How do China’s listed banks seek new opportunities amid uncertainties

Chinese listed banks in 2019 and forecasting trends can be summarized in three words: volatility, uncertainty and resilience.

The year 2019 was a crucial year for the Chinese banking industry. In the first decade of the 21st century, the industry experienced rapid development in line with China’s rapid economic growth; and in the second decade, profit growth across the industry tended to be slower and more volatile amid slowing economy and heightened financial regulation. Looking at the financial results of Chinese listed banks in 2019 and forecasting trends for the next decade, the course can be summarized in three words: volatility, uncertainty and resilience.

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1. Volatility. In the past three years, China’s listed banks collectively realized a net profit of RMB1,748.36 billion in 2019, up 7.32% from 2018. Net profit growth stemmed the downward trend seen in 2018 and gained momentum through 2019, which was mainly attributable to the accelerated growth in operating income and slower growth in loan loss provision. Between 2017 and 2019, large commercial banks and national joint-stock commercial banks saw rising net profit growth while city commercial banks and rural commercial banks both experienced a V-shaped movement. Particularly, the net profit of city commercial banks posted bumpy growth over the three-year period at 12.80%, -3.12% and 11.41%, respectively.

Following a subdued growth in 2017, listed banks saw a rapid growth in operating income in 2018 and 2019. Particularly, the operating income growth of rural commercial banks exhibited an inverted V-shaped curve, at 3.27%, 19.50% and 9.65%, respectively, which was mainly due to sharper volatility in investment income growth. In addition, the fee and commission income of listed banks grew slightly by 0.28% in 2017 and declined by 1.45% in 2018, due to the implementation of new regulations on asset management and lowering fee charges to support the real economy, among other factors. In 2019, the fee and commission income growth rebounded to 9.66% as listed banks grew their bank card business rapidly, accelerated the transformation of wealth management business and increased the volume of net asset value (NAV) wealth management products (WMPs) that are aligned with the new regulations.

Between 2017 and 2019, the overall loan loss provisions of listed banks increased by 7.27%, 28.79% and 11.12%, respectively, presenting an inverted V-shape. In the same period, the loan loss provisions of city commercial banks increased by 0.92%, 75.62% and 12.70%, respectively, while rural commercial banks recorded more volatile growth of -21.89%, 103.04% and 9.18%, respectively.

Volatility is also reflected in asset and liability growth. The total assets of listed banks grew by 7.01%, 6.53% and 8.91%, respectively, between 2017 and 2019. The total assets growth of national joint-stock banks continued to rise while that of city commercial banks remained on a downward trend. Large commercial banks and rural commercial banks saw an upswing after a decline in total assets growth. Particularly, the total assets growth rate of rural commercial banks increased by 12.43%, 6.70% and 10.92%, respectively, in the past three years, presenting a typical V-shaped movement.

2. Uncertainty. Listed banks in China have faced more uncertainties in an increasingly complex operating environment domestically and globally, coupled with tightening regulation.

The volatile operating performance of listed banks was largely caused by heightened macroeconomic uncertainties. In 2019, downside risks to the global economy were more prominent, and uncertainties from rising geopolitical tensions and prolonged China-US trade frictions clouded the prospects for global economic growth. Despite stable economic operation in 2019, with GDP growing by 6.1% year-on-year (y-o-y), China faced downward pressure on economic growth as structural and cyclical factors constrained the prospects. In addition, the COVID-19 outbreak in 2020 has inevitably had adverse impact on economic operation, with GDP growth in the first quarter of 2020 declining to -6.8%. Globally, the accelerated spread of the pandemic has caused greater financial volatility and dampened economic and trade growth severely. Meanwhile, larger-than-expected stimulus policies introduced across economies to address the impact might change the international economic and trade landscape to a certain extent, posing considerable uncertainties to global growth and exposing China’s listed banks to new challenges in business operation and development.

