Hong Kong's banking industry has been through a tough period, as global economic volatility, politics and the pandemic have caused problems. With interest rates heading higher, this should benefit banks' net interest margins, the firm said.

Hong Kong banks are likely to see their revenues rise in 2022 as net interest margins improve amid expectations of higher inflation and multiple interest rate hikes, KPMG said in its annual report on the Asian jurisdiction’s banking sector.

In 2021, the accounting and professional services firm said that the banking sector’s balance sheet continued to grow. Deposits rose and the total assets of all licensed banks expanded by 4.9 per cent to HK$24 trillion, with loans and advances increasing by 6.6 per cent on a year before. 

KPMG did not mention Hong Kong banks by name. Prominent players with a strong domestic link include HSBC, Bank of East Asia, Standard Chartered and Bank of China (Hong Kong).

This year, higher interest rates should widen banks’ margins. The Hong Kong dollar is tied to the US dollar – higher US Federal Reserve rates will lift those in the former British colony.

Uncertain economic conditions and ultra-low interest rates have curbed profits, the report said. Pre-impairment operating profit fell by 15.4 per cent to HK$196 billion in 2021. The low interest rate environment throughout 2021 weakened the aggregate net interest margin for all licensed banks, which shrank by 9 basis points from 2020 to 1.31 per cent.

Following the trajectory of 2020, total loans and advances of all surveyed banks increased by 6.6 per cent to more than HK$11 trillion at the end of 2021.

"We expect retail spending to bounce back quickly following the end of the fifth wave of the pandemic due to progressive relaxation on social distancing measures and the Consumption Voucher Scheme. However, the confidence of corporates in Hong Kong and China to borrow and invest is less certain and will have a bigger impact on loan growth in 2022,” Paul McSheaffrey, partner, financial services, KPMG China, said. 

Amid the recovery of the global economy, the credit quality of the Hong Kong banking sector slightly deteriorated with the impaired loan ratio for all surveyed banks slightly increasing from 0.78 per cent to 0.86 per cent.