Contents
Introduction3
Overview 4
Growth in Asia: Risk and regulatory considerations14
Raising the standard of conduct in global wholesale markets 16
The Belt and Road Initiative: Hong Kong banks to play a key role 22
Managed Services: the way forward 26
Strengthening Hong Kong’s role as a regional booking centre 28
An increasing focus on best execution 30
Welcoming the development of virtual banks in Hong Kong 32
Embracing change to drive effective compliance34
Unlocking the power of data to combat fnancial crime36
A digitally-enabled approach to Non-Financial Regulatory Reporting 38
Integrating cybersecurity into a broader digital strategy 40
Cracking the code for a successful customer experience 42
Shaping the workforce of the future 46
Driving transformation with tax technology48
Financial highlights and performance rankings 51
About KPMG 78
Contact us 79
2 |Hong Kong Banking Report 2018
2018 KPMG, a Hong Kong partnership and a member frm of the KPMG network of independent member frms affliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The 2017 results from our 30th annual Hong Kong Banking Report tell a
positive story for banks in the city, with margins rebounding after several
years of fat or decreasing levels. We continue to see interest rates rise in the
US – with HKD rates also expected to increase in the future – which could
lead to higher margins across the sector. Credit losses have decreased and
remain at a low level, and we have seen signifcant year-on-year loan growth,
indicating that banks are in a relatively healthy state and will continue to grow
their assets and loan books.
We believe that the strong focus on managing costs in previous years
has created additional proft for banks in Hong Kong, with many looking to
reinvest this capital in technology and innovation, and to access new markets
and products. We therefore expect to see further innovation around how
fnancial services are delivered to both retail and corporate customers, as
well as an increase in digitisation and the use of technology to make bank
operations more effcient and effective. Some examples discussed in this
report include using technology and advanced data analytics to combat
fnancial crime, and manage tax and regulatory compliance.
The greater focus on technology also raises challenges around cybersecurity
– especially given the amount of fnancial and personal data that banks hold –
and how best to shape the future workforce in the digital age.
The continued development of the Belt and Road Initiative and the integration
of the Greater Bay Area – where Hong Kong plays a key role as a fnancing,
risk management and professional services hub – present a number of
opportunities for banks in Hong Kong to expand their customer base and
drive growth.
We are also seeing the government and regulators in Hong Kong becoming
more proactive in encouraging investment banks to set up Asian booking
centres in the city, which should lead to increased demand for talent and
boost Hong Kong’s status as an international fnancial centre.
Another exciting development is the recent introduction of a new licensing
regime for virtual banks in Hong Kong which is expected to change how many
SME and retail customers consume fnancial services. This is making the
banking landscape in Hong Kong more competitive as non-traditional players
seek to apply for virtual bank licenses and provide other fnancial services.
While the market is expected to remain competitive, there are a number of
growth opportunities for banks that provide reason for optimism about the
future. However, despite the potential benefts that new technologies and
other regional economic initiatives bring, it is crucial for banks to ensure
they put their clients at the heart of what they do and deliver a holistic and
consistent customer experience in order to maintain their competitive edge.
I hope you enjoy our perspective on the sector in 2018, and would welcome
the opportunity to discuss the banking results and the current industry
landscape.
Paul McSheaffrey
Head of Banking & Capital
Markets, Hong Kong
KPMG China
Introduction
Hong Kong Banking Report 2018| 3
2018 KPMG, a Hong Kong partnership and a member frm of the KPMG network of independent member frms affliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.2018 KPMG, a Hong Kong partnership and a member frm of the KPMG network of independent member frms affliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
1 The analysis is based on fnancial institutions registered with the Hong Kong Monetary Authority.
2 The top 10 locally incorporated licensed banks mentioned in this article are the 10 banks with the highest total assets among all
locally incorporated banks as at 31 December 2017.3
NIM is either quoted from public announcements of fnancial statements, or calculated based on annualised net interest income and interest-bearing assets or total assets, depending on the availability of information.
Paul McSheaffrey
Head of Banking & Capital Markets,
Hong Kong, KPMG China
Rita Wong
Partner, Financial Services
KPMG China
Terence Fong
Partner, Financial Services
KPMG China
2017 was a strong year for Hong Kong’s banking sector, with notable growth
driven by robust exports and strong domestic demand, as well as an increase
in global expansion. The Hong Kong economy grew by 3.8 percent in 2017,
compared to 2.1 percent in 2016. This is also reflected in the strong performance
of the city’s banking sector. Total assets of all licensed banks grew by 8.1
percent, compared to 5.6 percent in 2016. The operating profit before impairment
charges of all licensed banks also increased by 13 percent to HK$229 billion from
HK$203 billion in 2016.
