A Hong Kong market update with Dr Francis Lau
Hong Kong is a small market, smaller still in the shadow of the Chinese Mainland market which we explored in episode 4 of How to Lend Money to Strangers. That said, its high concentration of low-risk/ high-income consumers make it a useful training ground for lenders looking to target prime and better customers.
In this thirteenth episode 13 of HTLMTS I speak to Francis Lau about the strength of the residential housing market post-COVID, about the emergence of virtual banks, and the growing line of competitors for credit card issuers.
The KPMG report on Hong Kong banking which Francis referenced can be read here, while the HKMA’s mortgage numbers can be found here and payment card numbers can be found here.
You can find out more about me on my LinkedIn page, here
You can read more in-depth articles on credit risk strategy topics here.
And if you have any feedback, questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.
Regards,
Brendan
You can read the full transcript with timestamps here:
Brendan Le Grange 0:25
Welcome back to How to Lend Money to Strangers, the podcast about lending strategies around the world and across the credit lifecycle. Today we're visiting Hong Kong, a city that's very close to my own heart after I spent eight years living there. But those eight years ended three years ago and a lot can change in three years, especially these last three years. So I decided to call in Dr. Francis Lau to give us more up to date overview of the market. Francis has a PhD, a CFA, and a wealth of experience in retail finance in the region. And in fact, was my replacement when I left TransUnion Hong Kong for the UK office.
Welcome to the show, Francis, thank you so much for joining me. Normally I'd introduce you as my upgrade at TransUnion Hong Kong, but you've also recently struck out on your own so would you mind starting the show by giving us a quick overview of your background and the work that you're doing at the moment.
Francis Lau 1:26
Nice to meet all of you. I'm Francis Lau, I have a grown up in Hong Kong, I've worked in Hong Kong, and I am also familiar with the Asia Pacific market. I have been working for about 18 years, mostly focusing in the data analytics area supporting consumer banking, corporate banking, and even the compliance and risk functions. I also have a research degree, and I'm now focusing on doing more on the education training side of things.
Brendan Le Grange 1:54
Now, Frances Hong Kong is very small market, especially if people are contrasting it to the stories coming out of mainland China, where Hong Kong seven and a half million citizens might be won over by a FinTech in a matter of months as customers. So their first reaction may be to dismiss it as not all that exciting. However, I wanted to bring you in because I think there are a lot of transferable lessons in there, especially for lenders that are targeting higher income, lower risk customer bases, because while Hong Kong is small, I think it's also very concentrated. And quite an extreme example of that scenario, where - and this is an oversimplification - but a lot of the customer base is relatively high income, and almost all of it is exceptionally low risk. So the target customers of a prime high-street bank, perhaps. And that's a segment that can be quite tricky to lend to. Do you think that's a fair description?
Francis Lau 2:48
I will say generally speaking, Hong Kong market is, as you have said, is very low risk. Because of many reasons. I think, first of all us because we in Hong Kong - and also Asian people - are very conservative. And then they also look at credit very seriously. So that's why over the years, Hong Kong has a exceptionally low delinquency rate even during the crisis period. Like during the peak of the COVID last year, we saw some some upheavals in the in the delinquency rates, but overall, we still only have a fraction of a percentage point - even for the more high risk products like unecure lending/ personal loans - is still less than a percentage point for serious delinquency rate.
I think that's the good evidence that Hong Kong is a low risk area. And you have said high income, that is half/ half I will say, 50% true. Because in Hong Kong, you know that we have a very distinct income gap, we have very rich people and also we have a segment of people which is living under subsistence level. The the income gap is very big. But before the meeting, I have gone to the web and searched for some information, which is showing that for the wealth distribution, for those adult population having USD100,000 to USD1 million is over 54% - that means the wealth level. Hong Kong is so small, it's so small place but over half have USD100,000 to USD1 million in assets or wealth. So I think that's really a wealthy place.
