Chart of the Day: Hong Kong’s New Virtual Banks Bled Cash Last Year

Hong Kong’s eight virtual banks all lost money last year, with a combined pretax loss of HK$2.4 billion ($309 million), according to a report published Tuesday.

Standard Chartered-backed Mox Bank reported the largest loss at HK$456 million, followed by Livi Bank at HK$438 million. Ant Bank (Hong Kong), the virtual banking arm of Ant Group Co. Ltd., lost the least at HK$172 million, based on data compiled by consulting giant KPMG.

“Unsurprisingly, all the virtual banks are yet to turn around a profit as they remain focused on investing and spending on areas such as office premises, staff costs, and information technology, as well as on marketing activities to grow their customer base,” KPMG’s Hong Kong Banking Report 2021 stated.

The eight lenders received licenses from the Hong Kong Monetary Authority (HKMA) in 2019 before beginning operations between March 2020 and December 2020.

“It is expected that over time as the number of customers and total deposits increase, we will see more of the banks’ expenses being offset by increasing operating income,” the report said.

By the end of last year, the virtual banks had attracted HK$15.8 billion in customer deposits, or 0.11% of total deposits across the entire banking sector in Hong Kong, the KPMG report showed. HKMA data show 420,000 virtual bank accounts had been opened in the Asian financial hub by the end of 2020.

Chinese online insurer ZhongAn Online P&C Insurance Co. Ltd.’s subsidiary ZA Bank and Mox Bank held the largest share of deposits among all virtual banks with 38% and 33% of the total, respectively, the KPMG report added. ZA Bank was the first digital bank to open in Hong Kong, while Mox Bank was officially launched in September.

The virtual banks share similar strategies such as high deposit rates to attract clients, which have squeezed their profitability in the highly competitive Hong Kong market.

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In the report, financial services partner at KPMG China Steve Cheung said that the banks should consider introducing new products and services such as credit cards and wealth management services.

Right now, the banks primarily offer deposit, loan and transfer services.

The virtual banks “can leverage their partnerships with their key owners and stakeholders to provide value-added benefits and promotion schemes such as shopping discounts,” Cheung said. Most of the banks are backed by internet or financial companies from the Chinese mainland. For example, Airstar Bank and Fusion Bank are backed by smartphone-maker Xiaomi Corp. and tech giant Tencent Holdings Ltd., respectively

The emergence of the virtual banks has prompted traditional lenders to enhance their digital offerings, the KPMG report added.

Last year, Hong Kong’s banking sector saw a drop in revenue, which has had a notable impact on overall profitability, the report said, expecting the trend to continue throughout the rest of this year and probably into 2022.

Contact reporter Kelsey Cheng (kelseycheng@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

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