Analysis: Lower fees, snazzy branches: Hong Kong banks gird for online-only onslaught

The Bank of East Asia

14/08/2019 24:00

* Eight new virtual banks to be launched in Hong Kong this
year
    * Launch expected to hit existing banks' profitability 
    * Banks including HSBC, StanChart, Citi boosting tech
investments
    * Hong Kong one of the most profitable banking markets
globally   

    By Sumeet Chatterjee
    HONG KONG, Aug 14 (Reuters) - Hong Kong's biggest banks are
set to cut fees, boost digital services and jazz up branches
with features such as touch-screen display panels to meet
competition from new online-only lenders in one of the world's
most profitable banking markets.
    As many as eight so-called virtual, or online-only, banks
are set to be launched in the Chinese territory this year,
posing the biggest challenge in years to a stronghold for
lenders including HSBC  HSBA.L  and Standard Chartered  STAN.L .
 urn:newsml:reuters.com:*:nL3N22L30U
    The expected moves show how keen traditional banks are to
protect their cash cows even with a short-term hit to their
profits, at a time when their growth elsewhere faces hurdles due
to an intensifying U.S.-China trade war.
    And though the virtual lenders are expected by analysts to
make only a dent in the business of the incumbents, the big
banks are unwilling to take any chances, given that the new
breed are backed by some of China's biggest firms, including
Alibaba Group Holding  BABA.N  and Ping An  601318.SS .
    In an acknowledgement of the looming competition, HSBC said
in June it would waive fees on accounts without a certain
minimum balance. The British bank said the move was to promote
financial inclusion. StanChart, Hong Kong-based Bank of East
Asia  0023.HK  and others followed with similar moves.
    The old guard is also expected to vie to raise deposit
rates, further pressuring their profits, people with knowledge
of the matter said.
    "The moves will certainly have an impact on the bottom line,
but hopefully it will not be very significant and we would be
able to offset that by increasing the business volume over a
period of time," said a senior banker at a foreign bank.
    
    BRICKS VERSUS CLICKS 
    Hong Kong is a highly profitable banking market. Return on
equity for leading Hong Kong banks ranges from 6.5% to 15%,
versus 1.1-13.4% in Asia, 0.4-9.2% in Europe, and 8.6%-15.8% in
the United States, as per Refinitiv data.
    HSBC made $3.4 billion in pre-tax profits from its Hong Kong
retail banking and wealth management operations in the first
half of this year, accounting for more than a quarter of the
bank's entire profits for the period.
    The bank, which has about a 30% share of retail deposits in
Hong Kong, has been bolstering its own digital capabilities, its
Asia Pacific head of retail banking and wealth management, Kevin
Martin, said.
    "We're very aware that competition is increasing and our
customers' expectations are changing and we will ensure we
continue to invest ... to meet these challenges and needs."
    StanChart's $1.9 billion first-half operating income in Hong
Kong represented a quarter of its total operating income. The
bank is leading a consortium that has won a virtual banking
license.
    "As competition increases, there will be some pressures on
fees and charges, which will be good for customers," said Samir
Subberwal, StanChart's regional head of retail banking in
Greater China and North Asia. 
    "But we believe that banks, as well as the new virtual
banks, will be sensible in pricing and discipline on financial
management," he said.
    Bank of East Asia declined to comment. The people declined
to be identified as they were not allowed to discuss specific
plans.
    The new online-only banks include those set up by consortia
led by affiliates of e-commerce and payments powerhouse Alibaba,
insurer PingAn, and smartphone maker Xiaomi  1810.HK , as well
as Bank of China Hong Kong.     
    The digital banks plan to begin by offering services such as
savings accounts, credit cards, personal loans, foreign exchange
and travel insurance. They also promise account openings in just
four minutes, an eye-catching claim in a city where customer
complaints about account opening difficulties are common.
    The key threat, however, is that their lower overheads will
enable them to offer sharply lower or zero-fee services, said
the sources.
    Hong Kong banks earn huge fees levied on retail banking
services. Morgan Stanley estimates the total fee pool was $9
billion in 2018, broadly flat over the last five years.    
    
    MAKING MONEY 
    Banks including HSBC and Citigroup  C.N  are also looking to
shift more customers to digital platforms and have been
revamping the physical branches to make service delivery
efficient and interactive.
    Citi, for example, plans to soon launch a "digital only"
banking option for its retail customers, said its Hong Kong CEO
Angel Ng, to supplement its physical network. "The branches are
also more akin to Apple stores and are paper-less and hi-tech."
    The virtual banks are, however, unlikely to grab a sizeable
share from the traditional banks soon, analysts said. New
tech-based players that entered Europe's banking and payments
sector since 2005 had 6%-7% of the market in 2016, a study by
consultancy Accenture showed.
    "The incumbents will have to respond to it (aggressive fee
pricing), but virtual banks still have to make money," said Tim
Pagett, Asia Pacific financial services leader for consultancy  
Deloitte.    
    "While they don't have to carry the cost of physical branch
networks, they do actually have to carry cost and they do have
shareholders who have certain return expectations."

 (Reporting by Sumeet Chatterjee; Editing by Jennifer Hughes and
Muralikumar Anantharaman)
 ((sumeet.chatterjee@thomsonreuters.com; +852-2847 2094;))