The launch of virtual banks in Hong Kong in early 2020 is set to disrupt the traditional banking model and blur the lines between different sectors, according to KPMG’s Hong Kong Banking Outlook 2020. At the same time, banks are expected to adopt more technology solutions to manage costs and achieve operational efficiency amidst a rapidly evolving and increasing competitive banking industry landscape.

Paul McSheaffrey, Partner, Head of Banking & Capital Markets, Hong Kong, KPMG China, said, “Reflecting first on 2019, we expect to see muted financial results across Hong Kong’s banking industry this year, with ongoing market uncertainty around the US-China trade tensions and the low interest rate environment being the key drivers. The recent events and business disruption in Hong Kong have also impacted retail investor confidence. Despite a challenging year, we continue to see opportunities for investment and growth for banks in 2020.”

The arrival of virtual banks is expected to have a greater impact in the SME space, with many in Hong Kong currently underserved and hungry for credit. SMEs may be tempted to switch their accounts as they will likely start to see an improvement in their ability to open bank accounts and obtain access to finance through the new virtual banks. In response, many traditional banks will seek to accelerate their IT and systems transformation, invest in new technologies and upgrade their digital platforms to compete.

At the same time, with margins continuing to be squeezed and macroeconomic and geopolitical uncertainty set to carry over into 2020, managing costs will continue to be a key focus for banks in Hong Kong. Leading banks will take greater strides in the year ahead to adopt AI and related digital solutions and collaborate closely with FinTech players to achieve longer-term savings.

The year 2020 may also see an increased focus on customer intimacy in the corporate market. Banks that are able to leverage the data to predict behaviour and create personalised experiences for their customers will give themselves a chance of long-term survival.

Terence Fong, Partner, Financial Services, KPMG China, said, “Innovative mainland Chinese banks will continue to actively invest in developing their big data application and advanced technology capabilities to improve customer experience. Leading banks will also explore and identify the appropriate data governance approach.”

Mainland China continues to open up its financial services sector to foreign investment, and ongoing developments and reforms in the Greater Bay Area (GBA) will continue to create increasing demand for financial services in the region in 2020, presenting a number of business opportunities for banks in Hong Kong.

Fong continued, “China based state-owned enterprises (SOEs) and privately-owned enterprises (POEs) – many with multi-jurisdictional operations – continue to look at expanding overseas, especially into the ASEAN region. With Hong Kong the most internationalised city in the GBA, more SOEs in the region would prefer to set up a regional corporate treasury centre in the city.”

While the industry rapidly evolves, risks also continue to change. Apart from the LIBOR transition and emerging financial and regulatory risks, a greater focus on non-financial risks is expected.

Given the launch of many virtual banks in Hong Kong next year, as well as traditional banks’ embrace of AI and cloud technology, cyber and third-party risk will continue to increasingly come to the fore.

With a climate crisis potentially just around the corner, investors’ increasing demand for integrating Environmental, Social, and Governance (ESG) into investment decisions will extend into Hong Kong’s banking sector next year. We also expect the cost of capital to increase for corporates – including banks – that do not actively manage ESG matters, in particular climate-related matters. The flow of capital will be directed more towards a low-carbon economy and industries and companies that are setting themselves up for this.

McSheaffrey concluded, “As we look into 2020 and the Future of Banking one thing is certain:  change will be the new constant. The broad themes our experts are predicting are around the changing nature of risks, a more competitive environment and increasing digital transformation all underpinned by a focus on data.  We predict that 2020 will not be a boring year for the Hong Kong banking sector.”

SOURCE KPMG China