Brendan Le Grange 4:16
And Francis, I think that one of the reasons behind that wealth, and indeed the disparity in wealth, is properties. So Hong Kong is the most expensive property market in the world, and that's all happened over the last 30 or so years. So you've had a population of property owners who've become incredibly wealthy, but those people without a property are under ever more pressure to keep up with rising rents on the back of that growth. And when we talk about rising property values, I think the average year over year growth rate for the last decade is 10% - so significant growth over a persistent level. One of the worries that has to have entered mortgage lenders minds is how sustained that would be through a crisis, like the COVID pandemic we've just been through, especially with Hong Kong's history with SARS. How have property prices held up?
Francis Lau 5:11
Yes, I think that's one of the reasons why there is so big a income gap in Hong Kong, the wealth gap in Hong Kong: the land supply in Hong Kong is very limited. And going back in history, the government regulated the supply of land and of course, that push up the property prices. And as you've said, In Hong Kong, the property markets in general is going up.
But we have some downside during the last 20 years, like for example, the 1997/ 1998 Asian financial crisis, of course, 2003 SARS, and also the 2008 financial tsunami. I just found out some statistics from the government. You know, in Hong Kong, we have the rating and valuation department, and they release the Property Price Index every single month. So it's really interesting that, even though we go through a long period of nearly two years of pandemic, the property prices have adjusted at the beginning of the pandemic but it reaches a historical high in July 2021. Hard to imagine. According to the latest statistic, the month-on-month changes for the property price index has dropped 0.2%. That means the August one compared with July one, but still year-on-year we have a 4% growth. And also I have got the Hong Kong mMA statistic on the residential mortgage survey, and there you can see that for August 2021, the new applications for mortgage dropped 8.2%, the high property prices may have an impact on that.
Brendan Le Grange 6:41
So there's been some volatility and a slowdown in growth by Hong Kong standards, but at 4% year over year, certainly not enough to make any mortgage lenders panic. And I think even more so than that. This has come on the back of not just COVID but the political and social unrest that preceded it. So if I was a mortgage lender looking at that, you would hope that that's among the worst that could happen. And yet properties have held up very well, in part due to that supply shortage you mentioned. But yes, you were to take confidence in your security off the back of that.
Francis Lau 7:14
And so this is telling us a story about how the property market behaved. But obviously you will have heard of news that the central government is trying to provide more directions to the Hong Kong property market because that's definitely impacting the ordinary lives of Hong Kong people because of the high property prices and also that translate into high rental. And more important is tomorrow, the Chief Executive will announce her last policy address and people expect there will be a big portion about the land policy, how to increase supply of land and also properties in Hong Kong.
Brendan Le Grange 7:52
And here we are with a quick update on that. So when I heard that the CEO was making her address the day after our initial recording, I asked Francis to join me for a follow up and here's what he picked up from her speech.
Francis Lau 8:04
So for the policy address of the Chief Executive 2021, one of the major mission for the Hong Kong government is to build a so-called Northon Metropolis, like a new town area which can house 2.5 million people comprising an area of 300 square kilometres. And the area will cover like Tin Shui Wai, Yeun Long, Fanling, Sheung Shui, this is the farmland, the underdeveloped land in the new territories. In the policy address, there are also infrastructure investment to build more railroads to connect these, you can say a little bit remote, parts of the New Territories, and then to open up the economy there, because we have the Greater Bay area and then we try to make better integration with the Shenzhen and also the Kwun Tong area.
More near term measures, is to ease the selling of the farmland, to ease the selling of the old buildings in the in the urban area to facilitate rebuilding. So that's the type of measures that government is doing to increase the land supply.
Brendan Le Grange 9:19
And now if we shift just a little bit. Last week, I joined TransUnion's quarterly update - for anybody who's interested in the Hong Kong market in more detail, do join that, it's very informative. - and one of the things I saw in that, was that credit card originations were starting to return towards pre-pandemic levels.
This is obviously good news, but if I remember correctly from my time there, even pre-pandemic levels of growth weren't exceptional. Cards have been struggling for good growth for a while. And when I left the biggest concern on the horizon was the emergence of the Chinese super apps and people were questioning, as cash left society was card going to gather some of that spend, or was that spend all going to be gathered up by WeChat and Alipay. But you've had a more recent look at the market. So what are your thoughts on cards growth, and the biggest competitors for credit card growth in Hong Kong at the moment.
