KPMG sees growth potential for Hong Kong banks through AI and shifting trade flows

While Hong Kong’s banks posted stable profits in 2024, the sector enters 2025 without obvious growth levers. Interest margins have plateaued. Loan demand remains subdued. Regulatory pressure is steady but not easing. In this low-volatility, low-growth climate, the most consequential moves will be structural, not cyclical—and the banks that reposition for regional trade realignment and AI leverage may redefine their role in the next capital flow cycle.

The headline from KPMG is not optimistic: interest rates, margins, and loan volumes are expected to remain flat. But the subtext is more revealing. Hong Kong’s banks are sitting on a stable capital base, solid deposit growth, and improved cost control—but the model is running at maintenance mode, not expansion. To maintain relevance and justify their current valuations, these institutions will need to reposition around two macro forces already reshaping Asia’s financial core: supply chain bifurcation and AI infrastructure spend.

Even as global headlines fixate on inflation and rate cycles, the more important long-term shift is happening along trade corridors. US-China decoupling, accelerated by tariffs and industrial policy, is driving a re-routing of manufacturing and services flows across Asia. For Hong Kong banks, which have historically played a facilitating role in PRC-linked capital activity, this presents a double-edged challenge.

On the one hand, diminished China-bound activity reduces the fee pool from trade finance, M&A, and cross-border cash management—products where Hong Kong was long advantaged. On the other, new flows—from Vietnam, Malaysia, and India toward the US, Middle East, and Europe—require new infrastructure, risk modeling, and credit practices. The banks that can build correspondent relationships and underwriting practices aligned with this new geography will be first to capture the emerging liquidity routes.

This requires more than regional sales offices. It demands a re-mapping of credit models, regulatory playbooks, and FX strategy—all underpinned by digital infrastructure that is still nascent in many Hong Kong institutions.

The second force reshaping the sector is AI. Unlike earlier waves of automation that trimmed back-office costs, today’s AI deployment changes the actual structure of banking services. From real-time KYC to automated SME lending models, generative and predictive AI are collapsing the latency in credit decisioning and risk evaluation.

For Hong Kong’s traditional banks, many of which operate with legacy systems and multi-layered compliance stacks, this is both an opportunity and a risk. AI-native challengers—especially those operating under lighter virtual banking licenses—are already encroaching on SME financing and FX hedging. The challenge isn’t just speed. It’s configurability: can incumbent banks reconfigure service delivery, credit thresholds, and client onboarding to match the fluidity of AI-native firms?

Without a re-architecture of internal systems—data lakes, credit decision engines, compliance logic—AI becomes a patchwork enhancement, not a competitive advantage. The technology isn’t the moat. The organizational fit is.

Hong Kong’s banking sector has long rested on three legs: property lending, cross-border capital services, and high-net-worth wealth management. Of these, only the last retains growth upside in 2025. Wealth inflows—especially from mainland Chinese clients seeking capital diversification—continue to provide fee stability. But this segment is increasingly mobile and regionally diversified. Singapore, Dubai, and even Riyadh are ramping up competing propositions.

Property lending remains risk-exposed due to ongoing softness in commercial real estate. Retail loan growth has been tepid, and tighter credit standards may further blunt expansion. Meanwhile, fee compression in traditional trade and transactional banking continues to erode margins, as fintech entrants and regional competitors offer lower-cost, API-enabled alternatives.

The takeaway? Holding pattern is not a strategy. It’s a countdown.

The real game for 2025 is not outperforming within a stagnant landscape—but reallocating toward where capital and trade are going next. That means deepening infrastructure around Southeast Asia’s emerging exporters. It means underwriting AI-forward business clients with faster credit pipelines. And it means rebuilding internal capabilities to support continuous compliance, adaptive pricing, and cross-border product delivery.

Banks that treat AI and trade realignment as transformation mandates—not adjunct projects—will emerge structurally leaner and strategically better positioned. Those that do not may find themselves increasingly bypassed in favor of regional platforms that are digitally native and geopolitically agile.

The surface calm of stable profits hides a deeper tension: without structural adaptation, Hong Kong risks losing its intermediary role in Asia’s next liquidity cycle. AI and trade shifts are not future scenarios—they are already reshaping client behavior, product demand, and competitive threat maps.

The Hong Kong bank strategy for 2025 is no longer about weathering cycles. It’s about rebuilding the chassis. And the window to do so—before capital bypasses, not pauses—is narrower than most institutions are modeling.