tuesday.
The KPMG Hong Kong Banking Report 2021 shows that the total assets of all licensed banks in Hong Kong expanded by 8.8 percent from HK$21.06 trillion (US$2.71 trillion) in 2019 to HK$22.9 trillion in 2020, while loans and advances also grew by 3.4 percent. However, the operating profit before impairment charges for all licensed banks decreased 19.3 percent, from HK$287 billion in 2019 to HK$232 billion in 2020.
The combination of likely lower interest rates and economic uncertainty, principally from COVID-19, will continue to affect the profitability of banks in 2021, said Paul McSheaffrey, financial services partner at KPMG in Hong Kong
The combination of likely lower interest rates and economic uncertainty, principally from COVID-19, will continue to affect the profitability of banks in 2021, said Paul McSheaffrey, financial services partner at KPMG in Hong Kong.
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However, he said the stabilization of COVID-19 infections and the rebounding economy in Hong Kong is still expected to have a favorable impact on the local economy as business returns to normal. After the city resumes quarantine-free cross-border travel, the rebound in economic activities will lead to an increase in bank profits, McSheaffrey added.
The average net interest margin, or NIM, for the top 10 licensed banks in 2020 fell to 1.38 percent from 1.71 percent in 2019, with all of the top 10 banks posting a decrease in NIM. Although there are some signs that US inflationary pressures may lead the US Federal Reserve to raise rates, the outlook for Hong Kong banks’ NIM is likely to remain challenging, according to the report.
As the prolonged low interest rate environment puts pressure on net interest margins as a key source of revenue for banks, many banks are seeking to generate income from other avenues such as the Wealth Management Connect program, according to the report.
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Since there is a large base of potential customers and middle class families on the mainland, and most of them lack access to overseas assets allocation channels, the Southbound Wealth Management Connect is expected to attract more investors, said Terence Fong, a partner at KPMG China and head of Chinese banking in Hong Kong.
Because of the wide range of investment channels and the local investors’ cautious attitude toward mainland regulations as well as the lower returns of mainland investment products, the Northbound Wealth Management Connect is expected to have limited appeal to Hong Kong residents, Fong added.