Weak growth in global demand has left the territory’s banks gasping for air.
While Hong Kong banks might not be careening off a cliff anytime soon, the next year or so will be marked with bumps and bruises as they trudge through a challenging operating environment, a growing heap of problem loans and rising credit costs. Moody’s Investors Service maintained a negative outlook on Hong Kong’s banking system as of the end of June, citing deteriorating operating conditions.
“We expect a more challenging operating environment for Hong Kong banks in the coming 12-18 months, because of the weak growth in global demand, and also because the banks’ borrowing costs are higher, owing to further monetary tightening in the US,” says Sherry Zhang, analyst at Moody’s. “This situation will pressure the system’s asset quality and profits, and test its resilience, given the territory’s elevated property prices and the banks’ growing linkages with Mainland China,” adds Zhang.
The negative outlook also reflects the credit rating agency’s expectation that large banks in the territory will receive less government support. Problem loans, meanwhile, are expected to increase from current low levels due to the slower Hong Kong economy and likely higher interest rates that tend to push up loan delinquencies. Zhang adds that Hong Kong banks will have to grapple with increased pressure on profitability amid lower interest income and higher credit costs.
Fitch Ratings is also signaling caution, and one of its main concerns is that the Hong Kong banking system still has “significant concentration and source of risk” stemming from its sizeable mainland China exposure (MCE).
Amid the prospects of rising problem loans and MCE risk, Hong Kong banks should start developing a more comprehensive risk management strategy that covers all aspects of the lending cycle from pre-loan assessments to post-lending management, says Paul McSheaffrey, head of banking at KPMG Hong Kong.
He says banks are starting to look at alternate ways to improve their profitability based on KPMG’s latest Hong Kong Banking Survey which reviewed the top 10 locally incorporated banks in Hong Kong. The survey reveals that some banks are focusing on enhancing their customer experience offering, as well as their mobile and other payment service channels to improve top-line growth.
Others might also look at managing costs optimally by harnessing data to improve regulatory reporting or implementing a cost management structure.
Who made it to HKB’s list?
Hong Kong and Shanghai Banking Corporation (HSBC) remains Hong Kong’s largest licensed bank in 2016 with 21,112 staff, a tad lower than the 21,153 reported a year earlier. HSBC deputy chairman and chief executive of HSBC Asia Pacific Peter Wong notes that hiring will continue this year despite tough economic conditions and a slowing Chinese economy. Hiring however, he said, is focused on role replacements on operations rather than for new business.
HSBC is followed by Bank of China and Hang Seng Bank with 14,000 and 8,237 staff, respectively. Altogether, Hong Kong’s 20 largest licensed banks increased staff by 5% to 81,253 staff in 2016.
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