The economic slowdown in 2012 caused a significant decline in the growth of net profits among Chinese banks.
According to PwC’s Analysis of China’s Top 10 Listed Banks for 2012, the total net profits of the top ten listed banks in China was RMB 965.63 billion, up 16.41% from the year before. The figure is however significantly lower than the 28.03% growth rate registered in 2011.
The drop is mainly due to three factors.
"Firstly, contractions in the macro economy and diversification of financing sources have placed considerable pressure on the banks’ credit businesses," says Raymond Yung, PwC Financial Services Leader for China.
Secondly, interest spread continues to diminish due to increases in term deposits, interest rate liberalisation, as well as the asymmetric interest rate cuts and the widening floating range of lending and deposit rates.
And thirdly, changes in regulatory requirements have significantly hindered the growth of banks’ intermediate businesses.
Total assets of the top ten listed banks increased 14.44% to RMB 78.69 trillion in 2012, although the year-on-year growth has shrunk since its peak in 2009. Total loans increased by 13.73%, a reduction compared to a growth of 14.02% in 2011 and the lowest since 2008. Nevertheless, loans remain the main interest-earning assets of banks.
Total RMB loans provided by financial institutions increased by RMB 8.2 trillion in 2012, with a growth rate of 15%; again, the lowest in the past five years.
Financing from other channels accounted for a growing share in the market, particularly from corporate bonds and entrusted loans.
Loans issued by traditional banking institutions were 52.1% of the overall outstanding loans, down from 58% in 2011 and the lowest since the data was first recorded. With the diversification of financing channels, financial disintermediation is also becoming more apparent.
With the level of uncertainty in the macroeconomic environment, the market has been shifting towards shorter-term financing, with short-term loans and bill financings being the main alternatives for replacing long-to-medium term loans.
The reduction in borrowing costs, as a result of two consecutive interest rate cuts and liquidity injections from the People’s Bank of China, has caused a continuous decline in banks’ interest income. As banks come under increasing pressure to expand their corporate businesses, small-and-micro-enterprises are naturally the new targets, with their rate of growth significantly overtaking the growth of total loans.
The quality of banking assets continues to be a source of concern in light of the sluggish growth in loan issuances. The overall percentage of non-performing loans (NPLs) at the top ten listed banks stood at 0.82%, up 0.01% from the previous year.
The overall NPL balance amounted to RMB 376.2 billion, increasing by 7%, or RMB 24.9 billion, from a year before.
Overdue loans, another critical quality indicator, also painted a gloomy picture. The total overdue loan balance at the top ten listed banks amounted to RMB 486.5 billion at the end of 2012, up 29% from 2011.
The average overdue loan ratio rose to 1.21% from 1.06%. The rise indicates the possibility of further increases in NPLs in the future.
China's still growing, albeit slower, economy has contributed to a rapid rise in the wealth management business. In 2012, China’s commercial banks issued a total of of 31,673 wealth management products, totaling RMB 7.6 trillion, an increase of 68% from the prior year.
“The CBRC’s main focus on wealth management products is regulating their overall volume, operational compliance, as well as risk management and disclosures. These products will inevitably become more market-oriented. But the key to an orderly market is the depth of awareness that the regulatory authorities will be able to establish and the enforceability of a caveat emptor. As China’s capital market is still in its adolescent stage, to be able to truly raise this awareness, there is still a long way to go,” says Jimmy Leung, PwC Banking and Capital Markets Leader for China.
The operating environment for banks continues to remain difficult in 2013, with the presence of a number of risks and challenges. The liberalisation of interest rate is likely to reduce the interest spread between deposits and loans, squeezing the banks’ profit margin.
As macroeconomic contractions continue to exert pressure on loan assets held by the banking sector, effective risk management continues to be a challenge.
Stringent regulatory requirements on intermediate businesses, wealth management products and capital management will force banks to explore new avenues, as well as transform their existing business models.
The emergence of shadow banking, internet and mobile banking on third party payment platform is underscoring “financial disintermediation”. The traditional banking businesses are facing an unprecedented level of competition.
“In recent years, the changing operating environment has compelled banks to innovate and transform. The drive for differentiation and service-and customer-centric operations is deeply rooted in the minds of the management and will be conducive in enhancing a bank’s ability to price and manage risks. Meanwhile, the government’s continuous effort in promoting the development of the financial industry and supporting the growth of SMEs and rural areas will be an added impetus in driving the development of new profit models for the banking sector,” adds Yung.