Hong Kong Banking Survey 2015 - KPMG | US · PDF file6 BOC Hong Kong (Holdings) Limited 2014 Annual Results Announcement, p. 17, ... Hong Kong Banking Survey 2015 Hong Kong Banking

BANKING
Hong Kong Banking Survey
2015kpmg.com/cn
http://www.kpmg.com/cn

ContentsIntroduction 2
Overview 4
Cybersecurity: Pace of regulatory evolution set to accelerate 12
Non-performing loans: The strategic role of risk management 16
Regulatory reporting: At the crossroads of finance and risk 20
Tax evasion: A renewed focus 24
Front-office supervision: Embracing change at the heart of the organisation 28
Performance rankings 32
About KPMG 64
Contact us 66
2015 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

2015 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 2015 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Paul McSheaffreyPartner, Head of Banking
As we publish our annual Hong Kong Banking Survey, it could be argued that the banking sector in Hong Kong is facing a difficult near-term future. The sectors 2014 financial performance is down slightly on 2013. Regulations and the continued intensity of regulation continue to loom over banks, with a potential need for investment to be directed towards regulatory rather than growth projects. Also, China, one of the sources of growth in balance sheets in recent years, is experiencing an increase in bad debts.
On financial performance, there were few positive trends emerging. Net interest margin (NIM) remained stable, but at low levels. The outlook for interest rate rises in the US remains uncertain and the prospect of a lower for longer interest rate environment could have an impact on the growth prospects of the sector in Hong Kong. Costs and cost-to-income ratios increased and this may be a sign that there are fewer areas for banks to easily cut costs in order to boost profitability.
We continue to see areas where regulators are increasing the intensity of their supervision of banks and where investment will likely be needed to satisfy their demands. Regulatory reporting has long been considered a low-level, back-office function. We are seeing increasing expectations from regulators that information provided to them on a regular and ad hoc basis is subject to stronger controls and governance.
Introduction
2 | Hong Kong Banking Survey 2015 Hong Kong Banking Survey 2015 | 3

Cybersecurity, front-office supervision and tax evasion are all topical areas at present. All require investment of some kind, often of significant amounts. However, the cost of getting it wrong through financial losses, fines or reputational damage in many cases, dwarf the investment required.
In China, we are seeing increasing non-performing loans (NPLs), which have the potential to impact Hong Kong banks. We offer our views on lessons learnt and some of the steps that Hong Kong banks can take now to minimise incurred losses and improve their overall credit risk going forward.
So while it is a difficult near-term future, we do not think it is all doom and gloom. Our recent FinTech publication Making Hong Kong a FinTech Centre: Innovating business in Asia highlighted some of the leading-edge thinking in financial services which is taking place in Hong Kong. An innovative approach from banks in Hong Kong could allow some to reinvent their competitive position and thrive in a new digital world.

Overview
Paul McSheaffreyPartner, Head of Banking

1 Profitability is taken as profit after tax.2 The analysis is based on the financial institutions registered with the Hong Kong Monetary Authority.3 The top 10 locally incorporated licensed banks mentioned in this article are the 10 banks with the highest total assets among all
locally incorporated banks as at 31 December 2014.
Results2014 was a more difficult year for the Hong Kong banking sector than 2013. Overall, the surveyed banks total assets grew by 8 percent. However, the effects of the economic slowdown and other challenges, including regulatory and cost efficiency pressures, can be seen in the banks profitability,1 which dropped by 20 percent compared to 2013. Although this decrease in profitability was due to the absence of a significant gain of HKD 34 billion recognised by The Hongkong and Shanghai Banking Corporation Limited (HSBC) in 2013 on the sale of its investment in Ping An, if this sale is excluded, overall profitability still dropped by 6 percent compared to 2013.
In general, revenue continued to be challenged as HKD and USD interest rates remained low. This was reflected in the net interest margin (NIM) which fell slightly, although the higher asset base meant that absolute levels of interest income increased. While there is still some expectation of increasing interest rates, the prospect of lower for longer interest rates would pose some strategic questions to certain players in the Hong Kong market around competitive positioning.
In terms of costs, we have seen cost-to-income ratios increase slightly for the top 10 banks. This, coupled with an 8 percent rise in operating expenses, indicates that banks may find it more difficult to make further cuts to operating expenses than in recent years. In addition, we expect to see compliance costs rising as well as a need to invest in future growth, for example in new digital channels.
We started to see signs of widening credit losses, particularly from China exposures. At the same time, these exposures are on the rise and this remains an area which will require focus.
In this survey, we present an analysis2 of some key metrics for the top 10 locally incorporated licensed banks in Hong Kong.3
BEA Bank of East Asia, Limited (The)
BOC (HK) Bank of China (Hong Kong) Limited
CCB (Asia) China Construction Bank (Asia) Corporation Limited
CITIC China CITIC Bank International Limited
DBS DBS Bank (Hong Kong) Limited
Hang Seng Hang Seng Bank, Limited
HSBC Hongkong And Shanghai Banking Corporation Limited (The)
ICBC (Asia) Industrial And Commercial Bank of China (Asia) Limited
Nanyang Nanyang Commercial Bank, Limited
SCB Standard Chartered Bank (Hong Kong) Limited
List of banks in this article

4 NIM is either quoted from financial statements, or calculated based on net interest income and interest-bearing assets or total assets, depending on the availability of information.
5 China CITIC Bank International 2014 Results Highlights, p. 28, https://www.cncbinternational.com/_document/about-us/investor-relations-announcements/en/2014/res.pdf
6 BOC Hong Kong (Holdings) Limited 2014 Annual Results Announcement, p. 17, http://www.bochk.com/dam/bochk/desktop/top/aboutus/ir/docs/announcement/2015/announcement_2015_0325_en.pdf
7 The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2014, p. 17, http://www.hsbc.com/~/media/hsbc-com/investorrelationsassets/latest-financial-information/hbap2014ar-en.pdf
8 Hang Seng Bank Limited 2014 Results Highlights, p. 5, http://www.hangseng.com/cms/fin/file/result/press_a_2014_en.pdf
Net interest margin
Net interest margin
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
1.91% 1.90% 1.86% 1.83% 1.82%1.72%
1.49% 1.36%1.09%1.31%
HSBC
Hang
Sen
gCI
TIC
Nany
ang
BOC
(HK)
BEA
DBS
SCB
ICBC
(Asia
)
CCB
(Asia
)
2014 2013
Source: Extracted from individual banks financial and public statements
NIM4 across the banks surveyed reduced slightly due to the continuing low interest rate environment in Hong Kong and the US. Our analysis of the licensed banks indicated an overall NIM of 1.69 percent in 2014, down 6 basis points from 2013.
For the top 10 locally incorporated banks, there was a similar drop in NIM, standing at 1.63 percent in 2014, or 2 basis point

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Hong Kong Banking Survey 2015 - KPMG | US · PDF file6 BOC Hong Kong (Holdings) Limited 2014 Annual Results Announcement, p. 17, ... Hong Kong Banking Survey 2015 Hong Kong Banking