Strengthening resilience to pursue sustainable development amid volatile operating performance — EY releases Listed banks in China: 2019 review and outlook

According to the EY report, Listed banks in China: 2019 review and outlook, China’s listed banks collectively realized a net profit of RMB1,748.36 billion in 2019, up 7.32% from 2018. The 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 provisions. 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 saw a “V” curve. Particularly, the net profit of city commercial banks posted bumpy growth over three year-period at 12.80%, -3.12% and 11.41%, respectively.

Effie Xin, Greater China Financial Services Managing Partner at EY¹ said, “The volatile operating performance of listed banks was largely caused by heightened macroeconomic uncertainties. In 2019, the 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. China still faces downward pressure on economic growth as the structural and cyclical factors constrain the prospects. In addition, the COVID-19 outbreak in 2020 inevitably has had adverse impact on economic operation in China and the world. Meanwhile, to address the impact, larger-than-expected stimulus policies introduced across economies will likely change the international economic and trade landscape to a certain extent, posing considerable uncertainties to the global economy and exposing listed banks to new difficulties and challenges in business operation and development.”

EY also issued the 1Q20 results for 36 listed banks of China, which shows that the 2020 first quarter net profit of 35 A-share listed banks and 1 H-share listed banks that disclosed quarterly results totaled RMB495.987 billion, up 5.03% year-on-year, 2.35 percentage point lower growth compared to the same period in 2019.

Volatile operating results

Operating income saw rapid growth in 2018 and 2019 following slower growth in 2017. The fee and commission income of listed banks increased slightly by 0.28% in 2017, followed by a decrease of 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 rose significantly to 9.66%, as the listed banks accelerated the transformation of their wealth management business and increased the volume of net asset value (NAV) wealth management products (WMPs) that were aligned with the new regulations, and grew their bank card business rapidly.

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

Volatility is also reflected in asset and liability growth. The total assets of listed banks grew by 7.02%, 6.53% and 8.91%, respectively, between 2017 and 2019. The total asset growth of national joint-stock commercial banks continued to rise while that of city commercial banks remained on a downward trend; and large commercial banks and rural commercial banks saw an upswing after a decline in total asset growth.

Improving enterprise risk management

In 2019, the listed banks enhanced credit risk prevention and control and increased the write-off and disposal of non-performing assets, bringing the average non-performing loan (NPL) ratio down to 1.46% as at 31 December 2019 from 1.52% at the beginning of the year. However, divergent trends appeared in different types of listed banks. The NPL ratio of large commercial banks and national joint-stock commercial banks dropped while that of city commercial banks and rural commercial banks rose. AJ Lim, Assurance Leader of Greater China Financial Services at EY², noted, “In 2020, the 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, the listed banks stepped up efforts to support the real economy. The proportion of loans in total assets was 52.93%, up 1.43 percentage points from the 51.50% as at 31 December 2018, while the proportion of non-standard investments continued to decrease. In addition, the listed banks expanded the sources of core liabilities, increasing the proportion of deposits in liabilities and continuously reducing interbank liabilities. The listed banks developed their retail banking to achieved increased the proportion of revenue, assets and liabilities by 0.73 percentage point, 0.99 percentage point and 1.26 percentage points, respectively. AJ Lim added, “Looking ahead, the listed banks need to optimize their business structure to expand revenue sources and enhance risk resilience.”

Replenishing capital and improving capital efficiency

In 2019, the listed banks enhanced their capacity to generate capital internally while actively seeking external sources to replenish capital. The capital base of listed banks strengthened steadily. As of 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. Steven Xu, Partner of Financial Services at EY², said, “Going forward, the listed banks should continuously seek innovative capital replenishment instruments and enhance capital strength by replenishing capital via multiple channels. The listed banks also need to improve capital efficiency, investing in long-term growth while improving returns on capital.”

Increasing FinTech investment

In 2019, the listed banks increased their investment in FinTech applications from multiple dimensions, further strengthening the role of FinTech in driving business transformation and growth and embracing accelerated innovation. Six large commercial banks and seven national joint-stock commercial banks disclosed their FinTech/information technology investments in their 2019 annual reports, totaling RMB100.8 billion, with each of the Big Four banks (ICBC, ABC, BOC and CCB) investing more than RMB10 billion. Nine listed banks disclosed their year-on-year growth in FinTech/information technology investments in 2019, with an average growth rate of 26%. Frank Jiang, Partner of Financial Services at EY², said, “The COVID-19 outbreak is accelerating the process of economic digitalization, highlighting the urgency and importance of digital transformation for listed banks. The listed banks need to continuously invest in FinTech, integrate digitalization and technologies with businesses to become a new engine to 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.”

Actively fulfilling social responsibilities

In 2019, the 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. Since the outbreak of COVID-19 in 2020, the listed banks, as the backbone of the banking industry, have devoted all their efforts to the fight against the outbreak. They strived to maintain business continuity and the stability of service quality while implementing quarantine measures internally; supported enterprises to fight the outbreak and to resume work and production by giving them easy access to credit services; provided "contactless" online financial services based on FinTech applications; provided open platforms to address the need for pandemic prevention and containment; and took the initiative to fulfill corporate social responsibilities by donating funds and materials.

Steven Xu said, “For listed banks, both financial results and environment, social and governance (ESG) performance are important. On the one hand, to enjoy policy dividends, the 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 the listed banks 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.”

The year 2020 marks not only the end of building a moderately prosperous society in all respects as well as the National 13th Five-Year Plan, but also the success of preventing and defusing financial risks. However, the unexpected outbreak of COVID-19 has inevitably impacted China’s economic operation to a large extent. Effie Xin noted, “Looking ahead, the listed banks need to strengthen operational resilience, develop long-term plans, and seek new opportunities from uncertainties to navigate the bumpy ride through economic cycles and achieve long-term sustained growth.”

¹ Ernst & Young (China) Advisory Limited
² Ernst & Young Hua Ming LLP

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About Listed Banks in China: 2019 review and outlook
This is the 13th 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, operating models and regulatory environment of listed banks in China.

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