Banks' Fee Income Plummets As Loan Demand Dwindles

Border reopening to benefit banks, but economic challenges remain.

Interest income is expected to rise, but economic slowdown will weigh on fee income, analysts warned.

Analysts are mixed on what 2023 has in store for Hong Kong banks, but one thing is certain: it’s likely going to be a challenging year.

“Interest rates are rising, so margins and interest spreads will drive increased interest income. However, the economic headwinds and recession risk will impact overall loan growth and there are continued concerns around loan impairment and, in particular, exposure to Chinese commercial real estate,” David Scott, EY Banking and Capital Markets sector leader for Hong Kong, told Asian Banking & Finance.

“Whilst regional growth has been adjusted upward as a result of Mainland China and Hong Kong’s recovery, uncertainties remain in global inflation as there is not much evidence that it has come under control,” said Natalie Chan, Deloitte China FSI Audit & Assurance Partner.

She noted that the US Fed is expected to continue its rate hikes in 2023, and geopolitics remains “highly complex.”

“Given these uncertainties, strengthening the operational and financial resilience of the Hong Kong banking sector should remain a key focus,” Chan added.

Interest rates go up, fee income goes down

Despite the challenges, the overall outlook is more positive compared to late 2022. The rise of interest rates is expected to benefit the city’s banks. This will expand margins, a positive after years of low margins, according to KPMG’s Hong Kong Banking Outlook Report.