Hong Kong’s banking sector has seen significant advances in technology, notably with the emergence of generative artificial intelligence (genAI), transformations in risk management, and the introduction of new environmental, social and governance (ESG) and climate requirements. These developments are highlighted in the latest edition of the Hong Kong Banking Report by KPMG, released earlier this month.

Hong Kong’s banks exceed global average in Generative AI adoption

The report highlights significant technological progress, particularly the emergence of genAI. The technology is increasingly being used for tasks such as data analysis and employee service through sophisticated chatbots. A survey by Finastra reveals that 38% of Hong Kong institutions have started rolling out genAI, the highest rate among all the markets surveyed and well above the global average (26%).

Despite the popularity of genAI, KPMG notes that Hong Kong banks remain cautious about implementing generative AI in areas involving customer data due to regulatory concerns and the potential impact on their reputation if data privacy is compromised.

To address these challenges, the Hong Kong Monetary Authority (HKMA) is preparing to launch a regulatory sandbox to allow financial institutions to trial genAI technologies safely. This sandbox will allow HKMA to monitor the development and implementation of these AI technologies, ensuring robust risk management practices before full market deployment.

Evolving climate and ESG risk

The KPMG report also emphasizes the increasing integration of climate risk into banking operations. Many banks are incorporating climate considerations into know-your-customer (KYC) processes and embedding ESG elements into training programs and staff performance metrics. According to the Finastra survey, 87% of financial institutions in Hong Kong see ESG and sustainability as the next big disruptor in the sector, with 90% recognizing green lending as a significant opportunity for growth and revenue generation.

HKMA has adopted a phased approach to addressing climate risk, focusing on establishing a common framework to assess the “Greenness Baseline” of banks, engaging the industry on green and sustainable banking requirements, and monitoring banks’ progress in meeting the targets. HKMA is also promoting the integration of green finance and fintech, which it believes will be conducive to accelerating the transition towards a green economy.

Cost optimization

Cost optimization is another key topic in the banking sector, with institutions having set ambitious cost-saving targets of 10% cost efficiencies over the next year and up to 30% over three years. Strategies include consolidating common capabilities, the elimination of non-value add activities, reducing labor costs and digitizing key functions.

The adoption of emerging technologies, such as genAI, is perceived as critical to unlock cost savings and enhance customer service efficiency. However, KPMG notes that the size of financial investment required to implement new technologies is a concern and holding a number of organizations back.

Beyond front-line operations, KPMG expects the next wave of cost transformation to impact functions including risk, compliance, finance and marketing. Within the risk function, for example, new risks continue to emerge and evolve, including cyber, ESG and geopolitical risks. These risks are requiring different resources compared to more traditional risks, and genAI will become crucial for managing these challenges.

Risk management transformation

Finally, risk management practices in Hong Kong’s banking sector are undergoing significant changes due to a rapidly evolving regulatory landscape, technological advancements, geopolitical factors, and shifting business demands. Traditional risks like credit risk are becoming more prominent again, while new risks such as deepfakes and social media risks are emerging.

Several drivers are behind this transformation. For one, cost management pressures are pushing firms to increase efficiency in non-revenue-producing functions, forcing risk managers to reduce costs while maintaining or improving quality.

Secondly, the industry is evolving to become “digital-first”, expanding product offerings to meet diverse client demands. This expansion introduces new risks, notably cybersecurity threats and virtual assets. Furthermore, financial services organizations are increasingly relying on complex operating models involving new ecosystems of suppliers and partners, leading to greater third-party dependence.

In 2023, Hong Kong’s banking sector recorded moderate growth in the overall balance sheet, with total assets of all licensed banks increasing by 2.7% to HK$23 trillion (US$2.9 trillion). Loans and advances decreased by 3.1% while customer deposits increased by 3.5%.

Among Hong Kong’s virtual banks, Ant Bank performed best, recording a net loss of HK$180 million (US$23 million) in 2023, against a net loss of HK$560 million (US$71.7 million) for Livi Bank and HK$406 million (US$52 million) for Fusion Bank. Mox Bank and ZA Bank topped the ranking in total assets, with HK$14 billion (US$1.79 billion) and HK$13.9 billion (US$1.78 billion), respectively.

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