PwC: China's listed banks need new growth drivers

Single-digit growth the New Normal, as margins shrink and NPLs grow

Hong Kong, 21 Sep 2016 - PwC today launched its latest China Banking Newsletter - Review and Outlook of China's Banking Industry in H1 2016. Covering 30 A- and H-share listed Chinese banks (see list below), the Newsletter finds the sector facing slower profit growth. Shrinking interest margins, increases in non-performing loans and falling capital adequacy ratios mean that these banks are in urgent need of new sources of growth. 

"Across all the categories of banks that we looked at, interest income fell as a proportion of total revenue in the first half of 2016," says Jimmy Leung, Financial Services Leader for PwC China. "There was moderate growth in non-interest income, including fee income, across the banks. These factors helped to stabilise overall growth in net profits, but we are looking at a 'new normal' of single digit growth for the larger banks."

The Newsletter reports that during the first half of 2016, the total assets of the 30 banks grew 7.63% to reach 135.41 trillion yuan. At the same time, the overall non-performing loan (NPL) balance (for the 29 banks that reported it) was up 10.06% to 1.13 trillion yuan. But the NPL ratio was almost flat at 1.66% (up 0.04 of a percentage point) from the end of 2015.

"Listed banks stepped up collection and disposal of NPLs in the first half of 2016, which helped slow the growth in the NPL balance," says James Tam, Banking and Capital Markets partner, PwC Hong Kong. "But it is still at a high level. And on top of this, the proportion of Special Mention Loans (SMLs) has also increased. These are up a quarter point to 3.74% at the Large Commercial Banks. So asset quality risk needs to be monitored."

Interest-bearing assets posted a big drop in yields during 1H 2016, leading to declines in net interest spread (NIS) and net interest margin (NIM). This contributed to slowing profit growth, which was up 4.60% year on year across the 30 banks. Growth was slowest for the five Large Commercial Banks at 3.11%. Based on relatively low levels a year earlier, the 13 City Commercial Banks managed to post the fastest growth, at 18.04%.

The Newsletter argues that all categories of bank need to urgently identify new sources of growth. The internationalisation of the RMB, "One Belt, One Road" initiatives and demand for cross-border financial services as Chinese enterprises go global are all seen as major opportunities for the banking industry. 

"China has issued nearly 120 billion yuan in green bonds in 2016 and is now the world's largest market for these instruments," says Jimmy Leung. "There are further growth opportunities for the banking sector in this area. These include developing green credit and insurance, green stock indices and derivatives, carbon finance and other tools. In every sense, banks will need to look further afield to find fresh sources of growth." 

The 30 listed banks covered by the newsletter are: 

Large commercial banks
Industrial and Commercial Bank of China
China Construction Bank
Agricultural Bank of China
Bank of China
Bank of Communications

Joint-stock commercial banks 
China Merchants Bank
Industrial Bank 
Shanghai Pudong Development Bank 
China Minsheng Banking Corp
China Everbright Bank
Ping An Bank
Huaxia Bank
China Zheshang Bank 

City commercial banks 
Bank of Beijing
Bank of Jiangsu 
Bank of Nanjing
Bank of Ningbo
Shengjing Bank
Huishang Bank
Bank of Tianjin
Harbin Bank 
Bank of Jinzhou 
Bank of Chongqing 
Bank of Zhengzhou
Bank of Guiyang
Bank of Qingdao 

Rural commercial banks
Chongqing Rural Commercial Bank
Jiangsu Changshu Rural Commercial Bank*
Jiangsu Jiangyin Rural Commercial Bank

* Delayed IPO. The stock issue was still underway at the time of this press conference.

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