China

Details

  • Type: Business and industry issue, Press release
  • Date: 7/29/2008

KPMG 2007 BANKING SURVEY REPORT 

29 July 2008

Hong Kong authorised institutions (AIs) continued to benefit from the robust performance of the economy. Overall net profit after tax for surveyed AIs increased by 45.9%, while return on equity stood at 21.1% for surveyed locally incorporated AIs.

Net interest income grew by 20.6 percent, benefiting from the combined effects of loan growth and better yields on treasury portfolios.
Thanks to the buoyant stock market and growth in treasury and wealth management activities, non-interest income rose by 49.5%.
Generally, loan asset quality continued to improve in the benign credit environment. The amount of impaired advances fell by 9.6%, and the overall impaired loan ratio dropped by 0.2 of a percentage point to 0.58%. Despite the continuing improvement in asset quality, the overall net loan impairment charges increased by 37% to HKD 7.9 billion due to a combined effect of lower write-backs and loan growth.
Capital adequacy remained strong under BASEL II with an overall industry average of 13.4%.

Introduction

 

KPMG will soon issue its 20th annual survey report, which is based on the results of 139 of the 200 Hong Kong AIs for periods ended in 2007. The aim of this report is to provide a review of the performance of locally incorporated AIs and foreign bank branches in 2007; their financial position; and the economic environment in which they have been operating. The report also provides a reference point for their detailed financial information. Below is a summary of the key findings.

 

ECONOMIC ENVIRONMENT

 

Hong Kong's economy expanded by 6.4% year-on-year in 2007, slowing slightly from 7% in 2006.

Property and rental prices picked up in 2007 after levelling off in 2006. Office and domestic property prices surged 42.2% and 25.7% respectively, year-on-year. Office and retail rental prices also rose 14.6% and 8.8% respectively. Sustained economic growth, a booming stock market and low interest rates helped to encourage speculative activity and boost property demand.
The steady flow of IPOs throughout the year continued to spark investors' interest in equities which drove up stock prices. Stock market turnover showed stunning growth, particularly during the second half of 2007. Overall, stock turnover for 2007 was about 2.5 times that of 2006.
The year-on-year inflation rate broke the 3% level in the last quarter of 2007. Rising food and oil prices, paired with the accelerating appreciation of the Renminbi, may aggravate this trend in 2008.
The unemployment rate continued to improve steadily throughout 2007, falling to a nine-year low. On the other hand, nominal payroll rose by 5.9% in the fourth quarter of 2007, climbing to a nine-year high partly due to accelerated inflation.

BANKING ENVIRONMENT

 

Hong Kong banks followed the US Federal Reserve to cut the prime rate by 100 basis points in the last four months of 2007. In the first quarter of 2008, banks in Hong Kong reduced the prime rate further by 150 basis points. Better yields on treasury portfolios and an increase in non-prime based loans helped the net interest margin climb to 1.90% in the fourth quarter of 2007, compared with 1.80% in the fourth quarter of 2006. However, intense competition in the lending business and the zero deposit rate continued to put pressure on the margins.

Lending grew by 20% in 2007 and growth was broad-based. Customer deposits also grew by 23.4%. The last time loans and deposits grew by 20% or more was in the 1980s.
The strongest loan growth was seen in loans for use outside Hong Kong which increased by 46.4% as banks continued to expand strongly across the border and to incorporate locally in the mainland for the first time. Exposures to non-bank mainland Chinese entities in the retail banks increased to HKD 550.4 billion or 7.8% of total assets at the end of 2007. Mortgages climbed 4.7% due to the active property market - the strongest growth since 1999. Commercial loans also grew by 19.7%. Double-digit growth was achieved across various industry sectors.
Time deposits alongside savings and demand deposits grew at a similar pace as IPO activities slowed amid the global credit crunch. Renminbi deposits grew 42.7% to RMB 33.4 billion at the end of 2007, but this still accounted for less than 1% of the total deposits. This figure however would not include all the Renminbi deposits held by Hong Kong clients in the mainland to earn higher deposit rates.

 

SECTOR PERFORMANCE

Balance sheet

 

The overall balance sheets of the AIs covered in the survey expanded by 27.0% during the year, compared with a 16.7% increase reported in 2006. The AIs' gross advances to customers grew by 22.2%; much stronger than the 8.5% achieved in the prior year. The strongest growth was achieved by licensed banks (LBs), and foreign bank branches (FBBs), which had an overall double-digit growth in both balance sheet and loan books. Restricted licence banks (RLBs) reported 8.4% and 13.3% increases in their overall balance sheet and loan books respectively. Deposit-taking companies (DTCs) saw an increase of 9.9% and 10.4% in balance sheet size and loan books respectively.

