MARKET REPORT: HONG KONG
Real estate exposures will still be a downer for banks in 2023
Banks’ fee income plummets as loan demand dwindles Border reopening to benefit banks, but economic challenges remain.
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nterest income is expected to rise, but economic slowdown will weigh on fee income, analysts warned. Analysts are mixed on what 2023 has in store for Hong Kong banks, but one thing is certain: it’s likely going to be a challenging year. “Interest rates are rising, so margins and interest spreads will drive increased interest income. However, the economic headwinds and recession risk will impact overall loan growth and there are continued concerns around loan impairment and, in particular, exposure to Chinese commercial real estate,” David Scott, EY Banking and Capital Markets sector leader for Hong Kong, told Asian Banking & Finance. “Whilst regional growth has been adjusted upward as a result of Mainland China and Hong Kong’s recovery, uncertainties remain in global inflation as there is not much evidence that it has come under control,” said Natalie 28 ASIAN BANKING & FINANCE | Q2 2023
Strengthening the operational and financial resilience of the banking sector should remain a key focus
Chan, Deloitte China FSI Audit & Assurance Partner. She noted that the US Fed is expected to continue its rate hikes in 2023, and geopolitics remains “highly complex.” “Given these uncertainties, strengthening the operational and financial resilience of the Hong Kong banking sector should remain a key focus,” Chan added. Interest rates go up, fee income goes down Despite the challenges, the overall outlook is more positive compared to late 2022. The rise of interest rates is expected to benefit the city’s banks. This will expand margins, a positive after years of low margins, according to KPMG’s Hong Kong Banking Outlook Report. However, the economic slowdown will adversely affect fee income that banks will earn from wealth management and other fundraising and general spending
activities by their customers, said KPMG analysts Paul McSheaffrey, senior banking partner, Hong Kong, KPMG China; and Terence Fong, head of Chinese banks, Hong Kong, for KPMG China. Loan activity–both in Hong Kong and cross-border transactions with China–will be constrained until the economy begins growing once more, McSheaffrey and Fong warned. The recently announced easing of travel restrictions will be an important factor that will help the city recover, and in turn, benefit banks. “Cross-border travel boosts the Hong Kong economy significantly and this will certainly help banks,” said Scott. “There are also knock-on effects from a number of stimulus measures in mainland China and hopefully continued growth of the GBA and connected initiatives as the reopening continues.” Chan noted speculations that regulatory measures around certain sectors including tech might be relaxed to support economic growth. “Sectors in the Chinese mainland including hospitality, autos, consumer and technology will benefit from the reopening. The reopening is expected to enhance the flow of logistics and travel between the Greater Bay Area, thus promoting cross-border transactions in various financial sectors such as investment and wealth management,” Chan said. Real estate Real estate exposures will still be a downer for banks in 2023. “Since the second half of 2021, the China real estate industry has been hit by a wave of defaults and a liquidity crisis, and many property developers have had to be rescued,” noted Chan. McSheaffrey and Fong echoed this sentiment in KPMG’s report. “One thing that will weigh negatively on performance in the year ahead is credit costs and loan impairment charges. In particular, many banks that have exposure to the China real estate market, or to real estate more generally, are going to continue to find that is going to weigh negatively on their earnings,” they warned. A respite could come from the wide array of
