Environmental change, performance divergence and deepening transformation
— EY releases Listed banks in China: 2018 review and outlook and Analysis of the impact of the implementation of new financial instrument standards on listed banks in China

Hong Kong, 15 May 2019

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EY releases Listed banks in China: 2018 review and outlook

According to the EY report entitled Listed banks in China: 2018 review and outlook, benefiting from the growth in net interest income, the net profit of listed banks in 2018 continued to increase. The 47 listed banks in China covered by this survey realized a total net profit of RMB1,627.2 billion, an increase of 5.21% from 2017, while growth remained flat compared with 2017. There was, however obvious divergence in the net profit growth for the different types of banks. The net profit growth of large commercial banks and national joint-stock commercial banks continued to increase, while that of city commercial banks and rural commercial banks decreased from 2017.

EY also issued the Analysis of the impact of the implementation of new financial instrument standards on listed banks in China, interpreting the financial impact of the new financial instrument standards on listed banks in China, especially on the application of the expected credit loss model. The provision for impairment losses on loans has increased for the listed banks implementing the new financial instrument standards, while the proportion of financial assets measured at fair value has also increased.

EY releases Listed banks in China: 2018 review and outlook

The composition of operating revenue of listed banks remained largely stable between 2016 and 2018, with net interest income accounting for the largest proportion (over 70%) of their operating revenue over the years. Jack Chan, Greater China Financial Services Managing Partner at EY said: “With the implementation of the new financial instrument standards in 2018 and the issuance of the new financial statement format for financial enterprises, interest income from financial assets measured at fair value through profit or loss is now included in investment income, which to some extent has led to the decrease in the proportion of net interest income of listed banks as compared with 2017. With regard to business structure, although financial regulation and the implementation of new rules on asset management has resulted in pressure on fee income, credit card installment payment and third-party payment business continued to grow rapidly, with revenue from the handling fees of bank card business and the settlement and clearing business increasing by 22.07% and 11.62%, respectively, from 2017.”

Support for the development of the real economy with continued growth in the proportion of loans

As at the end of 2018, the total assets of listed banks were RMB178,670 billion, up 6.46% from the end of 2017. In 2018, listed banks further served the real economy; by extending more credit for private enterprises, small and micro enterprises; granting more personal mortgage loans; and provided more financing support for national projects such as the "Three-Support-Belt Strategy" (covering the Belt and Road; the integrated development of Beijing, Tianjin municipalities and Hebei province; and the Yangtze River economic belt), Xiong’an New Area and the Guangdong-Hong Kong-Macao Greater Bay Area. Credit assets continued to grow rapidly, with loans accounting for 51.59% of total assets, an increase of 2.22 percentage points from 49.37% in 2017.

Continued growth in retail business and effective structural adjustment

In 2018, the overall contribution of the retail business to the growth of listed banks continued to rise. The profit before tax of the retail business accounted for 39.84% of listed banks’ total profit before tax, 0.75 percentage point higher than the 39.09% contribution in 2017. The wealth management business, private banking business and bank card business all grew to varying degrees. It is worth noting that in 2018, listed banks had been proactively mining the profitability of credit cards. In addition to the regular credit card business, a variety of installment products and deferred repayment products were also launched to meet customers’ need for short-term funds. However, with the increase in credit cards in issue and related credit granted, the non-performing loan (NPL) ratio in credit cards of many listed banks increased in 2018. Going forward, ensuring the “quality” while increasing the “quantity” of credit card business will become a focus for listed banks.

The retail banking landscape has continued to evolve with the changes in regulation, emergence of new technologies and rising customer expectations and emergence of new competitors such as FinTech companies. Kelvin Leung, Greater China Financial Services Banking & Capital Markets Leader at EY, noted: “Banks should grasp the opportunities in the trend of consumption upgrade to improve customer loyalty by reshaping bank products and services, creating a new multi-channel and intelligent retail finance model, and refining scenario-based marketing and cross-selling. In addition, listed banks can adopt the innovative models of Internet platforms, participate in the digital innovation ecosystem instead of innovating behind closed doors. Listed banks can also cooperate with FinTech companies or platforms to process and organize the huge customer base and data so as to develop conventional and customized products to satisfy customers’ current and future needs, enhancing customized financial service experience for customers.”

Sustained pressure on asset quality and increase in impairment allowance

In 2018, listed banks took the initiative to address external macroeconomic risks by enhancing credit risk control and stepping up efforts in writing off and disposing of non-performing assets. The overall non-performing loan (NPL) balance of listed banks increased while the NPL ratios decreased. However, there was divergence in the figures of listed banks. Both NPL ratios and overdue loan ratios had increased for city and rural commercial banks, and pressure on asset quality is mounting.

Furthermore, the annual reports of the listed banks in this survey showed that 28 listed banks had implemented the new financial instrument standards from 1 January 2018, and most of them have increased impairment allowance to varying degrees. According to the annual reports of the listed banks that had implemented the new financial instrument standards, as at 1 January 2018 – the initial implementation date, 28 of the listed banks increased the loan impairment allowance by 8.84% from the end of 2017.

Accelerated transformation of wealth management business and innovation in capital replenishment instruments

Guidelines on Regulating Asset Management Business of Financial Institutions (the “New Asset Management Rules”) and Measures for Supervision and Administration of Wealth Management Business of Commercial Banks became effective in 2018, imposing challenges for the wealth management business of listed banks. As listed banks actively reduced non-standard investments and adjusted their asset management business structure to comply with the new regulatory requirements, investments in structured entities sponsored by third parties which had not been consolidated had decreased. In 2018, the fee income of listed banks fell significantly due to the decrease in the size of off-balance sheet in their wealth management business. Listed banks also accelerated the setup of wealth management subsidiaries to drive transformation.