Francis Lau 10:15
So I think you have outlined a competitive landscape. But let me give you the idea behind this. Even for myself, I use the online payment like WeChat pay. In Hong Kong, I use AliPay, which is provided by Alibaba, but the thing is, usually for this type of mobile payment apps, they are bundled to your credit card, or even tied to your savings account. But I think it's in general, helping the credit card business. Of course, there are some competition, if the user did not tie their credit card with the mobile payment apps, I think that's one of them.
But let me give you some other statistics, I also get from the Hong Kong MA, which gives you some idea about the payment card segment. The total number of credit cards in circulation is 19 million in Hong Kong, and also dropped by a year on year is 1.5%. That means the total number of cards in circulation is dropping. And also there are two important statistic also, the total number of credit card transactions on a quarterly basis is grow by 7%, and on a year basis is grow by 15%. That means the number of cards is dropping slightly, but the number of card transaction is growing. It seems like the consumers in general are consolidating the credit card, but they still use it as their medium to conduct transactions.
And I think for the for the competition with the mobile apps or mobile payment apps. Some of them may be complimentary. But I think nowadays we have an even bigger competition coming the bnpl the buy now pay later, which definitely will have an impact on credit card transactions. Let's wait and see.
Brendan Le Grange 11:46
Ah yes, the now nearly universal story of buy now pay later as an emerging threat.
As for the payment apps then, it seems that they've evolved more along the Apple Pay line where, although the card issuer is losing out some engagement by disappearing from the front end, they're still capturing the settlement and the balances in the back end. But before we leave this point, I just want to loop back to a number you mentioned there: 19 million credit cards in issue. That's for what four, four and a half million card carrying consumers? So the typical person with a credit card in their wallet has four or five credit cards in their wallet. And that means when we talk about industry numbers, we can't really tell the whole story by talking about the total, or by talking about the average, because for any credit card issuer the real story that's important to them is about how they winning their share of that market. And it also means that even before we take into account the threat of things like buy now pay later or Chinese super apps, there's already an incredibly competitive landscape. Could you maybe sketch that out a little bit more for us?
Francis Lau 12:51
I can answer your question as a consumer. And in general, I can also share my viewpoint on the whole market. No doubt Hong Kong is a very competitive market, the credit card issuers are facing strong competition. For myself, I think I have more than five cards but in general, I will focus on one or two cards that're my major transaction medium. Why I want to just focus on using one or two cards is because of the benefits, because of the discounts, because of the cashback. You can go to different shops or restaurants, you have discounts, you have rebates and then on different purchases, you have also other privileges. That's the major motivation. I think, in general that's true for other consumers in Hong Kong. And on the other hand, as you're said because they're always new cards coming out with new features, especially the welcome gift, you spend a few $1,000 and then you can get some cash coupon or you can get some premium or whatever - then that will motivate you to to apply for new card, but after that it will just sit there. I think that's a very normal way of life.
So there are many dormant cards in Hong Kong. That's the way the credit card market works. And that's why, in Hong Kong, if you open a new card the acquisition cost is very high, and also the maintenance cost is also high because on an annual basis the customers will ask you, like myself I will not pay any annual fee, I will not pay, I will ask them to waive it, or if not, I will cancel the card. Unless I'm a revolver the banks can only earn the transaction fee, they can just earn the transaction levy from from what I have spent. So how to stimulate consumers to use the card to spend is another expensive way, like for example you need to have joint campaign with the stores offering so much percentage or rebate to the customers.
We need to really figure out growth strategies to balance between the acquisition costs maintenance costs and also the the transaction volume and also the balances.
Brendan Le Grange 14:54
Yeah, and which is interesting when you see it in the context of a market like the UK where I think we were 1.1 credit cards per user and interchanges are kept very low, if they're there at all. So there doesn't exist a culture of rewards. As you can very clearly see if one card issuer decides to win customers through something as repeatable as spending on rewards, it can very soon become an arms race where the winner is the one who can give the most expensive reward out, and still make a profit. But I think what's changing now - and you've mentioned by now pay later - is the awareness that that's unsustainable, we have to instead compete on customer experience.
