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Interest rates are expected to continue supporting banks’ income in 2024, says KPMG

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Banks should prioritize operational efficiency and risk management for seizing opportunity when growth returns

HONG KONG SAR  29 January 2024 – The year 2024 is expected to present challenges for banks as they prepare to navigate a range of macroeconomic hurdles. It is important for banks to focus on operational efficiency and managing their risks, to be ready to reap the rewards when growth returns in 2025, according to KPMG’s latest report.

The KPMG Hong Kong Banking Outlook 2024 provides thoughts and predictions from KPMG experts regarding the outlook for Hong Kong and key themes for banks in the year including preparing for climate risk, and staying abreast of tax and regulatory developments.

KPMG expects that the challenges facing the banking sector will persist into 2024 as economic sentiment remains muted, which is likely to result in lower loan growth. Reduced financial activity will also have an impact on the fees and commissions earned by banks.

Interest rates are unlikely to decrease until at least the third quarter of 2024. Higher interest rates have generally been positive for banks, and this will provide support to their income throughout the year. While credit losses have emerged as a significant trend, it is expected that in 2024, many banks will clean up their books and position themselves for future progress.

Jianing Song, Head of Banking and Capital Markets, Hong Kong, KPMG China, says: “2023 saw mixed fortunes for the banking sector and the city. Looking to 2024, there are some clouds on the horizon, including potential election outcomes globally. We remain cautiously optimistic given declining interest rates, tamed inflation, and generally a better macro outlook from a business standpoint. Hong Kong should continue to reinvigorate and redefine our value under Two Systems, not just as an IFC for China, but also as a superconnector for the rest of the world.”

Paul McSheaffrey, Senior Banking Partner, Hong Kong, KPMG China, says: “While the year ahead may not see significant growth for banks in Hong Kong, there will still be some opportunities amid a changing landscape. Outside of Hong Kong, inflation being in many jurisdictions should provide more stability to the global economy. Given the anticipated continuation of a challenging environment in 2024, banks should prioritize operational efficiency and risk management to position themselves for reaping the rewards when growth returns in 2025.”

In the year ahead, banks should ensure that they are staying ahead of the potential risks emerging from different sources, and also keep abreast of the constantly shifting regulatory environment in Hong Kong and the Chinese Mainland. At the same time, banks can remain on the look-out for growth opportunities, such as those emerging in the Greater Bay Area.

Managing emerging risks is key

Corporate credit will remain challenged in 2024, with the quality and scale of corporate loan growth under pressure. It is also expected that there will be rising non-Mainland real estate impairment charges. Many banks are reassessing the adequacy of their stress testing methodologies and early warning mechanisms. KPMG recommends that banks enhance their early-warning mechanisms by incorporating more forward-looking indices to ensure comprehensiveness and effectiveness.

In terms of climate risk, collaboration will be key. By fostering partnerships, sharing data, and developing common standards, the banking industry can collectively address climate risks and leverage green financing.

Emphasis on regulatory compliance within business strategies

Data connectivity is an important topic in the digital age, with the Chinese Government regularly issuing regulations regarding cross-border data transfer. Data flow is a complex matter and it requires appropriate technical infrastructure, including cross-border data inventories and comprehensive control frameworks. Looking ahead in 2024, it is critical for banks to prioritize the consideration of cross-border data flow when developing their upcoming business strategies.

In order to mitigate risks to financial stability, regulators require high-quality data to effectively assess systemic risk, conduct market surveillance, and facilitate enforcement and resolution activities. KPMG expects that Granular Data Reporting (GDR) should be a priority for banks in 2024. The imperative to take action and establish a robust, scalable, and cost-effective solution is pressing.

Cross-border connectivity fuels market activities

Despite the generally challenging environment for banks at present, there are still opportunities for growth. The Greater Bay Area is a unique private banking and wealth management opportunity with a growing population and economy. We continue to see M&A transactions taking place in the financial services sector and an increase in deals within the wealth management and private banking sector is expected. KPMG anticipates that banks will focus on leveraging Wealth Management Connect 2.0 to enhance their digital wealth agenda and ensure a seamless end-to-end customer journey, from onboarding to the sale of wealth management products.

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