Faced by requirements to provide more support of the real economy, and to accelerate the disposal of non-performing assets, listed banks have continuously used various avenues to replenish capital, and capital adequacy ratios have steadily increased. Large commercial banks had the highest capital adequacy ratio (CAR), followed by rural commercial banks. National joint-stock commercial banks and city commercial banks faced greater pressure with regard to capital adequacy.

Kelvin Leung believes that listed banks should enhance their capacity to generate capital; explore innovative instruments to replenish capital; optimize development strategy, accelerate strategic transformation, and achieve sustainable development by the means of retained profit. Listed banks should also consistently refine the management of capital, and achieve higher return on capital by adopting an intensive operational business model that underpins less capital consumption, and lower risk weightage. Despite the high CAR, large commercial banks should be prepared for the future as they may face stricter capital constraints under the regulatory requirements on the total loss-absorbing capacity (TLAC) for the global systemically important banks (G-SIBs) introduced by the Financial Stability Board (FSB).

Drive green finance development and improve inclusive finance service

Currently, the main green finance products of listed banks are green credit and green bonds. China's green credit and green bond markets continued to grow rapidly in 2018. The balance of green loans and the total issuance of green bonds increased by 16% and 12%, respectively.

Benefiting from incentive policies, the growth of inclusive finance loans accelerated in 2018, with large listed banks leading innovation. Inclusive finance loans, such as loans to small and micro enterprises, loans for agricultural production and operation, and entrepreneurial guarantee loans, are expected to further increase in 2019.

Promote the establishment of smart banks and embrace open banking

Some listed banks also set up FinTech subsidiaries to not only develop and capitalize their core banking capabilities through cloud services, but also provide new financial services experience by deepening cooperation with other vertical industries and integrating into the ecosystem. So far, six listed banks have set up FinTech subsidiaries.

In the next few years, open banking will be the mainstream direction of development for the banking industry. The core competitive advantage of open banking is to satisfy customers’ need for instant financial services at the first touchpoint with scenario-based services by adopting ecosystem-based approaches with open standard application programming interface (API), which will disrupt traditional models.

Jack Chan says: “Open banking is not the turning point of digital transformation for banks, but an alternative to overcome resources bottleneck. For most banks, the biggest challenge is not to set up the technical standards or implement the technology roadmap of open banking. The biggest challenge for them is how to introduce the concept of 'ecosystem' without a blueprint; how to respond positively to regulatory developments while creating a new operating model in the new financial industry; and how to integrate their current business with development goals so as to create a unique roadmap for the implementation strategies and standardization of open banking.”

Transform technology-enabled outlets and reshape talent structure in banking

For the banking industry, outlets have become the “test site” for FinTech. In 2018, listed banks continued to propel outlet optimization and digital modification and upgrading, promote channel integration, provide more diversified customer-centered services, accelerate the shift of outlets from being transaction-oriented to sales-oriented and to comprehensively optimize the human resources structure. The overall number of outlets of large and medium banks decreased in 2018. Listed banks focused on enhancing service to key areas and the main customer base, providing more online offerings deploying intelligent equipment and improving existing processes and customer service models.

The employees of outlets were repositioned to sales and integrated services due to outlet transformation. As at 31 December 2018, the total headcount of listed banks was 2,479,000, down slightly from the beginning of the year. Similar to 2017, the decrease was more prominent at six large commercial banks. At the end of 2018, large banks had 1,839,000 employees in total, a decrease of 27,000 employees, or 1.45%. The number of employees of joint-stock commercial banks, city commercial banks and rural commercial banks continued to increase while the number of outlet tellers, operators, managers and other roles reduced significantly; the increase of employees were for business lines, IT, risk compliance and other areas.

Therefore, listed banks were actively driving human resources optimization by recruiting key talents and retraining employees to equip them with new skills and redeploy them to new positions, establishing talent teams with updated competencies. Kelvin Leung says, “The key for a future bank to remain competitive will be its talent. Listed banks will survive in the growing competition only by further developing and deploying talent, improving incentives and performance assessment mechanisms, assisting them in career planning, providing a well-designed promotion path and equipping them with the skills and experience in maintaining a competitive edge for the future,”

In conclusion, the business model adopted by Chinese listed banks are gradually transforming from a homogeneous model to a differentiated one with the continuous advancement of financial reform. In 2018, some listed banks achieved positive results with their agility in responding to the complex and changing environment and the positive effect of transformation, while some listed banks’ results were affected as they struggled to find a suitable development model for their business under such environment. Looking ahead in 2019, China’s deepening supply-side structural reform, financial reform and the opening up of the industry will present listed banks with new challenges and opportunities in an increasingly complex environment. Jack Chan says: “Listed banks should continue to serve the real economy, help prevent financial risks, deepen innovation and transformation, and to promote strategic implementation, so as to explore a suitable and differentiated development path, which will be key to the sustainability of listed banks.”

- Ends -

About the Listed banks in China: 2018 review and outlook report

This is the 12th EY annual report on China’s listed banks. The purpose of this annual report is to provide an outlook on the direction of the future development of China’s banking industry based on the observations of the businesses and operating models of listed banks as well as the regulatory environment in mainland China.

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This press release has been issued by Ernst & Young, China, a part of the global EY organization.