City's banks faced with challenging environment amid global slowdown

Hong Kong banks are facing an uncertain outlook amid slowing activity due to global economic woes and lukewarm investment markets, with net interest margins likely to stay at low levels, according to a KPMG report.

Although Hong Kong's economic conditions were generally favorable last year, it was evident that banks in the city were operating in a challenging environment, the global accounting firm said in its annual report on the city's lenders released on Wednesday. It indicated that Hong Kong banks are confronting pressures on revenue, new liquidity regulations as well an increasing need to manage costs.

Total net profits earned by local banks were registered at HK$128 billion ($16.51 billion) in 2011, up from the HK$107 billion a year earlier, according to KPMG's 24th annual publication of the series. The report, nevertheless, highlighted low net interest margins (NIM) during the period, despite net interest income among these banks rising HK$24 billion over the previous year.

"The key narrative on NIM for 2011 was one of rising deposit costs as banks had to increase rates to attract, or in many cases, retain deposits, particularly in the fourth quarter of 2011," Rita Wong, a partner of KPMG China said during a media briefing on Wednesday.

Wong attributed the rates increase to keen competition in the market, particularly for fixed term deposits, forecasting that the trend would continue throughout the year due to the ongoing economic environment.

At the same time, growth momentum of non-operating income was also repressed last year as fund raising activities were quiet in the market and stock market turnover was rather flat compared with 2010, according to the report.

The implementing of the "Basel III Bank Capital Standards", which will compel local lenders to raise their capital adequacy ratios, is also bringing liquidity issues. The new rule is expected to lead Hong Kong banks to compete for customer deposit base to fund lending activities, which is likely to result in further margin compression for a number of lenders, noted the report.

Another KPMG report entitled "Liquidity: A bigger challenge than capital" released earlier this year indicated that improving banks' management of liquidity as well as increasing the size and quality of their liquid assets are two key elements in the "Basel III" to boost local banks' financial strength through periods of stress and market disruption.

"If revenue pressures remain, we expect a number of banks to reassess their size and offering in Hong Kong, particularly in the light of restrictions on capital in home countries," said Paul McSheaffrey, a Partner of KPMG China.

Royal Bank of Scotland Group PLC (RBS) this April sold most of its equity capital market business in the Asia-Pacific region to Malaysia's CIMB. The equity assets included those in Hong Kong and the mainland that RBS has pledged to expand in the region.

"More banks are likely to only focus on what they are good at in Hong Kong," McSheaffrey said during the media briefing, who estimated that the assets transactions among the lenders will likely to continue in the near future.

The report also noted emphasis by many banks on cost control in the city to offset increasing revenue pressures and to remain competitive under the current challenging environment. According to the accounting firm, operating expenses among the local lenders have increased by 11 percent in 2011 over the previous year.

litao@chinadailyhk.com

(HK Edition 09/13/2012 page2)