EY issues China Banking Industry Report:

Initial success of China’s listed banks in strategic transformation

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Beijing, 8 May 2014 — According to the EY report titled “Listed banks in China – 2013 review and outlook”, China’s listed banks have achieved initial success in their strategic transformation. In 2013, fee income from the intermediary business as a percentage of operating income increased while net interest income dropped, indicating that the listed banks are reducing their reliance on traditional deposit franchise and lending business.

In 2013, China’s listed banks made fruitful attempts in expanding their intermediary business and successfully explored a number of new areas for business growth, with fee and commission income growing 23%, accelerating by 11 percentage points compared to 2012, representing 20% of operating income compared with 18% for the prior year. “For a period of time in the future, commercial banks will be embracing the opportunities in investment banking, thanks to the expected increase in mergers and acquisitions emerging in economic restructuring as well as the increasing demand for underwriting and issuance of debt securities in the course of financial disintermediation. Meanwhile, as household wealth grows, a greater demand for wealth management is expected to continuously prop up the development of asset management services of commercial banks such as wealth management, private banking and custodian business,” says Geoffrey Choi, the assurance leader of EY Financial Services in Greater China.    

According to the report, China’s interest rate liberalization is having a greater impact on the net interest margin (NIM) of the listed banks. In 2013, the average NIM of the listed banks dropped 17 basis points, a decline sharper than that of the prior year. A combination of narrowed NIM, slowing asset growth and tightened regulatory requirements for loan provisioning caused the growth of the listed banks’ net profit to fall to 13% in 2013 from the 17% level of the previous year. In 2013, the net profit of the listed banks maintained a double digit increase, which is attributable to the growth of intermediary business and the drop in cost-to-income ratio.

“The competition is undoubtedly intense in the era of internet banking, but what is positive is that commercial banks have attached greater importance to it and proactively responded. The long-standing reputation of traditional commercial banks and the advantages they have in risk control are incomparable to the emerging internet-based financial institutions, and the commercial banks need to duplicate the ‘innovation gene’ of their rivals and recognize the significance of technological advance to innovations in products and channels,” adds Choi.

According to the report, despite the negative growth in interbank assets in 2013, new interbank business posted a growth instead of a drop. “Considering the diversified trading structure, a wide range of participating principals and legal complexities in new interbank business, the key question for banks is how to enhance business innovation management and day-to-day risk management and establish protection against potential risks,” says Steven Xu, partner of EY Financial Services.

The report shows that the squeezed liquidity pushed up the loan-to-deposit ratio of most China's listed banks and resulted in a lower liquidity ratio at the end of 2013. The Administrative Measures for Liquidity Risk of Commercial Banks (Trial) issued by the CBRC earlier this year has raised stricter liquidity risk management requirements for banks. According to the Measures, a commercial bank shall cover all of its on- and off-balance sheet assets and liabilities when calculating the cash flow and cash flow gap limits, including the potential liquidity needs arising from payments beyond contractual obligations for addressing reputational risk, which incorporates the impact of the on- and off-balance sheet items such as interbank and wealth management business on cash flow into the calculation and control of liquidity risk. Consequently banks are facing unavoidable adjustments to their business model.

The report notes that the China’s listed banks posted a rise both in non-performing loans (NPL) and average NPL ratio in 2013. Average NPL ratio increased to 0.97% at the end of 2013 from 0.92% at the end of 2012. To respond to the impact of the real economy on credit asset quality in economic transformation, the listed banks have enhanced protection against credit risk and made more aggressive efforts in collecting and writing off bad loans to improve asset quality.

“Despite various uncertainties, the banking industry embraces the opportunities in the long run as the fundamentals supporting China’s long-term economic growth remain unchanged.  Industrialization, urbanization and information technology all enjoy broad development space and the growth potential will be realized gradually after the completion of the economic restructuring and industrial upgrading. Commercial banks need to further their strategic transformation to build a long-term sustainable growth engine,” concludes Choi.

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About the “Listed banks in China – 2013 review and outlook” report
This is EY’s seventh annual report focusing on China’s listed banks. The report provides a future picture of China’s banking industry through observation of the business development and operating models of China’s 19 listed banks and the regulatory landscape.

About EY
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This news release has been issued by EY, China, a member of the global EY organization.