And perhaps that's what buy now pay later is going to show the industry. You can compete among yourselves for as long as you like, giving ever better rewards, but if you're not investing in better customer experiences, then somebody can come in with a completely different model, and win your market share. And that price war would have been expensive for the card issuers to maintain, and would have kept profits relatively low, but I think it's also a barrier to entry. So if a FinTech was looking to get a card business up and running in Hong Kong, it will be very hard to justify because the cost of winning a customer is so high, the cost of maintaining a customer is so high, it's hard to see where they'd get enough capital to make big inroads. However, where competitors are coming in and saying, actually, I'm going to deliver a better customer experience. And I'm going to win your customers that way. And now this arms race is circumvented or even flipped, because you'd normally think of fintechs, or startups in general, as being experts at customer experience.
Staying on that idea of taking on the big players via better customer experience. When I was leaving Hong Kong, the government had just issued its first set of virtual banking licences, I think names had been attached to successful bidders, but it was still too early for anybody to actually be operating. But in the last three years, we have seen a number of virtual banks go through the end to end process and now emerge in the market as fully fledged businesses. How is their emergence changed the financial landscape in Hong Kong?
Francis Lau 17:08
Okay, I think that's also an interesting area. And as I told you, I have a go through some report, I found one, which is published by KPMG: in Hong Kong, we have eight virtual banks, all of them in operations now. And the KPMG report is good that they provide some financial figures for these banks, you can see in terms of interest income, the ZhongAn Bank has the highest interest income, and even the asset level is the highest for the ZhongAn bank, I can tell you the first three, the second one and also the third one is no doubt the Livi Bank and also the Airstar Bank, they have got the same net interest income, and in terms of assets, they also come the second and also the third. And you know that in Hong Kong, the virtual bankx are very, very aggressive in getting customer deposits, first of all your customer deposit, and then the other hand is to do loans themselves. Like the Airstar Bank, they are doing a huge promotion in the market for for p-loans, interest free and also a payment free benefit if you joined the programme, and then they encourage you to transfer the balance to grow that books. Another example is the Ping An Bank, Ping An OneCredit Bank, they are very aggressive in the SME market.
Actually, the eight of them are in operations, but they have very different strategy. But in general, all of them look to the Greater Bay Area. That's the growth engine because in Hong Kong, you know that we are very small market. But in Hong Kong, under the Hong Kong MA, the Hong Kong Monetary Authority, the AI, the authorised institutions, we have about 200 API's in Hong Kong, and also for moneylenders the number is, is astronomical. We have 2,500 moneylenders in Hong Kong. So small place. Not all of them are very active, but you can see we have 200 banks over 2,000 moneylenders for only 7.5 million population - how to make a profit, the competition is exceptionally high? So that's why all the banks or the financial institutions look to the greater Bay, where we have a 70 million population,
Brendan Le Grange 19:18
With the greater Bay Area being Hong Kong and Macau plus the neighbouring mega cities on the Chinese mainland, Shenzhen, Guanzhou, etc.
Francis Lau 19:25
Yes, there we call the nine plus two, there is nine municipalities in China and including Hong Kong and also Macau, there is 11
Brendan Le Grange 19:34
If you think about Hong Kong in its traditional position as a financial powerhouse in the East. That was well utilised by the capital markets, so capital could flow in and out very easily but in consumer banking, it was always geographically constrained, you could only lend to the people that lived in Hong Kong. And as we've said, that's only about seven and a half million people. They might be rich, but it's still a small market. But now that's an export market, as such, for Hong Kong financial innovation So, if a FinTech starts in Hong Kong and comes up with a successful model, they can suddenly look at the far bigger market just across, well, now just across the bridge.
Francis Lau 20:11
Yes. And I think that's why do the virtual banks are looking toward that with their business model because they are not the bricks and mortar banks, they serve their customers via online channels. So whether the customer is in Hong Kong or whether is in Shenzhen or in Guangzhou make no difference. They just serve it through a mobile app, or even another online channel,
Brendan Le Grange 20:32
Which gets me thinking back a bit as well. So when I left Hong Kong, the the banks were slowly losing market share to the moneylenders - or the non-banking financial services providers. But in that TransUnion webinar, I saw that the trend was starting to reverse itself and banks, as a singular unit, were regaining market share. And that got me wondering, was that because of virtual banks, perhaps, were they presenting a more customer friendly, more risk hungry face of the banking industry? Or do you think is something more mundane, just around cost of capital or stability during the crisis?
