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Banking and Finance Industry in Hong Kong

Banking and Finance Industry in Hong Kong. 09011242 Tsoi Yat Fei 09012680 Cheung Kwok Tung 09010408 Mok Ka Yan. Introduction. B&F is one of HK’s “pillar” industries Its GDP’s contribution increased from 10% in 1997 to 16% in 2006

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Banking and Finance Industry in Hong Kong

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  1. Banking and Finance Industry in Hong Kong 09011242 Tsoi Yat Fei 09012680 Cheung Kwok Tung 09010408 Mok Ka Yan

  2. Introduction • B&F is one of HK’s “pillar” industries • Its GDP’s contribution increased from 10% in 1997 to16% in 2006 • Central Govt stated repeatedly supporting HK’s statusas an “International Financial Centre”

  3. In 2007 68 of World’s top 100 banks operating in HK. A total of 258 foreignowned fin institutionsoperating in HK. World’s 15th largest banking centre in terms ofexternal assets.

  4. 6th largest centre for FX trading 7th stock market in terms of market cap 5th in terms of total equity funds raised About US$800b under asset management

  5. HK’s core competence and challenges a strong cluster of international firms and services providers strong links with Mainland and SE Asia free capital flows and highly liquid market rule of law

  6. Latest developments in banking sector • HK’s banking industry underwent some difficulties since Asian Financial • Crisis in 1998, with contracting loan portfolio and rising bad debts. But • banking structure has remained stable. Average capital adequacy ratio of • banks was 28% in 2Q 2004, much higher than minimum requirement of about 10%.

  7. HK’s banking industry underwent some difficulties since Asian Financial • Crisis in 1998, with contracting loan portfolio and rising bad debts. But • banking structure has remained stable. Average capital adequacy ratio of • banks was 28% in 2Q 2004, much higher than minimum requirement of about 10%.

  8. Banking rebounded significantly in 2004 and 2007 was a very profitable year.Profits for HSBC’s Asia‐Pacific operation increased sharply by 53% in 2007 to HK$13.3b. • 2008 was the worse year for banking and finance globally, given subprime debacle and meltdown of international investment banking industry. Global investment banking collapsed.

  9. For example, HSBC needed to provide US$10b bad‐debt provisions in 1st half of 2008. Total profits declined by 29% and HK’s profit declined by 8%. • Losses spread from developed markets to developing markets

  10. Major structural features of banking industry • A 3tier system: 142 commercial banks, 29 restricted licensedinvestment banks and 29 DTCs by end‐2007 • Govt tightened regulatory requirements: to improve stability ofbanking sector; # of fin institutions declined sharply after Asian fincrisis; banks from 185 in 1995 to 133 in 2005, DTCs from 132 to 29.

  11. Capital adequacy ratio remained high by international standard • Japan encountered severe recession in 1990s: greatly reduced business operation in HK, # of banks in HK declined from 46 to 11,DTCs from 37 to 3. • US, Mainland and local banks also declined, while Taiwan banks • increased from 5 in 1999 to 17 in 2007.

  12. Total banking assets were HK$10,400b, 16 % by Mainland banks,9% US, 6% Japan, 30% European • Total banking assets declined from HK$8,400b in 1997 toHK$6,000b in 2002, down by 29%; mainly due to contraction ofJapanese banks and weak economic activities.

  13. Between 1994 & 1997, Japanese banks loans accounted for morethan 50% of total loans; HK was used as a “Booking Centre” fortheir regional loans; Japan’s 80% loans were overseas loans. • As for other banks, about 80% loans were used in HK.

  14. Trends for merger and acquisition intensified in 2000s: e.g. Bank of East Asia purchased First Pacific Bank (2000), DBS purchased Dao Heng Bank (2001), BA (Asia) acquired by a Mainland Bank; because more severe competition, economies of scale, required larger asset size to enter Mainland market

  15. With declining traditional businesses, banksexpanded aggressively into non‐interest earningbusinesses, e.g. wealth management , fundmanagement, insurance, investing in other fin assets.Banks’ new strategy was very successful until collapseof Lehman Minibond & Accumulator in 2nd half of 2008.

