2018
Hong Kong
Banking
Outlook
kpmg/cn
Contents
Overview: Exciting possibilities ahead as fintech goes mainstream 3
Macro trends affecting banking: New challenges on the horizon 4
Regulatory landscape: Regulations reducing, but technology
brings new complexity 5
Fintech: Collaboration not disruption 6
Robotics: Robots are not quite ready to take over the world
(or take our jobs) 7
Technology: Technology is creating new ways of working,
but humans remain important 8
Anti-Money Laundering: Battling financial crime through
technology 9
Deals: Hong Kong to go green 10
Conduct: Conduct is the new focus 11
Culture: Spotlight on bank culture 12
Banks’ booking models: Hong Kong gains traction as regional
booking hub 13
Non-Performing Loans: NPL outlook for Hong Kong is promising
with expectation of positive developments in China 14
Non-Financial Regulatory Reporting: The next issue for
enforcement 15
Tax: Tax policy makes Hong Kong a more attractive place
to do business 16
Strategy: A year of growth 17
Contact Us 18
Paul McSheaffrey
Partner, Head of Banking & Capital
Markets, Hong Kong
KPMG China
Overview
Welcome to our outlook for 2018, where our Banking team forecasts the key
developments and trends in Hong Kong for the next year.
With the market environment starting to stabilise in 2017, there are a number
of positive developments and opportunities in the year ahead for banks in Hong
Kong to increase their profitability. We are seeing increasing signs that US
interest rates will continue to rise, which is likely to benefit Hong Kong as liquidity
in the city’s system is pulled out to invest elsewhere. This may lead to better
yields and increases in revenue for Hong Kong banks in 2018.
We also expect to see credit losses remain within their existing levels, with
China’s financial deleveraging proceeding at its current controlled pace without
any large shocks that could cause potential losses for banks in Hong Kong.
Furthermore, we believe that 2018 will be the year where fintech goes
mainstream in Hong Kong. We appear to have reached a tipping point where
the adoption of fintech and other technologies across all aspects of banking has
become a priority issue on the boardroom and executive committee agenda. This
trend is likely to drive the industry towards making a step change in the adoption
of fintech in the next 12 months.
However, it is important that banks bear in mind that technology changes are
always more successful when they are business-led, rather than technology-
led. Encouragingly, we are seeing that the industry is now recognising this, with
banks increasingly ensuring that they first identify the problems they are facing
before seeking out the best available technology to effectively solve the issues.
Certainly, for banks in Hong Kong, there is no shortage of problems – regulatory
and compliance costs, conduct and culture risk, anti-money laundering issues –
and banks will increasingly apply technology to tackle these issues, manage costs
more effectively and maximise revenue generating opportunities.
Hong Kong’s position as a key international financial centre cannot be ignored,
and the city will continue to play a pivotal role in propelling China’s growing
influence and power on the world stage. In 2018, we expect mainland China to
continue to use external investment as a soft power vehicle, as well as look to
build new trading blocs and forge new alliances. One significant way to facilitate
this is through the Belt and Road initiative. We therefore expect to see a major
step change in Belt and Road financing that is arranged or facilitated through
Hong Kong in the year ahead.
We believe that with these positive developments, Hong Kong’s role of bringing
together investors and investees, and facilitating inbound and outbound
investment will be stronger than ever in the short-term.
Exciting possibilities ahead as
fintech goes mainstream
John Shelley
Senior Advisor
KPMG China
Macro trends affecting banking
A decade after the global financial crisis (GFC), the financial services industry
worldwide is now nearing the end of the cycle of regulators and governments
recouping money from banks through fines and other forms of redress. In the
US alone, banks have paid USD 150 billion in fines since the GFC. The associated
investigations and remediation activities have held back the level of investment
and management time that could have been spent on innovation.
Going into 2018, there are a number of significant external factors that banks need
to monitor and prepare for. Banks cannot ignore the geopolitical tensions and the
more nationalistic and protectionist tone being taken by some leaders. Ongoing
developments around Brexit continue to impact many international financial
institutions, with several banks considering moving key business and staff out of
the UK due to a lack of clarity over the path Brexit will take. We are also seeing
similar reported issues around Catalonia’s possible secession from Spain.
