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  1. Special Reports
February 10, 2021

Hong Kong banks look to 2021 with muted optimism

By Mohamed Dabo

KPMG has issued its Hong Kong Banking Outlook 2021, highlighting some bright spots amid the challenging times. Mohamed Dabo reports

When the Netherlands-based international consulting firm issued its outlook for 2020 a year ago, Hong Kong’s economy and banking sector were facing market uncertainty and disruption largely due to social unrest and US-China trade tensions.

As 2021 dawns, the new report strikes a more upbeat tone, as reflected in its predictions covering 10 key areas across the banking industry:

Sector outlook

The shift from interest income to fee-earning activities will create growth opportunities for banks that get it right—but be wary of the risks. With Hong Kong weathering the challenges brought about by Covid-19 relatively well in terms of containing the virus, ensuring operational resilience and pushing through financial relief measures for businesses, the banking sector has also remained in reasonable shape in 2020.

Non-performing loans (NPLs)

NPLs in Hong Kong are expected to increase as businesses face prolonged economic uncertainty. Despite signs of recovery in mainland China, banks in Hong Kong will need to maintain extreme vigilance as non-performing loans (NPLs) are expected to increase in 2021.

Regtech

Regtech (regulatory technology) refers to computer programmes and other technology used to help banking and financial companies comply with government regulations. Regtech adoption will not be an aspiration in 2021, it will be a necessity.

With Covid-19 rapidly transforming business and operating models, the application of regulatory technology will transform risk management and compliance and present significant growth opportunities for banks in Hong Kong in 2021.

Financial crime compliance

Regtech, network analytics, and information sharing are key to combating increasing financial crime in 2021. The report predicts that one outcome of this in 2021 will be that all retail banks in Hong Kong will have a digital on-boarding channel, with a significant majority of new customers being on-boarded entirely digitally.

Digital transformation

Digitalisation is set to transform SME banking in 2021, while non-banking-led partnerships will emerge in retail banking. With Hong Kong’s banking sector is undergoing rapid digital transformation this year, the banks that venture beyond pursuing fundamental digital initiatives such as basic automation will reap the benefits, while those who do not will struggle to remain competitive.

Operational resilience and third-party risk management

Banks that bolster their operational resilience and third-party risk management in 2021 will be best placed for success. The KPMG experts predict that banks will significantly increase their focus in the year ahead on optimising their setup for more remote and agile working. However, the reality is that some banks are still not fully equipped or ready for this change.

Regulatory focus areas

Credit risk and emerging risks arising from new business models will be front and centre for regulators in 2021. Hong Kong’s banking industry has faced unprecedented challenges over the past 12 to 18 months as a result of Covid-19, social unrest and ongoing US-China trade tensions.

These challenges have brought operational resilience and credit risk management to the fore and have given rise to new and evolving risks as banks transform their business models to adapt to the new reality.

In 2021, the experts predict that banks will continue with their agile working arrangements. The researchers expect the regulators to increase their focus on ensuring that banks demonstrate sound and robust risk management practices, systems, and controls to effectively manage the increasing levels of credit and emerging risk.

Environmental, social, and governance (ESG) criteria

Banks will take firm action to integrate ESG into their business in 2021, with a focus on capacity building. Despite a challenging and disruptive 2020 that has caused banks to rethink their business and operating models, ESG issues will remain a key priority for banks in Hong Kong in the year ahead.

The first set of 50 licenced banks have completed their self-assessments as part of the Hong Kong Monetary Authority’s (HKMA) Common Assessment Framework – which measures an institution’s readiness to manage climate and environmental-related risks – and the HKMA is expected to call on the remaining banks to follow suit.

Tax reimaged

BEPS 2.0 developments and the impact of Covid-19 will expedite the digitalisation of banks’ tax functions in 2021. The rapidly changing environment caused by Covid-19 and the resulting disruption to organisations – including their tax functions – is spurring banks to explore a fresh approach to managing their tax obligations.

Greater Bay Area

The Greater Bay Area will remain a key growth driver for many domestic and international banks in Hong Kong. As mainland China continues along its path to recovery from the disruption and challenges caused by Covid-19, KPMG expects to see renewed interest from international and domestic banks in Hong Kong in expanding onshore, with the Greater Bay Area (Gba ) a key opportunity. <

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