China's Listed Banks to Accelerate Business Transformation

More stringent regulatory requirements on capital adequacy will lead China's commercial banks to accelerate their business transformation, according to the Ernst & Young report, "2010 Review of China's Listed Banks and Outlook."  This entails a focus on their business model and less reliance on asset growth, and increasing non-interest income from business areas requiring less capital consumption, in particular areas such as Cash Management, Credit & Debit cards, Investment Banking, Private Banking and E-banking services. The new standards for liquidity will make it more difficult for banks to derive large-scale profits from exploiting liquidity mismatches between deposits and loans. However, the strengthened regulatory supervision framework will help reduce liquidity risks for banks, and therefore benefit the long-term growth of the Chinese banking sector.


"A strong balance sheet and diversified business operations will help Chinese Banks meet the new regulatory standards and any challenges from the interest rate markets, as well as adapting to a growing customer demand for integrated financial services," says Geoffrey Choi, the Banking and Capital Markets Leader for Ernst & Young in Greater China.


Choi also expresses his recognition of the business branding strategies of small and medium banks, "Growing through differentiation is important for small and medium banks in response to the increasingly competitive market.”


The report, Ernst & Young's annual publication on the financial results of China's listed banks, contains an in-depth analysis of the profitability, assets and debt structure, asset quality, capital and liquidity of 17 listed banks in Mainland China. It provides insights and an outlook on China’s banking sector based on the current business and operating models of these listed banks and the external regulatory environment in which these banks operate.


According to the report, these 17 listed banks had an aggregated net profit of RMB 687.3 billion in 2010, representing a 33 percent increase from 2009. The growth of these listed banks is attributable to the increase in the net interest spread, growth in interest bearing assets, growth in net fee and commission income,and effective control of costs.


According to the report, these listed banks further optimized their loan structure in 2010 and their asset quality continued to improve. The average ratio of non-performing loans of these 17 listed banks reduced from 1.58 percent at the end of 2009 to 1.14 percent at the end of 2010.


The steady growth of the domestic economy is one of the reasons behind the continuously reducing reported level of non-performing loans ratio.  In future, the impact of local government financing platform loans, real estate loans and loans to industries with surplus supplies on the non-performing loans ratio will need closely watching.


The report also mentions that all these listed banks have further increased their provision coverage ratio (total loan provision over total non-performing loans) in 2010, with the average provision coverage ratio rising from 152 percent at the end of 2009 to 210 percent at the end of 2010.  However the loan provision ratio (total loan provision over total loans) for most of the 17 listed banks is below 2.5 percent. The China Banking Regulatory Commission (CBRC) requires banks to have a loan provision ratio of no less than 2.5 percent by the end of 2013 at the earliest and definitely by the end of 2018 at the latest. Currently the loan provision coverage ratios of large state-owned commercial banks are not far away from this future required standard. Some joint-stock commercial banks and urban commercial banks are behind, though they still have 6 to 8 years to catch up and meet the CBRC requirements.  It is not expected that this new regulatory requirement will exert much downward pressure on the profitability of these listed banks.


Looking forward in 2011, under the macroeconomic environment of an appropriately tightened monetary policy, the growth of credit assets is expected to ease.  On the other hand, the interest margin may continue to widen, resulting in an optimistic view about the overall profitability of listed banks in 2011.







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