RISK MANAGEMENT

KPMG: Profitability Increasing for China Banks

With the macroeconomic environment stabilizing, the profitability of China’s banking sector increased at an accelerated pace in 2016, finds KPMG’s 11th annual Mainland China Banking Survey.

The 2017 Mainland China Banking Survey reviews the 2016 financial highlights of commercial banks in China, and analyses key trends for the sector.

According to the survey, the cumulative net profit of commercial banks in Mainland China reached RMB 1.6 trillion in 2016, an increase of RMB 5.64 billion, or 3.5 percent, over 2015. The growth rate increased by 1.1 percentage points.

“Due to the regulatory requirements for capital expansion and slower net profit growth, commercial banks’ net profit grew at a slower pace than that of capital. Therefore, the average asset profit ratio and return on capital for commercial banks continued to decline over the past three years,” says Edwina Li, Partner and Head of Financial Services Assurance at KPMG China.

The total assets of commercial banks at the end of 2016 was RMB 181.7 trillion, an increase of RMB 25.9 trillion, or 16.6 percent, compared to the end of 2015. Total liabilities amounted to RMB 168.6 trillion, an increase of RMB 24.3 trillion, or 16.9 percent, compared to the previous year.

The report also discusses key trends affecting the banking sector in China, including new standards for financial instruments, the fast-changing anti-money laundering (AML) regulatory landscape, the securitization of non-performing assets (NPAs), the development of foreign banks in China, and the future of bank branches in the digital age.

On NPAs, a white paper on asset securitization in China was issued in April 2017, which points out that the pilot of the securitization of NPAs will be expanded. Twelve banks, including China Development Bank, China CITIC Bank, China Everbright Bank, Hua Xia Bank and China Minsheng Bank were included in the second pilot list.

“NPA securitization helps banks diversify the approaches and channels of NPA disposal. More importantly, it allows more buyers to participate – in particular the qualified investors on the interbank bond market – which can help optimize the China NPA market and increase the banks’ NPA recovery rates,” says Arthur Wang, Partner and China Head of Banking, KPMG China.

From offline to online platforms

With the rapid development of internet finance and mobile payments, as well as fast-evolving consumer preferences, the banking sector is increasingly turning to mobile banking, big data, cloud computing and other technologies. This is driving banking from offline to online platforms, and has raised discussions about whether bank branches are still necessary.

Wang says: “The banking sector needs to start accepting internet thinking and initiate its transformation by detecting and resolving the ‘core spots’ and weak links of client services and banking development. Branches should be designed in line with customer behavior and service requirements in terms of location, scale, products and service models.

Banks should do systematic research and quantitative assessment to help branches become more personalized, offer customers a more comfortable environment and generate sustainable profit.”

The report also examines the rapidly changing regulatory environment, where the implementation of PBOC Decree No. 3, the Financial Action Task Force’s mutual evaluation programme, and overseas regulatory developments are having a significant impact on AML compliance developments within Chinese financial institutions.

The report suggests that with AML regulators worldwide ramping up oversight in their jurisdictions, financial institutions should develop and implement a robust and effective AML compliance programme that is consistent with industry-leading practices and meets local regulatory expectations.

Increase in total assets of foreign banks

In 2017, foreign banks marked their first decade of their incorporation in China. According to statistics from the China Banking Regulatory Commission, from 2006 to 2015, the total assets of foreign banks increased from RMB 92.79 billion to RMB 2,680 billion, with a compound annual average growth rate of over 20 percent.

However, the statistics show that the percentage of total assets of foreign banks to total assets of the banking sector recorded a decrease from 2.38 percent in 2007 to 1.38 percent in 2015, mainly due to the global financial crisis, the rapid development of local Chinese banks, and the rising bad debt ratio of financing for foreign trades.

Even with the rapid growth in China’s banking sector, the market share of foreign banks is expected to stay at around 2 percent in the next several years, says Li.

“However, compared with Chinese banks, foreign banks usually possess a broad overseas network, professional industry practices, more comprehensive experience in financial services and in the adoption of financial technologies. These advantages are helpful for foreign banks to succeed in some businesses and accurately target their positions in China’s banking industry.”

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