Profit Growth of China Banks rebounds as Transformation Remains a Long-Term Commitment

The 37 listed banks in China collectively realized net profit totaling RMB1,453.175 billion in 2016, up 3.65% year on year, growing faster by 0.8 percentage point as compared to 2015, according to an EY report titled Listed Banks in China – 2016 Review and Outlook.

It is the first time that the net profit growth of listed banks saw a rebound since 2011.

For the 28 listed banks (including 25 A-share listed banks and 3 H-share listed banks) that have disclosed their performance in the first quarter of 2017, the total net profit increased by 3.69% against the first quarter of 2016, growing faster by 0.98 percentage point.

NPL balances and ratios continued to rise

Both non-performing loan (NPL) balances and NPL ratios of the 37 listed banks continued to rise due to a combination of macroeconomic slowdown, increased risk exposure to industries burdened with overcapacity, and adjustments to commodity prices.

The report shows that, as at 31 December 2016, NPL balances at the 37 listed banks totaled RMB1,240.296 billion, up RMB184.088 billion from the prior year-end, while the NPL ratio rose to 1.65% from 1.59% at the end of 2015, albeit at a slower pace.

As at 31 March 2017, the total NPL balances at the 28 listed banks that have disclosed their quarterly performance reached RMB1,239.8 billion, up RMB24.0 billion from the 2016 year-end, while the NPL ratio dropped to 1.64% from 1.66% at the 2016 year-end.

“Although signs of improvement are evident in NPL ratios, Special Mention loan ratios and overdue loan ratios, the overall asset quality of listed banks is still under significant pressure,” says Jack Chan, Managing Partner of EY Financial Services in Greater China.

“To address the lack of diversified disposal models in dealing with growing NPLs, listed banks are stepping up efforts in exploring and implementing new disposal models. For example, the securitization of non-performing assets and debt-to-equity swaps have gradually commenced market-based operations."

The report points out that, in addition to credit risk, listed banks also faced cross-sector and cross-border risks as they endeavored to accelerate business transformation, enhance integrated financial services capabilities, and expand international footprint.

“Listed banks should prevent risk transmission during business transformation, further enhance risk management, and improve liquidity risk management policies to better serve the real economy,” says Chan.

Promoting external financing and business transformation to ease capital pressure

The report mentions that, the average capital adequacy ratios of listed banks in 2016 stood at 12.62%, down 6 basis points from the 2015 year-end.

“To ease capital pressure, listed banks have continued to promote external financing throughout 2016 by issuing common shares through initial and secondary public offerings, as well as preferred shares, tier-two capital bonds and other capital instruments in both domestic and overseas markets to effectively replenish capital,” says Kelvin Leung, Banking & Capital Markets Sector Leader of EY Financial Services in Greater China.

“Meanwhile, some listed banks proactively pushed for the transformation to ‘asset-light banks’, and saw good results in their exploration of capital-saving development model.”

Acceleration of FinTech to optimize branch network and personnel structure

According to the report, listed banks have paid increasing attention to the application of FinTech : of the 37 listed banks, 30 mentioned FinTech in their 2016 annual reports.

“FinTech such as big data, artificial intelligence, blockchain, cloud computing, mobile payment and biological identification have changed and will continue to bring profound changes to the products and service offerings, business models and operating concepts of the banking industry, and will drive the transformation and upgrade of traditional financial services industry and help financial institutions to achieve innovation in products and service offerings, and business models,” says Leung.

With the rapid development of FinTech, listed banks have continued to drive transformation of branches and operational reform. In 2016, the total number of branches of large commercial banks declined for the first time while the proportion of smart branches further increased.

Listed banks have continued to promote the construction of digital channels such as mobile banking, online banking, WeChat banking functions and direct banks while optimizing physical branches. The extent to which digital channels substituted branch businesses further increased.

The transformation of the branches of listed banks was accompanied by personnel restructuring. According to the report, over the past three years, the growth in the headcount of listed banks has slowed year on year, particularly for large commercial banks, whose total headcount declined for the first time in 2016.

With the technological advancement and the deepening reform of banking operation in the future, listed banks are likely to continue to optimize branches and streamline personnel structure.

“In the long run, the optimization of branches and restructuring of personnel by listed banks will be conducive to improving the service capabilities with reduced cost, enhancing the professional competence of the employees in the areas of risk management and internal control, and new financial businesses, and sustaining the banks' competitiveness,” says Chan.

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