China’s listed banks continued to grow their net profits in 2016, but they will face increasing pressure to maintain this growth, according to PwC’s Banking Newsletter - Review and Outlook of China's Banking Industry in 2016.
Slowing economic growth and downward pressure on interest rates mean that net interest margins will continue to narrow and asset impairments will increase. Banks are leveraging asset expansion and solid growth in their intermediary business to help drive growth. But credit asset quality and provision coverage remain under pressure.
The Newsletter looks at the 2016 annual results of 27 A-share and H-share listed banks, published as of 31 March 2017. It follows the China Banking Regulatory Commission’s categories of Large Commercial Banks, Joint-Stock Commercial Banks, City Commercial Banks and Rural Commercial Banks (full list below).
“Asset expansion is the main way these banks have been stabilising profit growth,” says Jimmy Leung, Financial Services Leader for PwC China. “But fees from intermediary business are also important. They increased as a proportion of total interest and fee income across all the listed banks. For the Joint-Stock Commercial Banks, non-interest income was nearly a third of operating income.”
The Newsletter shows the different categories of banks are facing different challenges. Pre-tax profits were flat or fell for the Large Commercial Banks, as net interest income declined and growth in fee-based income was slow. At some Joint-Stock and City Commercial Banks, operating profit growth remained healthy, but net profits were impacted by provisions.
For Rural Commercial Banks, net profit growth was more variable, reflecting the influence of regional differences on profitability.
Non-performing loans remained a concern in 2016. NPL ratios increased across the board to an average of 1.67% at end-2016, up from 1.61% the previous year. The NPL balance was up 16.80% year-on-year to reach RMB 1,154bn.
“Banks sought to tackle their NPL balances through a variety of methods in 2016,” says Raymond Poon, Financial Services Partner, PwC Hong Kong. “These included restructuring, write-offs and transfers. The banks are clearly intent on getting credit risk under control – write-offs and transfers were more than 26% higher than in 2015.”
Looking forward to 2017, the Newsletter highlights a number of areas where banks need to adjust their business strategies. They will need to prepare for new compliance requirements under the forthcoming Macro-Prudential Assessment (MPA) system.
The banks also need to make better use of FinTech to achieve channel transformation and deliver service innovations for customers.
Recent regulatory tightening will prompt banks to focus on their core banking business while better reflecting risk profiles, thus serving the real economy more effectively.