Regulatory and financial reforms had implications for listed banks in the following aspects. The formation mechanism of the loan prime rate (LPR) officially rolled out in 2019 amid deepening interest rate liberalization posed pricing challenges for listed banks; the implementation of new regulations on asset management and the implementation rules have driven listed banks to transform their wealth management business. The year 2020 marks the end of the transition period for implementing new regulations on asset management, but listed banks still face challenges in the disposal of legacy non-standard assets, the promotion of new products, NAV management, and the strategic positioning of their wealth management subsidiaries as they proceed with business transformation under the new regulations and implementation rules. In addition, in an effort to urge the banking industry to improve asset quality, regulators proposed Interim Measures for the Risk Classification for Financial Assets of Commercial Banks (already open for public consultation), which, along with other policies, are expected to have impacts on different types of banks once effective. In 2019, listed banks also addressed the potential impact on their financial results as they started to implement the new financial instrument standard and applied the new standard on the classification of financial assets, which resulted in an increased proportion of financial assets measured at fair value and the replacement of the “incurred loss” model with “expected credit loss” model in the calculation of impairment provisions.

3. Resilience. Enhancing operational resilience is key for listed banks to respond to the uncertainties in the external environment and achieve long-term sustainable development. Resilience can be built by:

Improving risk management. In 2019, listed banks enhanced their credit risk prevention and control, and increased write-off and disposal of non-performing assets. As a result, the average non-performing loan (NPL) ratio decreased to 1.46% as at 31 December 2019, down from 1.52% at the beginning of 2019. However, divergent trends were noted in different types of listed banks. The NPL ratio of large commercial banks and national joint-stock banks decreased while that of city commercial banks and rural commercial banks increased. In 2020, listed banks need to further strengthen credit risk management to address the potential rise in the NPL ratio in the wake of the COVID-19 outbreak. In addition, listed banks should closely monitor market and liquidity risks amid current financial market volatility and remain alert to new risks.

Optimizing business structure. In 2019, China’s listed banks stepped up their support for the real economy. The proportion of loans in total assets further increased while the proportion of non-standard investments continued to decrease. Besides, listed banks diversified the sources of core liabilities, increasing the proportion of deposits in liabilities, and continuously reducing interbank liabilities. Listed banks also further developed retail banking to achieve increased proportion of both income and balance sheets. Looking ahead, listed banks need to further optimize the business structure to expand revenue sources and enhance risk resilience.

Replenishing capital and improving capital efficiency. In 2019, listed banks enhanced their capacity to generate capital internally while attracting supplementary capital from external providers, seeing the capital base being strengthened steadily. As at the end of 2019, the core Tier-1 capital adequacy ratios (CARs), Tier-1 CARs and CARs rose by 0.19 percentage point, 0.41 percentage point, and 0.36 percentage point, respectively, from the beginning of the year. Going forward, listed banks should continuously seek innovative capital replenishment instruments and enhance capital strength by replenishing capital via multiple channels. They also need to improve capital efficiency, investing in long-term growth while improving returns on capital.

Increasing FinTech investment. In 2019, listed banks increased their FinTech investment from multiple dimensions, further strengthening the role of FinTech in driving growth and transformation and embracing accelerated innovation. The COVID-19 outbreak is expected to accelerate the process of economic digitalization across the board, highlighting the urgency and importance of digital transformation in listed banks. Thus, they need to continuously invest in FinTech, integrate digitalization and technology with business to create new engines that can drive high-quality development, and deploy innovative approaches to optimize customer-oriented businesses, products, services, processes, management and risk control based on new technologies such as big data, artificial intelligence (AI) and blockchain, in an effort to improve customer experience and achieve a win-win result in strengthening both customer and bank values.

Fulfilling social responsibilities. In 2019, China’s listed banks actively responded to national strategies and continuously promoted the development of green finance and inclusive financial services. Particularly, large commercial banks increased their green credit and inclusive finance loans by 13.3% and 45.0%, respectively. For listed banks, financial performance and environment, social and governance (ESG) performance are equally important. On the one hand, to enjoy policy dividends, listed banks must align their strategies and efforts with the national initiative to vigorously promote the construction of ecological civilization and develop inclusive finance. On the other hand, only when they actively perform social responsibilities, demonstrate customer-centered commitment, attach importance to the protection of consumer rights and interests, and maintain a good reputation and image, can they gain trust and enhance customer loyalty.

However, the outbreak of COVID-19 has inevitably impacted China’s economic operation to a large extent. Looking ahead, listed banks need to strengthen operational resilience, set out long-term plans, and seek new opportunities amid uncertainties to navigate the bumpy ride through economic cycles and achieve long-term sustainable development.