Commercial loans, accounting for 37.5% of AIs' loan books, recorded a 20.6% increase. Mortgages, accounting for 17.2% of total loan books, increased by 4.6%. High yielding credit card advances and other unsecured personal loans increased by 11.0% and 24.9% respectively. Furthermore, loans for use outside Hong Kong swelled by 37.3% year-on-year with their proportion of the total loan books rising to 32.6%.
LBs have significantly increased their loans for use outside Hong Kong, other personal lending, trade finance loans, and commercial loans. RLBs and DTCs on the other hand saw their credit card lending double during the year while loans for use outside Hong Kong also rose by over 30%. FBBs saw strong growth in loans for use outside Hong Kong, trade finance and commercial loans. Strong economic growth in China was one of the key drivers of the expansion in loans for use outside Hong Kong across all of the AIs.
As the banks deployed increasing surplus customer deposits, investments in securities rose by 11.0% over the year with the share of total assets falling slightly to 19.2% from 20.2%.

 

Profitability

 

Overall net profit after tax grew by 45.9% compared with a 20.7% increase in 2006. FBBs and RLBs achieved a 138.5% and 79.7% increase respectively, while LBs and DTCs reported rises of 33.1% and 19.4%.

LBs and FBBs saw their average net interest income rise by 18.9% and 38.0% respectively. RLBs and DTCs also recorded modest growth in net interest income; but they accounted for less than 3% of the total net interest income for all AIs.
Non-interest income continued its strong growth, rising by 49.5% overall, compared with 26.6% in 2006. Fee income grew by 59.4%, partly due to the buoyant stock market. Returns from treasury operations rose 35.6%, and 6.2% excluding HSBC. Growth in treasury gains was partly offset by investment write-downs as a result of the global credit crunch. LBs (excluding HSBC), RLBs, and DTC all recorded drops of over 40% in returns from operations. On the other hand, FBBs realised strong growth of over 80% partly due to smaller investment write-downs at the branch level.
Total operating income rose by 35.1%, compared with 23.8% in 2006. The share of non-interest income to total operating income increased to 52.1% from 46.7% in 2006, with the ratio varying from between 77.4% and 88.7% in FBBs and RLBs to 31.7% and 40.8% in DTCs and LBs.
Operating expenses rose by 25.7%, slower than the growth in operating income, resulting in an improvement in AIs' cost/income ratio which increased slightly to 45.2%, from 48.2%.
Overall, core operating profit before impairment charges rose by a strong 41.9%, compared with 26.2% growth in 2006. For LBs, contributions from associates and jointly controlled entities rose significantly over 2006. This was mainly attributable to a one-off gain on the dilution of investments in mainland banks following their IPOs and the increase in the share of their profits over 2006.

 

Asset quality

 

Generally, loan asset quality continued to improve in the benign credit environment. The amount of impaired advances fell by 9.6%, causing the impaired loan ratio to drop by 0.2 of a percentage point to 0.58%. The only exception was RLBs, which reported a 9.1% increase in their impaired advances balance.

For locally incorporated AIs, the ratio of loans that were past due but not impaired rose from 1.8% to 2.2% at the end of 2007. Excluding HSBC, this fell from 2.2% to 1.9%. This ratio was still low despite increases at the sector level.
The overall impairment charge increased by 37% due to loan growth and lower write-backs. Loan impairment charges for RLBs and DTCs dropped while those of the LBs and FBB rose. Net individually assessed loan impairment charges rose by 5.4 times while net collectively assessed loan impairment charges grew by 19% for locally incorporated AIs. Excluding HSBC and BOCHK, net individually assessed loan impairment charges rose 2% while net collectively assessed loan impairment charges soared by 68%.
Overall, credit costs still remained at a very low level of 0.21% (2006: 0.19%) as measured by the ratio of loan impairment charges to gross loans and advances.
The asset quality of investments held by the AIs was affected by the global credit crunch. Based on disclosed information, listed banks had at least HKD 20.24 billion in nominal value tied up in asset-backed securities, collateralised debt obligations and structured investment vehicles. Of this, HKD 7.67 billion was charged against 2007 profit. The level of additional impairment provision will depend on whether there is any recovery in the credit markets.

 

Capital adequacy

 

AIs in Hong Kong adopted the revised capital adequacy framework (Basel II) as of 1 January 2007. Capital adequacy remained strong under Basel II with an overall industry average of 13.4%. The ratio was generally lower than that calculated under Basel I largely due to capital charges on operational risk.

