Banks’ fee income plummets as loan demand dwindles

Border reopening to benefit banks, but economic challenges remain. Strengthening the operational and financial resilience of the banking sector should remain a key focus

Interest 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

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

“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 support measures that regulators in China have launched in the final quarter of 2022. With this, the real estate industry is expected to see a turning point towards gradual recovery in 2023, Chan said.

“A series of systematic and comprehensive relief measures are steadily restoring liquidity and allowing property developers to gradually turn around to healthier, more sustainable businesses,” she said. In the short term, different regions are expected to continue to implement policies locally.

“The effects will be manifested in the effective implementation of policies, and market sentiment might gradually improve. The specific impact on banks depends on their sector exposure. In the long run, those policies will proactively alleviate liquidity crunch in the industry and provide solid fundamentals to support its stable development,” Chan said.

Wealth is still key

Whilst fee income from wealth management may be affected by Hong Kong’s economic slowdown, demand for such services is expected to rise over the year, particularly from China.

“Demand for ways to manage finance and wealth is expected to increase tremendously. As a result of the immense economic growth over the past decades, the investable assets held by individuals in the Chinese mainland are estimated to grow from RMB2.7t (approximately US$391.1m) in 2021 to RMB3.5t (approximately US$507.04m) by 2025. With such an increase in demand and investable assets, there is tremendous potential in the industry and we expect it to experience high growth, with an emphasis on globalisation, transparency, and digitalisation,” Chan said.

Overall, wealth management is expected to remain a key focus of Hong Kong banks through 2024.

“It’ll be a continuing growth focus for banks in Hong Kong, both in traditional wealth management segments of high net worth and ultra-high net worth, but also with a growing focus on capturing clients earlier in their wealth journey and growing those relationships along the wealth continuum, as the clients’ wealth increases,” Scott said.

Scott pointed out that the latter segment has seen particular innovation in digital wealth products by traditional wealth managers and especially the virtual banks who are targeting this market.

“This digital wealth focus has been a key driver for investment in the mainland China market and aimed at the more emerging wealth end of the continuum,” he said.

The future

In the future, expect to see developments in the financial technology (fintech) space as well as the rise of digital asset-related businesses. In 2021, the HKMA unveiled a strategy called Fintech 2025 to drive fintech development, with three main objectives and five focus areas. The objectives are driving fintech demand by facilitating banks’ application of technology, enhancing data infrastructure, and growing the HK fintech ecosystem, according to Chan. “Certain areas such as regtech, paytech, and loantech have already gained high exposure in the market. There will continue to be a focus on private wealth as private wealth holders seek diversification and optionality, digitisation of the banking sector including the use of regtech and suptech, and the acquisition of assets across APAC. Going forward to cater for Fintech 2025, the primary focus will eventually shift to investtech, wealthtech , greentech and insurtech,” Chan noted. Digital assets-related business will also be a key trend as the HK market is slowly opening up to retail investors.

“We also expect that more ESGrelated assets will become available as transition finance is being used by governments to encourage developments in this area. In the medium term, AI will also be used more widely in the banking sector, while its ethical implications will be monitored closely by regulators,” Chan said.

YVES ROESTI Managing Partner and CEO Synpulse

RAHUL BANSAL Associate Partner Synpulse