Hong Kong banks face mixed outlook with expected rate cuts in 2024

Credit risk management will be a key concern for banks amidst fluctuating interest rates.

Whilst banks in Hong Kong are expected to continue benefiting from high interest rates, an expected rate cut in the near future and ballooning climate risk and real estate risk will keep lenders on their toes.

KPMG further expects that 2024 is the year that Hong Kong’s banks will lay the groundwork for the sector’s future development.

The total assets of all licensed banks in the city expanded by 2.7% to HK$23t in 2023, buoyed by the high interest rate environment that helped expand the banks’ net interest margins (NIM). NIMs for all banks increased 30 basis points (bp) to 1.84%, whilst operating profit rose by 34.7% to HK$295b.

For 2024, interest rate cuts are expected, which will have a mixed effect on banks. For lenders with more exposure to the capital markets, a lower interest rate environment will benefit investment banking and wealth management operations. This is because equities will become more attractive, according to KPMG.

“Looking ahead, banks will continue to benefit as interest rates may stay at higher levels than forecast. However, the timing and pace of a rate cut are still subject to uncertainties, so banks should plan their strategies accordingly,” noted Paul McSheaffrey, Senior Banking Partner, Hong Kong, KPMG China.

Credit risk management will be a key concern for banks amidst fluctuating interest rates.

"As higher interest rates will continue to improve profitability, banks need to be vigilant in managing the credit risk in their loan portfolios. The anticipated reductions in rates along with a continued increase in cost, means that the challenge for managing costs and creating headroom for continued investment has become an imperative,” warned Simon Shum, Partner, Financial Services, KPMG China.

Capital market activities, equity risk premiums, businesses leveraged to cost of funding as well as the inevitable cash risk premium 'opportunity cost' are additional factors that will impact each bank differently as the interest rate cycle shifts, KPMG said.

Climate and real estate risks
One big change that Hong Kong banks are preparing for is the rise of climate risk.

Over the past year, banks have been preparing for the HKMA's Climate Risk Stress Test, due in June 2024. This aims to provide the regulator with a comprehensive understanding of banks' climate resilience, focusing on both physical risk and transition risk, the KPMG said.

Risks associated with banks’ exposures to mainland China’s real estate sector and local small and medium enterprises (SMEs) will be other areas of concerns for banks.

“Any further measures taken by the Chinese Mainland authorities to contain and manage the issues arising from the real estate sector will be crucial in stabilising the market and limiting defaults among borrowers,” KPMG noted.

“Separately, the pace and strength of Hong Kong's economic recovery from the lingering impacts of Covid will be another key factor, as a robust rebound in the city's economy will contribute to improved credit conditions, especially for SMEs,” it added.

Talent gap still an issue
Talent retention and acquisition remained challenging for the banking industry in general, KPMG found. Total staff costs of the surveyed banks stayed broadly consistent with a slight increase of 3.2% in 2023. 

Talent schemes under the Fintech 2025 platform include the Fintech Career Accelerator Scheme, which has a variety of programmes for students and graduates, and the Industry Project Masters Network for post-graduates, which should help ease the talent shortage in this key area, KMPG said.