 

Commenting on the banking survey report, Babak Nikzad, partner in charge of KPMG's Financial Services practice in Hong Kong, said:

"We are pleased to see a very strong growth in net profit after tax of 45.9% as compared with 20.7% in 2006, with the key contributors being net interest income and non-funded income. The banks continued to benefit from robust economic growth in Hong Kong and the mainland. Net interest margins were under pressure due to intense competition in the lending business and the zero deposit rate. However, this was more than offset by resurgent loan demand and better yields on treasury portfolios, and in total net interest income increased by 20.6%. Loan growth was broad-based, with the strongest growth recorded in loans for use outside Hong Kong. Moving into 2008, we have started to see banks increase lending rates on the prime-based mortgage portfolio, which should benefit the net interest margin in the medium term.

On the non-funded income side, AIs continued to focus on generating higher fee-based income through securities brokerage and wealth management activities, which led non-interest income to surge by 49.5% for all AIs. The buoyant stock market helped non-funded income to record healthy growth in 2007. Looking into 2008, the stock market correction will make for a much more challenging environment."

Martin Wardle, a partner in KPMG's Financial Services practice, commented:

"Asset quality continued to improve in the benign credit environment. The impaired loan ratio for all AIs dropped by 0.2 of a percentage point to 0.58%. For locally incorporated AIs, the ratio of loans that were past due but not impaired rose slightly to 2.2% at the end of 2007 from 1.8% a year before. Although there was a small increase, the absolute ratio is still very low.

Despite healthy delinquency statistics in Hong Kong, lenders should remain cautious of the negative economic impact of the global credit crunch, global inflation and a slow down in the US economy. High property prices and commodity prices continued to put pressure on profit margins. Exposures to non-bank Chinese entities are increasing and the default risk on these companies should be carefully monitored, particularly with the current monetary tightening measures in the mainland which may affect borrowers' liquidity and their ability to grow."

Walkman Lee, a partner in KPMG's Financial Services practice, added:

"Since December 2006, foreign banks in China have been allowed to conduct local banking business in the mainland. Foreign banks, including those incorporated in Hong Kong, have started to convert their mainland branches into domestically incorporated banks. At the end of June 2008, six Hong Kong incorporated banks had incorporated locally in the mainland, and have a total of over 140 branches and sub-branches. Shanghai remains the preferred location for their headquarters."

 

- End -

 

Click this here to access the full report.

About KPMG

KPMG is a global network of professional services firms providing Audit, Tax and Advisory services. We operate in 145 countries and have more than 123,000 professionals working in member firms around the world.

The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. KPMG International provides no client services.

About KPMG in China

KPMG China has 12 offices (including KPMG Advisory (China) Limited) in Beijing, Shenyang, Qingdao, Shanghai, Nanjing, Chengdu, Hangzhou, Guangzhou, Fuzhou, Shenzhen, Hong Kong SAR and Macau SAR, with more than 7,000 professionals.

In 1992, KPMG became the first international accounting firm to be granted a joint venture licence in China, and our Hong Kong SAR operations have been established for over 60 years since 1945. This early commitment to the China market, together with our unwavering focus on quality, has been the foundation for accumulated industry experience, and this is reflected in our appointment by some of China's most prestigious companies.

As China businesses join the global economy and international companies seek to enter the China market, KPMG's blend of international experience and local knowledge makes us well-positioned to serve our clients in this increasingly complex but exciting market.

Our single management structure for all our China offices allows efficient and rapid allocation of experienced professionals wherever the client is located in China. The flexibility of this single structure allows us to effectively serve companies across China, and we have many projects where professionals from different offices work together on an work engagement under the supervision of a single nominated client partner who has operational control of all resources.

Our business in China has established industry groups, enabling targeted, industry-specific experience and solutions to be delivered where needed. For our clients, this focus on industry and country specific knowledge means we can deliver exceptional people with an intimate knowledge of your specific business issues, as well as an overriding commitment to strive for the highest quality services.

 

For any further enquiries, please contact the following banking specialists at KPMG:

Martin Wardle
Partner in charge, Financial Services practice in Hong Kong
 +852 2826 7132
 martin.wardle@kpmg.com.hk


Joan Ho
Partner in charge, Financial Services practice in southern China
 +852 2826 7104
 joan.ho@kpmg.com.hk

Simon Donowho
Partner, Financial Services practice in Hong Kong
 +852 2826 7105
 simon.donowho@kpmg.com.hk

Ivan Li
Partner, Financial Services practice in Shenzhen
 +86 (755) 2547 1218
 ivan.li@kpmg.com.cn

 

For media enquiries, please contact:

Nina Mehra

Senior Manager, Media Relations

KPMG China

 +852 2140 2824 (Direct)

   +852 9724 6092 (Mobile)

 nina.mehra@kpmg.com

 

 

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