Special Report – Financial market: two portraits

There are those who view it with optimism and those who point out flaws. Everyone agrees that it can grow.

MB April 2021 Special Report | Financial Hub in the making

During the presentation of the Policy Address for the year 2021, the Secretary for Economy and Finance, Lei Wai Nong, stressed that the local financial sector represents more than 10 per cent of Macau’s GDP. “In the last 10 years I have conducted a study, and the annual growth is 18.1 per cent, and it is growing faster compared to the gaming sector. In addition, it ranks third in Macau’s GDP. According to this year’s data [2020], the financial sector occupies more than 10 per cent of Macau’s GDP. And in the future, maybe, we can expand the space of development of the financial sector,” said the secretary last December.

Independent observers responded to this rosier view suggested by the government.

Jorge Costa Oliveira, Partner and CEO of JCO Consultancy, pointed out to Macau Business in February, “Macau’s financial market is rather unsophisticated. This is caused by the restriction on the (already very small) number of banks and insurance companies allowed to operate in Macau and the resulting absence of effective competition, the limited size of Macau’s market, the adoption of the universal banking model, and the concomitant restriction to market access for specialized financial operators – there are no brokerage companies, no financial leasing operators, no private equity or hedge funds, no exports insurers, etc.”

“Macau’s financial market is rather unsophisticated” – Jorge Costa Oliveira

According to Mr Oliveira, “The negative impact of these factors is further amplified by the existence of a large, vibrant and efficient financial center in nearby Hong Kong (and Shenzhen).”

Within the scope of their research paper “Project on the factors of development of a financial sector in Macau” (2019), professors Lin Deqin and Leung Chung Sing are positioned halfway.

The two authors understand, for example, “in the present situation [the financial system] is not yet at an ideal level, making a small contribution, given its potential”, and “from the point of view of social contribution, in recent years, the financial sector has developed relatively steadily, the Macau SAR government has adopted policies conducive to its growth. However, on how the issue of hegemony of the gambling weighs on the local productive structure, there is still no possibility that its status will be threatened.”

Lin and Leung also claim that the Macau financial sector “is very poorly differentiated and small-scale”, highlighting the facts that in 2018 there were fewer insurers (24) than in 1999 (25) and that only six more banks have emerged in that same period (from 23 to 29).

The researchers lament that the financial sector is limited fundamentally to banks and insurance companies, as that means “a very poorly differentiated structure, which results in a major disadvantage for the qualitative development of Macau.”

The pandemic and the banks

It is too early to assess the impact of the pandemic on Macau’s financial sector, according to a report by the Macau Monetary Authority (AMCM).

The document states in particular, “The deterioration of macroeconomic conditions could have a severe impact on the health of the local financial sector”, and “the asset quality and credit risk of Macau’s banks are significantly affected by macroeconomic variables, including economic growth, interest rate, property price and exchange rate. In particular, asset quality would deteriorate with lower output growth.”

“The global economy has been clouded with unexpected events alongside the evolving situation of Novel Coronavirus Pneumonia starting from the onset of 2020. These uncertainties may trigger different types of crises which could be transmitted into the financial system,” advised the author of the report, Z.T. Cheang, Research and Statistics Department, AMCM.

The document states that local banks, among other measures, “are required to conduct risk assessments of various operations, particularly their financial investments and lending portfolios, and pay particular attention to changes in credit ratings and market values of financial investments, asset quality and provision coverage of various types of loans and advances.”

Taking the preliminary results of four main local banks, the year was not good but also not negative: the Bank of China has reported some MOP5.6 billion (US$706.8 million) in net profit for 2020, a 3 per cent year-on-year rise from the previous year, the ICBC group has reported profits of MOP3.08 billion, slightly less than in 2019 (MOP3.07 billion), Tai Fung Bank also increased its profits last year (0.5 per cent more than in 2019 to a total of MOP2.19 billion) and Banco Nacional Ultramarino recorded profits of MOP420.3 million, indicating a 41.7 per cent drop from the year prior when BNU reported MOP721.9 million.

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