Why Hong Kong banks may have structurally derated

Lower margins are largely to blame.

According to Macquarie Research, it could be argued that HK (along with Singapore and Korea) has derated in the period following the GFC, given that average Operating Return on Assets (OROA) has fallen. The primary reason behind the lower profitability is lower margins relative to their historical levels. 

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Looking ahead, this situation is unlikely to change meaningfully (recall Fig 1 OROA), which suggests the need to embrace a new business model to supplement the weaker interest income stream from lower margins.

Typically, the strategy would entail imputing more non interest income into their revenues, focusing on higher yielding segments, and/or expanding outside their mature, saturated market.

However, for HK, this trend has been going the other way, as mortgages (typically higher yielding) have been declining in share, non interest income is weaker (on the back of stricter HKMA measures on the sale of investment products), and overseas expansion is limited to China (competitive & experiencing possible asset quality stress).