Banks will also continue to closely monitor the actions of the US in respect of
regulation. While there is continued discussion about rolling back aspects of US
regulation, the less reported area of concern is that the US appears to be stepping
back from implementing Basel 3, which has been hammered out between the
leading economic powers. As a result, some leading European nations have said
that they will also not implement aspects of the regulation, as they only agreed to
do so on the basis that the US would as well. The Basel framework has been an
important mechanism for international cooperation in the post-GFC world, and its
demise would leave a worrying vacuum.
One consequence of the increased capital requirements for banks has been
to dramatically reduce the attractiveness of Fixed Income, Currencies and
Commodities (FICC). This business has long been one of the biggest revenue
engines for wholesale investment banks. As this area of business continues to
shrink and become less profitable, it has forced many major investment banks to
seek alternative growth strategies, which can put more pressure on executives
to find new revenue streams. Banks need to be mindful of the need to drive
profitable growth while maintaining a focus on promoting a sound banking culture
and mitigating operational and conduct risk.
Across the world, non-traditional players are challenging the traditional banks,
and banks are experimenting to find the right balance between treating these
insurgents as competitors or partners. In mainland China, powerhouses Tencent
and Alibaba are transforming the way business is done and are threatening to
replace the traditional means of B2B commerce and trade finance payments
conducted by banks. China already leads the world in mobile payments with
volumes increasing five times in 2017 from the prior year to RMB59 trillion (USD
8.8 trillion)1. This has led to the central bank mandating that all mobile payments
will need to go through a centralised clearing house by next June to give the
authorities greater visibility and control. With this trend showing no signs of
abating, banks in Hong Kong and mainland China need to seriously consider how
to transform, innovate and compete with the fast-growing non-financial players. 1 The Financial Times, https://ft/content/3bcb5150-
7cce-11e7-9108-edda0bcbc928
New challenges on the horizon
Regulations reducing,
but technology brings
new complexity
Regulatory landscape
As banks in Hong Kong continue to adjust to new regulatory requirements,
there is a greater level of certainty around the regulatory environment in the city,
which should give banks the confidence to develop business and opportunities.
Furthermore, the optimism over the use of fintech and regtech to reduce costs,
increase efficiency and enhance customer experience is also expected to develop
further into 2018.
Hong Kong’s regulators are also focusing more on promoting technology and
innovation, and facilitating growth. While these steps are encouraging, it will be
important for both the regulators and banks in Hong Kong to ensure that they
balance this with their core responsibility of protecting investors and depositors,
and maintaining the stability of the financial system.
As 2017 draws to a close, there is a cautious ‘feel-good’ factor over the global
economy. This is partly because of synchronous global growth, which is perceived
to be non-cyclical. In addition, the impact and winding down of quantitative easing
in the US is expected to be smooth, provided it is managed well.
In parallel, the number of new global regulations has tapered off this year – the
Basel 4 standards are likely to be finalised in the next few months – and 2018
is expected to be a time of calibration and implementation rather than revisiting
rules and regulations.
In the US, after much discussion, it is unlikely that a rewrite of the Dodd-Frank Act
will take place. The government is looking to downscale regulatory requirements
for small and medium-sized institutions by increasing the threshold for which they
are exempt.
However, there are some challenges and concerns that banks in Hong Kong
need to address in 2018. First, cybercrime is an increasingly pervasive issue –
quantifying the size and nature of potential losses is also particularly difficult – and
banks need to continue to focus on managing cyber and related operational risks
in the year ahead.
Second, anti-money laundering (AML) and counter-terrorist financing are still key
areas of focus for banks both regionally and in Hong Kong. The rapid introduction
of new providers and technologies in recent years is also creating new AML
“typologies” and ways to launder money and hide terrorist financing, and is a
challenge that banks in Hong Kong need to continue to tackle in the year ahead.
Another trend over the past few years has been the growing number of
consumers who are diversifying to new providers, delivery and transaction
methods. Many of these new providers are associated with technology and
online services, and do not have a long history of managing customers’ money,
which creates the potential for things to go awry.
Simon Topping
Partner, Regulatory Advisory
KPMG China
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