As the COVID-19 pandemic spreads rapidly in many countries and shows no sign of deceleration, global financial markets have experienced extreme volatility, and the world trade and economic growth has been curtailed severely. According to the IMF World Economic Outlook forecasts published in April, the 2020 global GDP is forecast to plunge to -3%, a recession unseen since the Great Depression in 1930s. Countries have rushed to address the economic impact with larger-than-expected relief and stimulus measures or started reopening their economies, which may change the global economic and trade landscape to a certain extent, adds to uncertainties or risks about future growth, and poses new challenges to China expecting to quickly recover from production disruptions and returning to the trajectory of sustainable development.

In 2020, listed banks are likely to face more severe and complex domestic and global operating environments and a mix of challenges, albeit certain emerging opportunities.

On the one hand, listed banks face increased difficulties in maintaining steady operation as external uncertainties persist amid global recession and China’s growth comes under downward pressure due to structural transformation and cyclical implications. The net interest margin and profits of listed banks will be squeezed as interest rate liberalization progresses, cross-industry competition intensifies, and favorable banking policies will be rolled out to benefit the real economy.

On the other hand, the banking sector is embracing the broad space for business development as a series of major national strategies are being implemented, including the integrated development of Beijing-Tianjin-Hebei, the integrated regional development of the Yangtze River Delta, the development of Guangdong-Hong Kong-Macao Greater Bay Area, and the construction of Shanghai International Financial Center. New growth drivers also emerge from substantial financial service demand existing in new infrastructure construction, advanced manufacturing, technology-driven innovation, and people’s livelihood improvement initiatives. In addition, relief packages rolled out by the government can boost confidence and vitality among smaller businesses, laying a solid foundation for customer base expansion and business development for banks. The pandemic is expected to accelerate the pace of building a digital economy, especially to improve smart approaches in manufacturing and digitalization across service sectors, thus presenting new opportunities and unleashing potential to build a new ecosystem for the banking sector. At the regulatory level, tightened regulation and strengthened financial market discipline have improved the business environment for banks. With all these favorable factors at work, listed banks will prioritize their agenda on continuously serving the real economy, addressing financial risks, and accelerating digital transformation in 2020.

Better serving the real economy

While committing adequate financial resources to fight the pandemic, listed banks remain focused on the development of the real economy, actively supporting the government’s policy to expand domestic demand and ensure economic stability. Looking ahead, listed banks will align their major initiatives with national strategies, supporting high-quality development. The industry consensus is to increase the support for the real economy, especially for the development of private enterprises and micro- and small-sized businesses. For listed banks, the key to better serving the real economy is to harness underlying strengths to achieve breakthroughs in the traditional business sphere and make innovation in new business areas to enhance differentiated service capacity.

Improving risk control through analytical enhancement

In 2020, listed banks must enhance risk awareness and forward-looking risk analysis to strengthen risk management comprehensively as it is crucial to persevere in high-quality sustainable development. To address uncertainties and risks from the on-going spread of the COVID-19 pandemic, listed banks need to closely monitor and judge how risks evolve, strengthen industry and customer analysis, implement risk control with digital expertise, align business structure with customer structure, hold asset quality stable, and consolidate achievements already made in credit risk management. Moreover, listed banks should improve market risk and liquidity risk management to establish a solid buffer against external shocks, effectively manage operational risk and IT risk, and step up capital replenishment to better address financial risks. For large banks with more overseas branches and operations, it is essential to closely watch the developments of the pandemic in the world and the volatility of global markets that present challenges and risks to their overseas exposure. 

Expediting technology-driven digital transformation

Technology-driven digital transformation is speeding up. The COVID-19 outbreak is accelerating the process of economic digitalization, highlighting the urgency and importance of digital transformation for listed banks. They need to integrate digitalization and technology with businesses and leverage it as a new engine to drive high-quality development. They also need to deploy innovative approaches to optimize customer-oriented businesses, products, services, processes, management and risk control based on new technologies such as big data, AI and blockchain, in an effort to improve customer experience and achieve a win-win result in strengthening both customer value and bank value.