China’s bankers focused on regulatory reform - PwC and China Banking Association report

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70% expect NPL ratios below 2% within three years

Hong Kong, 10 Jan 2018 - China’s banks successfully adjusted to a series of challenges in 2017, according to the latest Chinese Bankers’ Survey produced by the China Banking Association (CBA) in partnership with PwC. These challenges included deleveraging and regulatory tightening, as part of the Chinese government’s ongoing reforms, as well as the huge disruption brought about by the rise of FinTech.

Now in its ninth edition, the Chinese Bankers’ Survey 2017 was prepared jointly by the CBA and PwC, based on interviews with 1,920 bankers from 163 institutions. These cover every category of institution, listed and unlisted, in 31 mainland Chinese provinces (excluding Hong Kong, Macau and Taiwan).

“The challenge of building a more effective regulatory framework in order to prevent systemic risks was ever-present in 2017,” says Richard Zhu, PwC North China Financial Services Leader. “This aim was clearly articulated at the 19th National Congress of the Chinese Communist Party in October, and was promptly followed by the establishment of the Financial Stability and Development Commission. This ‘super regulator’ will be critical to ensuring the co-ordinated reform of China’s vast banking sector.”

The theme of financial regulation runs consistently through the survey, with nearly 80% of respondents citing it as the most important external factor felt by their institution. In line with a general mood among China’s bankers of the need to shift from speed to quality, risk management, better internal controls and corporate governance are seen as key strategies for reforming the banking sector.

“The challenge of non-performing loans has been uppermost in the minds of China’s bankers in recent years,” says Monica Ng, Financial Services partner for PwC Hong Kong. “An increasing NPL balance was cited as the main pressure on their institution by 87% of respondents in 2016. But this was supplanted in the 2017 survey by concerns about a slowdown in the rate of profit growth.”

The survey argues this is partly a recognition by bankers of the ‘new normal’ of more moderate GDP growth in the coming years. But it also reflects ongoing success in the gradual absorption of NPLs – particularly by the largest banks.

Investment in IT infrastructure and in new products and services enabled by FinTech is another major theme emerging from the survey. Mobile payments, online banking and internet-based supply chain finance are three of the key business development areas cited by respondents.

“In 2017 we saw China’s five largest banks all announce major partnerships with FinTech giants such as Baidu, Alibaba and Tencent,” says Benson Cheng, Financial Services partner for PwC China. “While these banks have already made considerable strides in this field, they are continuing to investigate the potential of such innovations as the Internet of Things and Blockchain technology.”

While accepting that breakneck growth will have to give way to more sustained reform and restructuring, most respondents are confident about the banking sector’s prospects over the next three years. The proportion of bankers who expect revenue and post-tax profit growth in the 5-10% range is higher than in 2016. Over 70% forecast that NPL ratios will fall steadily to less than 2% over the next three years. 

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