Francis Lau 21:10
It's not a simple question, I would say, it's not a simple question. But a virtual bank will be part of the answers to that question, because as I've said before, the virtual banks are targeting consumers to open up new credit accounts or transferring their credit accounts to them. And you know that in Hong Kong, the consumers who have p-loans are definitely having some financial needs. I don't say the financial troubles but financial needs. And those who who are super prime or even the prime plus though those are on the risks tier, they they may have very limited credit needs. And also you know that in Hong Kong, the commercial banks usually focus on the prime peers, for the consumers. But for those who are more on the near prime or below prime level, those are usually target by the moneylenders. But for for virtual banks, they will target those consumers, because I think that will be the growth engine. But those numbers you have seen, I think, will be more the virtual banks, or maybe the second or third tier banks may be part of the answer to it.
Or is it because the access to capital I think that's more complicated question. But company registry have issued a new set of rules to golf and the renewal of licence for the moneylenders, they put up more on the management, and also on the continuing credit monitoring process that will definitely raise the standard of the moneylenders to make sure that the borrowers are able to repay. If not, then the lenders cannot lend to them to promote the responsible lending.
Brendan Le Grange 22:46
Yeah, so a number of factors but it does seem like, primarily, when it comes to personal loans it's virtual banks against money lenders for the most part but with that added interesting layer from regulation. So we've spoken about virtual banks not being banks in the way they deliver service, but at the same time, they might bring just enough banking heritage to do really well at the regulatory side of things that the money lenders are now having to get their heads around. So a space to watch for sure.
Should we finish by talking about what you're doing now? In the introduction, you talked about getting back into education? What is that looking like on a day to day basis?
Francis Lau 23:27
Yes, let me give you some more background: I used to be conducting training for different types of organisations and recently I work closely with the universities in Hong Kong to try to provide them programmes. Yes, I develop the programme myself first, and then I am the instructor, and also I will find other people to become an instructor because I know that nowadays for those graduates, especially the business graduates because I myself and my business graduate, usually for the technical skills like the programming skills, they are not very familiar with. But for myself, I when I worked for the banks, I learned how to use SAS, Python, R by myself. And so that's why I want to increase or enhance the employability of the the graduates and for those youngsters. So I tried to develop and also provide some technical training for them. But with a more a FinTech environment/ scenarios, which can help to develop the talents that the next generation in our market. The Hong Kong MA has released the vision to upgrade Hong Kong into a FinTech hub, but given that we have a limited supply of talents, I think that's that's a bottleneck. So that's why I'm trying to engage in that area.
Not just Hong Kong is facing that challenge. Always there are a limited supply of the talents. And more important what I saw is, as a person who works on the, I will say the research and also the analytics areas, you can't just rely on the IT team or the analytics team to generate the results for you. Because every time - you and I have the experience - if you want to change some of the angle in looking at the data, you need to ask the data science team, they may be occupied by other tasks, the turnaround time will be quite long. And also you need to make them understand what you need. So better to do it yourself. That skill set the data skill is definitely needs to be one of the necessary skill for the next generation.
Brendan Le Grange 25:23
That's a great point, Francis data is only going to become more and more important. And the basic level of what counts as data literate is going to keep rising. So yes, you'll be working in a team with real data experts who can do the really complicated work, but you don't want to get caught sending off a request waiting for the data to come back. Working on it a little realising you may be asked slightly wrong question, sending it back, getting a tweak, getting it back to you realising now you want to compare it to a different year, sending it back, you want to at least have the ability to take a data set, slicer that look at a few scenarios and really understand the question, and then hand it over to the experts. I think that's going to be a core competency of anybody in business in the future. So you're doing some great work there.
Francis, thank you so much for joining the show. It's been an absolute pleasure catching up. And thank you all for listening. If you're enjoying the content, don't forget to subscribe and to share. This has been How to Lend Money to Strangers, the podcast about lending strategies around the world and across the credit lifecycle. And I'll see you next Thursday for another episode in one of my older hometowns as we take a closer look at lending in the Nordics.