HK copes with China, regulatory rules and new technologies

The Hong Kong banking sector is holding up remarkably well despite the three-pronged challenges of tightening regulatory pressure, increasing competition from abroad, and new threats from technology, says TC Chan, senior adviser at the Bank of East Asia.

He adds that while China’s opening up has created worries about Hong Kong’s role as a regional finance hub, the way forward lies not in resisting change, but in taking advantage of the city’s close economic and banking integration with the mainland.

Developments in recent years have created a number of challenges for the local banking sector. Five years on, the effects of the 2008-09 global financial crisis continue to be felt across the industry. This has brought more stringent capital and liquidity requirements in the form of regulations such as Basel III. These leave less room for banks to operate freely and also affect growth and how banks go about conducting their principal trading and selling activities.

Chan says that in the local banking sector, the collapse of Lehman Brothers and the public uproar surrounding the mini-bonds saga has changed how banks are perceived by the public. It has also changed the way banks operate, particularly in sales of wealth management products.

Meanwhile, more and more mainland banks are building up their presence in Hong Kong – either through mergers and acquisitions, the purchasing of bank assets or organic expansion.

Chan adds that local banks are not only facing rising competition and tighter regulatory frameworks, but also a change in customers’ appetite for risk and certain products. These include products that provide financing for property purchases, which have been hampered by measures to cool property prices.

Despite these challenges, the city’s banks have been able to lean on their fundamental strengths. Those which have so far reported their interim profits this year have shown strong performance, Chan says. One of the reasons for this is that banks in Hong Kong are generally well capitalised, enabling them to cope with increasingly stringent capital requirements.

Hong Kong banks are also well managed, Chan adds, noting that as a sector, cost-to-income ratio, delinquency ratios and write-offs were low.

“By and large, the Hong Kong banking sector is very prudently managed. That reflects well in the quality of our banks, despite the fact that it will be increasingly difficult to achieve impressive growth. We are still making money and that’s very encouraging,” Chan says.

Local banks also understand that they can no longer rely on providing products and services to the city’s retail and commercial banking clients alone. More banks are seeking to provide services to clients accessing China – be they investing or operating on the mainland, Chan says.

Looking ahead, he says that one important trend is the continued integration of the Hong Kong economy and its financial services sector with China.

As the mainland continues its economic reforms and opens up even more to the outside world, there has been increasing concern regarding developments such as the setting up of the free-trade zone in Shanghai and the Qianhai economic zone in Shenzhen. There are also concerns as to whether these areas and other mainland cities will supplant Hong Kong’s traditional role as a financial gateway to China.

“What we have to do in order for us to secure sustainable growth in the future is not to resist these changes, but rather embrace them to our advantage so that we can continue to expand our footprint in this most important market,” Chan says.

“It won’t be as easy as 10 or 20 years ago, when most banks investing in China could expect very high growth. Those days are over,” Chan adds, noting that the market has become much more sophisticated, as well as saturated, in recent years.

Still, he says it is worth noting that the sheer size of the market as well as continued economic expansion bode well for banking services demand.

Finally, Chan says that threats have emerged from new technologies that can disrupt the way that banking is conducted. This includes the rise of non-financials in the payment-services space, such as Alipay, which forms part of the mainland billionaire Jack Ma’s Alibaba Group.

“Nowadays, there isn’t any more Chinese wall insulating non-banks from participating in the market of providing traditional banking services to the public,” Chan says. “What [these new platforms] are doing is using new technology to circumvent the traditional role that banks play in payment and cash-management operations,” he says.

Historically, customers had to rely on banks for settlement when making purchases or sales, but this is no longer the case, he adds.

And that’s not the end of it. Chan says that threats could also emerge from new technologies. The challenge is to figure out how banks should position themselves to ensure long-term survival and growth. “Hopefully, at this year’s Hong Kong Institute of Bankers conference, we can shed some light on how the latest advances in technology are affecting and will affect the banking industry,” he says.