Steady Growth in Uncertain Times

In a landscape marked by global economic turbulence, Hong Kong's banking sector has showcased remarkable resilience and growth in 2024. KPMG's latest report highlights that total assets across all licensed banks in the city surged by 4.5%, reaching a staggering HK$24 trillion. Operating profits, before accounting for impairment charges, climbed 7.8% to HK$318 billion. This growth is attributed to disciplined cost management, enhanced operational efficiency, and a ruthless focus on digital transformation amidst sluggish loan demand and slight declines in net interest margins.

Navigating Challenges with Prudent Strategies

Paul McSheaffrey, Senior Banking Partner at KPMG China, emphasized the sector's ability to weather challenges posed by ongoing US-China trade tensions and a complicated global economy. "Hong Kong's banks have remained resilient by adhering to rigorous risk management and capital discipline, along with robust investment in digital solutions to adapt and stay competitive," he remarked.

Loan Decline, Deposit Growth

Despite a 2.3% drop in total loans and advances, customer deposits grew by 4.1%. However, the banking sector is also grappling with increased asset quality issues, as the impaired loan ratio rose from 1.65% to 2.15%. This surge reflects ongoing struggles in the commercial real estate sector, prompting banks to enhance risk management through portfolio diversification and digital solutions for early risk detection.

The Impact of Geopolitical Uncertainty

KPMG's findings align with predictions asserting that the banking environment is being shaped by US monetary policy volatility and geopolitical conflicts, including rising tariffs in trade relations between the US and China, which have clouded economic forecasts for Hong Kong.

Progress in Digital Innovation

On a positive note, the report highlights significant strides in digital transformation within the banking sector. The Hong Kong Monetary Authority (HKMA) is pioneering blockchain applications, exemplified by Project Ensemble, which explores the use of wholesale Central Bank Digital Currency (CBDC) for tokenized assets transactions. Additionally, its e-HKD initiative continues to advance, with real-world applications of retail CBDC undergoing testing.

AI Adoption on the Rise

Banks in Hong Kong are rapidly embracing artificial intelligence, particularly agentic AI, to optimize efficiency and compliance. Angel Mok, Partner at KPMG, noted that while there is cautious optimism regarding AI's potential, banks adopting a strategic, data-driven approach will thrive in this competitive landscape.

AI: A Double-Edged Sword

Jia Ning Song, KPMG's Head of Banking and Capital Markets, stressed the importance of addressing governance and risk concerns associated with AI. Establishing trustworthy AI systems is imperative for sustaining public confidence in Hong Kong's banking framework, particularly as some institutions advance their digital agendas while others tackle foundational gaps.

Conclusion: A Cautiously Optimistic Outlook

In summary, while Hong Kong’s banking sector stands firm amid a challenging macroeconomic backdrop, ongoing vigilance and proactive approaches to both risk and opportunity are crucial. Institutions that strategically navigate these waters are set to lead in the competitive financial landscape of Asia.