  16. Banking is under restructuring now: (i) moreconservative & returning to basics, (ii)declining noninterestincome, (iii) deteriorating risk profile ofborrowers, (iv) restrictive lending and de‐leveraging, (v)increasing interest & other fees, (vi) more provisions,(vii) declining returns.

  17. Banking is under restructuring now: (i) moreconservative & returning to basics, (ii)declining noninterestincome, (iii) deteriorating risk profile ofborrowers, (iv) restrictive lending and de‐leveraging, (v)increasing interest & other fees, (vi) more provisions,(vii) declining returns.

  18. Latest developments of securities industry Market capitalization increased rapidly from HK$6,700b at end‐2004 to HK$20,700b at end‐2007, mainly due to listing of many large Mainland companies in HK. HK ranked 7th internationally Total banking assets declined from HK$8,400b in 1997 toHK$6,000b in 2002, down by 29%; mainly due to contraction ofJapanese banks and weak economic activities.

  19. In 2008, HSI and share prices of many major listedcompanies once declined by more than 60%. Shareprices of HKEx (0388) dropped from a high of HK$265.6to HK$49.7. IPO activities contracted sharply in 2008 Derivative warrants became very active in recentyears, with largest trading volume globally and a lot ofretail interest.

  20. Major structural features of securities industry There were 1,248 listed companies with 444 Mainland‐related (5/2008).Mainland companies accounted for about 57% of market cap, up from27% in 2000 & about 70% of average daily transactions.

  21. Between 2003 and 2007, HK ranked within top 5internationally in terms of fund‐raised Top 10 largest IPOs in the last few years wereall Mainland‐related companies and 9 of themwere financial institutions

  22. Businesses of large IPOs were concentrated withlarge investment banks, e.g. BOC Finance,Morgan Stanley, Goldman, Deutsche Bank, MerrillLynch, HSBC, Citi, etc. Other smaller sponsorsinvolved in smaller IPOs.

  23. Businesses of large IPOs were concentrated withlarge investment banks, e.g. BOC Finance,Morgan Stanley, Goldman, Deutsche Bank, MerrillLynch, HSBC, Citi, etc. Other smaller sponsorsinvolved in smaller IPOs.

  24. Report on Econ Submit on “China’s 11 Five‐year Plan & Developmentof HK”, 2007. Major recommendations forpromoting HK’s Banking &Financial Sector: (i)Explaining to Central Govt ways to better utilize HK’s financial system &position to benefits Mainland’s development

  25. (ii) HK’s regulatory organizations and fin industry should be actively seeking opportunities to set up regular mechanisms to work closely with relevant departments in Mainland to formulate relevant fin policies & strategies.

  26. (iii)HK’s regulatory organizations should cooperate closely together withrelevant departments in Mainland to explore technical implementationdetails of various financial policies.

  27. (iv)HK’s regulatory organizations should cooperate closely together withrelevant departments in Mainland to explore technical implementationdetails of various financial policies.

  28. (v) Liberalizing restrictions to permit more HK financial companies to operate freely in Mainland. (vi) Liberalizing Mainland’s investors, companies & fin institutions to “go out”, using HK as a platform.

  29. (vii) Permitting HK’s fin instruments to be traded in Mainland, particularly those issued by Mainland institutions in HK (viii) Strengthening HK’s position to manage RMB transactions. (ix) Enhancing connections of HK & Mainland’s financial infrastructure development

  30. (x) Encouraging more Mainland institutions using HK’s finmarket for international asset management. (xi) Enhancing HK’s position as insurance and reinsurance centre.

  31. Regarding securities market: (i) Inviting more Mainland companies to be listed in HK, on a sustainable basis. (ii) Reducing transaction cost in securities market. (iii) Reviewing securities market’s regulatory framework.

  32. (iv) Encouraging financial innovations. (v) Promoting activities of fin intermediaries. (vi) Providing legal backing to listing rules.

  33. Regarding FX & Futures Markets: (i) Developing RMB’s futures and options market. (ii) Attracting Mainland users to participate in HK market. (iii) Strengthening regulatory system & mechanism for FX, Futures & Commodities markets.

  34. (iv) Developing more commodity trading products for HK’s market. (v) Developing HK’s asset management business.

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