Hong Kong’s prominent role in facilitating China’s 13th Five-Year Plan, the Belt
and Road Initiative and the Greater Bay Area, as well as the surge in digital
innovation, present significant growth opportunities for banks. Strong growth in
loan portfolios, including to mainland Chinese entities, and improved net interest
margins resulted in robust revenue growth. Overall credit quality improved with
impaired loan ratios and cost-to-income ratios decreasing in 2017. This has
generally led to higher profitability for banks in Hong Kong compared to 2016.
In this report, we present an analysis1 of some key metrics for the top 10 locally
incorporated licensed banks2 in Hong Kong. Please note that we have conducted
this analysis on a legal entity basis, and where banks have a dual entity structure
in Hong Kong (e.g. a branch and an incorporated authorised institution) we have
not combined the results.
Net interest margin
Following the three interest rate hikes by the US Federal Reserve in March, June
and December 2017, the Hong Kong Monetary Authority (HKMA) adjusted the
Base Rate upward from 1 percent in 2016 to 1.75 percent in 2017. However,
retail deposit rates for banks in Hong Kong remained low during 2017, resulting in
a slower increase of funding costs. This contributed to the improved net interest
margin (NIM)3 and profitability of the surveyed banks in 2017.
Overview
4 |Hong Kong Banking Report 2018
2018 KPMG, a Hong Kong partnership and a member frm of the KPMG network of independent member frms affliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
4 HSBC consolidated results include Hang Seng and its other
Asia operations.5
Hang Seng 2017 Annual Report - p.27,
hangseng/cms/fn/fle/statement/ar_2017_full_en.pdf
6 HSBC 2017 Annual Report and Accounts - p.10,
personal.hsbc.hk/1/PA_esf-ca-app-content/content/about/fnancial-information/regulatory-disclosures/
pdf/HBAP_ARA_2017_e.pdf7
CITIC 2017 Annual Report - p.21,
cncbinternational/_document/about-us/interim-and-annual-reports/en/2017/annual_report.pdf
8 ICBC (Asia) 2017 Annual Report – p.137-138,
http://v.icbc/userfles/Resources/ICBC/haiwai/Asia/download/EN/2018/annual_report_en18.pdf
0%
1%
2%1.94%1.88%
1.73%1.65%
1.59%1.57%1.56%
1.27%
1.02%
1.15%
Han
g S
engHSBCCITICBEA
Nan
yan
g
DB
S
BO
C (H
K)SCB
ICB
C (A
sia)
CC
B (A
sia)
20172016
Source: Extracted from individual banks’ financial and public statements
Net interest margin
The average NIM across the surveyed licensed banks increased by 6 basis points
compared to 2016. In comparison, the average NIM for the top 10 licensed banks
for 2017 increased to 1.54 percent from 1.43 percent in 2016, with nine out of
the top 10 banks posting an increase in NIM. Hang Seng Bank Limited (Hang
Seng) and The Hongkong and Shanghai Banking Corporation Limited (HSBC)4
had the highest NIM among the top 10 locally licensed banks as at 31 December
2017.
Hang Seng’s NIM improved to 1.94 percent (an increase of 9 basis points
compared from 2016), mainly driven by the optimisation of its asset and liability
structure and a wider customer deposit spread as interest rates rose.5 HSBC’s
NIM stood at 1.88 percent (an increase of 13 basis points from 2016), mainly
due to higher margins from its Hong Kong and mainland China activities. Despite
the lending spread in mainland China narrowing, HSBC’s NIM in mainland
China increased, driven by a higher yield from portfolio mix changes, and a
higher re-investment yield coupled with lower funding costs. In Hong Kong, the
bank’s improved NIM was driven by wider customer deposit spreads and higher
re-investment yields, coupled with a change in its asset portfolio mix.6
Among the top 10 locally incorporated banks, China CITIC Bank International
Limited (CITIC) recorded the largest increase in NIM (26 basis points), while
the NIM of Industrial and Commercial Bank of China (Asia) Limited (ICBC (Asia))
remained flat in 2017 compared to 2016.
CITIC’s NIM increased from 1.47 percent in 2016 to 1.73 percent in 2017,
primarily due to closer collaboration with its parent bank and higher asset yields.7
The flat NIM experienced by ICBC (Asia) appears to be due to a decrease in
the ratio of interest-bearing assets with long-term maturity, which tend to carry
higher interest rates, to total assets. The ratio of long-term maturity assets to
total assets decreased from 6.55 percent in 2016 to 6.13 percent in 2017.8
With US interest rates likely to continue to increase in 2018, we expect that
interest rates in Hong Kong will rise as currency flows out and narrows the gap
between US Dollar and HK Dollar interest rates.
Hong Kong Banking Report 2018| 5
2018 KPMG, a Hong Kong partnership and a member frm of the KPMG network of independent member frms affliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.2018 KPMG, a Hong Kong partnership and a member frm of the KPMG network of independent member frms affliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.。