Hong Kong banks face margin squeeze despite asset growth

Loans advanced 3.3% in 2025 and ended a three-year contraction.

Hong Kong's banking sector is expected to remain on a growth path through the rest of 2026, with HSBC remaining the largest licensed bank by total assets in 2025.

However, concerns over high debt levels in AI-related industries, ongoing conflicts in the Middle East that are pushing up energy and shipping costs, and uncertainty over future US interest rate cuts could weigh on global growth, according to KPMG's Hong Kong Banking Report 2026.

Banks are also expected to contend with continued weakness in mainland China's housing market and Hong Kong's commercial real estate sector.

Against that backdrop, KPMG said banks should maintain prudent risk management and closely monitor exposures to highly leveraged property portfolios and vulnerable corporate sectors.

HSBC saw its assets reach $1.5t (HK$11.68t) last year, followed by Bank of China (Hong Kong) at $553.8b (HK$4.26t) and Standard Chartered Bank (Hong Kong) at $377.0b (HK$2.90t).

Hang Seng Bank ranked fourth with total assets of $236.6b (HK$1.82t), followed by Industrial and Commercial Bank of China (Asia) at $129.0b (HK$992.5b) and Bank of East Asia at $119.7b (HK$921.0b). Nanyang Commercial Bank, China Construction Bank (Asia),

China CITIC Bank International and DBS Bank (Hong Kong) completed the top 10.

HSBC also recorded the highest net profit after tax at $16.1b (HK$124.12b). Bank of China (Hong Kong) ranked second with $5.4b (HK$41.31b), followed by Standard Chartered Bank (Hong Kong) at $2.8b (HK$21.42b).

Hang Seng Bank reported net profit after tax of $2.0b (HK$15.76b), whilst DBS Bank (Hong Kong) ranked fifth with $1.0b (HK$7.75b). Industrial and Commercial Bank of China (Asia), China Construction Bank (Asia), Bank of Communications (Hong Kong), CMB Wing Lung Bank and Bank of East Asia completed the profit rankings.

The Hong Kong government expects the economy to grow by 2.5% to 3.5% this year, after expanding 3.5% in 2025.

Inflation is forecast to rise to 1.7% from 1.1% last year. Growth in the first quarter of 2026 was driven by exports of electronic products, stronger services exports, continued demand for AI-related products, and a recovery in tourism and financial services.

The positive outlook follows a stronger performance in 2025. Total assets of licensed banks rose 7.1% to $3.4t (HK$26t), whilst loans and advances increased 3.3%, reversing three consecutive years of declines.

Customer deposits grew 9.1%, well above the average annual growth of 2.5% recorded between 2022 and 2024.

Operating profit before impairment charges increased 5.5% to $43.8b (HK$337b), supported by a 5.7% rise in non-interest income.

Lower interest rates continued to put pressure on profitability.

The US Federal Reserve cut rates by a total of 75 basis points in 2025, prompting the Hong Kong Monetary Authority to lower its base rate to 4.00% from 4.75%.

The average net interest margin across surveyed banks fell by seven basis points, although total net interest income still rose 4.5% to $40.0b (HK$308b) as lending recovered.

Looking ahead, KPMG said banks' profitability will depend on how well they manage their balance sheets in a lower-rate environment to protect margins.

Credit quality is also expected to remain broadly stable, although banks will need to watch global trade tensions, US tariff risks, interest rate movements and geopolitical developments whilst keeping a close eye on commercial real estate exposures.

($1.00 = HK$7.84)