Hong Kong’s banks will continue to benefit as interest rates look likely to stay at higher levels than forecast in 2024, according to a KPMG report on Wednesday.
The consultancy firm said the bank industry saw moderate balance sheet growth last year and the total assets of all licensed banks expanded by 2.7 percent to HK$23 trillion ($2.94 trillion). Notably, their net interest margins (NIM) increased by 30 basis points to 1.84 percent, and operating profits before impairment charges jumped remarkably by 34.7 percent to HK$295 billion.
For banks with more exposure to the capital market, KPMG found that a shift to a lower interest rate environment would provide supporting tailwinds, benefiting those with investment banking and wealth management operations as equities become more attractive
“As the higher rates persist generally through the second half of 2024, that’s going to continue to be positive for banks in Hong Kong in terms of their ability to make money on that NIM,” said Paul McSheaffrey, senior banking partner at KPMG China.
“However, the timing and pace of a rate cut are still subject to uncertainties, so banks should plan their strategies accordingly.”
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Capital market activities, equity risk premiums, business leveraged to cost of funding as well as the inevitable cash risk premium are additional factors that will impact each bank differently as the interest rate cycle shifts, KPMG pointed out.
For banks with more exposure to the capital market, KPMG found that a shift to a lower interest rate environment would provide supporting tailwinds, benefiting those with investment banking and wealth management operations as equities become more attractive.
Credit quality is another risk worth considering. Simon Shum, partner of financial services at KPMG China, says: “As higher interest rates will continue to improve profitability, banks need to be vigilant in managing the credit risk in their loan portfolios.”
The key focus for the credit quality outlook will be the exposure to the Chinese mainland real estate sector and Hong Kong’s small and medium-sized enterprises.
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As for the leverage of generative artificial intelligence (GenAI) in the banking industry, Jia Ningsong, head of banking and capital market at KPMG China, said: “It will likely take some time for use cases to emerge, and true adoption and productivity gains from GenAI will probably become the story of 2025 and beyond.”
