Consolidation far from finished in well-served sector
Hong Kong remains heavily over-banked and under-borrowed - and with little prospect of a surge in loan demand any time soon, this is a mix that ensures continuing consolidation in the sector. Whether the process serves customers as well as it serves the surviving banks will be for the future to judge.
At $3.567 trillion at the end of last year, customer deposits in Hong Kong's banking sector exceeded loans for customer use by $1.76 trillion, according to the Hong Kong Monetary Authority.
These 'surplus' deposits worked out at about 140 per cent of GDP, maintaining Hong Kong's status as the most liquid banking market in the world by this measure - and an even higher ratio than the 124 per cent noted by Goldman Sachs analysts, who first drew attention to this deposits-loans mismatch, and its relationship to the broader economy, in research published three years ago ('The game moves on, Part 2', May 2001).
Despite a decade of mergers, consolidation and branch closures that have gathered momentum over the past two years, Hong Kong remains one of the most over-banked cities in the world, with one bank branch for every 3,000 or so citizens (or roughly twice the density in Britain and the United States).
Combine all of these elements with sluggish loan growth and it comes as no surprise that last year, 17 banking licences were surrendered while eight new ones were issued - a net loss of nine licences.
For some that meant an exodus from the marketplace, for others a slimming-down and restructuring. The merger of Singapore-based DBS's Hong Kong interests including Dao Heng Bank accounted for four surrendered licences, as KPMG pointed out in its just-released Banking Survey Report 2003.
Forcing lenders to quit the market was an unpalatable cocktail of loan contraction, a continued squeeze on lending margins caused by growing competition and lower yields on free funds. All of these factors helped drive the sector's net interest margin down to 1.91 per cent at the end of last year, a drop of around 28 basis points - or nearly 13 per cent - since 1997. Making money at these razor-thin margins presents challenges to small banks. Even mid-way through this year, those that had survived the seven lean years ensuing from the 1997/98 Asian financial crisis still had some scars to show for it.
Some did not survive. Mergers and acquisitions erased the names of one in four locally incorporated and licensed banks over the period, reducing their number from 31 to 23.
Some of the survivors have, however, prospered.
At the close of 1998, the big four in the marketplace were Hongkong & Shanghai Banking Corporation (with 20.4 per cent of total assets), its subsidiary Hang Seng Bank (5.8 per cent), the not-yet-consolidated operations of Bank of China and its sister banks (3.7 per cent) and Standard Chartered Bank (2.8 per cent).
By the end of last year, with the Bank of China Group consolidated and listed as BOC Hong Kong (Holdings) (BOCHK), the big four remained otherwise intact - although individually and collectively they had considerably expanded their market share.
HSBC (excluding Hang Seng) reported assets of $2.148 trillion at the end of last year - up from a 20.4 per cent share of total 1998 sector assets to one-third of the sector's $6.49 trillion in total assets.
BOCHK had vaulted over Hang Seng Bank into second place and from a 1998 market share of 3.7 per cent to 11.74 per cent, with assets now at $762.587 billion.
Hang Seng was third with assets of $502.959 billion (or 7.74 per cent) and Standard Chartered fourth with assets of $304.786 billion (4.7 per cent).
Together, the big four now command almost 60 per cent of total sector assets and the consolidation tide has not yet run its course.
