EY releases Listed Banks in China: 2020 Review and Outlook

EY released Listed Banks in China: 2020 Review and Outlook, which shows that listed banks achieved positive net profit growth in 2020, while weathering the COVID-19 pandemic with operational resilience. The report concludes that listed banks that can remain resilient and achieve sustainable high-quality development in the future will be those actively seeking transformation, seizing policy opportunities and adhering to strategic commitment to sustainable development.

EY also issued the 1Q 2021 results for 38 A-share listed banks in China, which shows that in the first quarter of 2021, 38 A-share listed banks realized a total net profit of RMB519.944 billion, growing by 4.55% year-on-year (YOY), a decrease of 0.49 percentage points from the same period in 2020.

Operating results under pressure from the pandemic

In 2020, listed banks faced greater operational pressure, realizing a net profit of RMB1,761.6 billion, an increase of 0.10% from 2019. The weighted average return on net assets and the average return on total assets were 11.19% and 0.86%, respectively, decreasing by 1.28 and 0.07 percentage points respectively from 2019, due to the slower net profit growth.

Geoffrey Choi, EY¹ Asia Pacific Financial Services Assurance Leader said, “The performance pressure of listed banks in 2020 mainly came from the macroeconomic environment. The pandemic had an adverse impact on the global economy, China-US trade frictions continued, and international commodity markets and financial markets experienced extreme volatility. The complexity of the external business environment has put China’s listed banks through an unprecedented and severe stress test. The growth of net profit indicates that China’s listed banks have successfully passed the stress test. In addition, we saw banks actively respond to the national pandemic prevention and containment policies and continue to provide favorable monetary policies for the real economy.” According to the report, the operating income of listed banks still grew by 4.93% YOY, and the capital adequacy ratio (CAR) remained stable, increasing by 0.17 percentage point from the end of 2019 to 15.25% at the end of 2020.

Increased disposal of non-performing assets and holding asset quality stable

Due to the impact of the pandemic and other factors, the aggregate amount of non-performing loans (NPLs) of listed banks increased by RMB241.1 billion from 31 December 2019 to RMB1,827.1 billion as at 31 December 2020. The weighted-average NPL ratio increased from 1.47% as at 2019 year-end to 1.50% at 2020 year-end. Despite the increase in the NPL ratio of listed banks, the overdue loan ratio continued to decline to 1.49% at the end of 2020 from 1.70% at the end of 2019.

Steven Xu, EY¹ Financial Services Partner said: “The overdue loan ratio of listed banks decreased as they stepped up efforts in the disposal of NPLs and implemented regulatory policies related to the fight against the pandemic, thus mitigating to a certain extent the impact of the economic downturn and the pandemic and keeping asset quality relatively stable.” He further noted that banks provided temporary deferred repayment of principal and interest for some borrowers affected by the pandemic in accordance with regulatory requirements. These loans will not be reported as overdue loans until the due date of the deferred repayment of principal and interest, but those banks should classify the risk of the loans according to the actual condition and exposure of the borrowers. Listed banks need to closely monitor any improvement in the operating conditions of these borrowers to avoid concentrated risk exposure on the due date of deferred repayment.

Actively pursuing change and transformation

Based on data of 22 listed banks that disclosed their investment in FinTech or IT in the 2020 annual reports, the total investment was RMB144.579 billion. Particularly, large commercial banks and national joint-stock commercial banks collectively registered a growth of 37.88%, with the investment individually made by each bank of the two groups averaging nearly RMB10 billion. Large commercial banks began to offer FinTech solutions and risk control tools to facilitate the development of small- and medium-sized banks, while further enabling their own businesses with FinTech across the board. Small- and medium-sized banks continued to focus on customer-centric differentiators and cultivate their comparative advantages, and deployed innovative approaches to optimize businesses, products, services, processes, management and risk control in an effort to improve customer experience and maximize the value for both customers and the banks with a win-win approach. Benny Cheung, EY¹ China South Finance Service Leader said: “To meet the increased demand for ‘contactless banking’ services under the pandemic in 2020, listed banks further sped up funds and talent investment in FinTech and set up subsidiaries to accelerate FinTech deployment and digital transformation and made steady progress, which in turn helped them navigate the pandemic.”

Listed banks continued to promote retail banking transformation that acted as a new engine driving profit growth and made increasing contribution to their profit. Listed banks posted more prominent results for their retail banking operations in 2020, as the business was less affected by the pandemic. The operating income from retail banking accounted for 42.33% of total operating income, increasing by 2.86 percentage points from 2019 and outperforming that of corporate banking for the first time. The profit before tax of retail banking accounted for 45.61% of total profit before tax, increasing by 6.56 percentage points from 2019. The advantage of retail banking over corporate banking increased from 2.46 percentage points in 2019 to 10.29 percentage points in 2020.

As at 31 December 2020, a total of 19 wealth management subsidiaries of listed banks commenced operation. As these wealth management businesses were being transferred to subsidiaries, relying on the advantageous resources of their parent banks in sales channels, customer groups, systems operations and other aspects, these subsidiaries achieved rapid growth in net profit and scaling up of products in 2020. This in turn spurred a rebound in income from the intermediary business of listed banks.

The year 2021 marks the end of the transition period for implementing new regulations on asset management, but listed banks and their wealth management subsidiaries still face challenges in the transformation of their wealth management business. Benny Cheung said: “In the current market environment, with the emergence of new technologies and new products, as well as new regulations, the asset management industry is experiencing gradual reform, and the asset management business is ushering in a new era. Under relevant regulatory policies, the profits of wealth management businesses that were made through traditional methods such as maturity mismatches and leverage increase have been restricted to some extent. Hence, asset managers should shift to diversify asset investment products and improve asset pricing and risk response capabilities. It is crucial for commercial banks to explore their business models for wealth management, enhance their core competitive strengths, and achieve a sound and orderly development of wealth management business in the new environment.”

In 2020, China’s listed banks actively responded to national strategies and continuously promoted the development of green finance and inclusive financial services, which achieved rapid growth. Large commercial banks in particular increased their green credit and inclusive finance loans by 25.38% and 48.38%, respectively. In this regard, Steven Xu said: “For listed banks, the in-depth development of green finance and inclusive finance is an inevitable choice for transformation and development. To enjoy policy dividends and seize market opportunities, listed banks must align their strategies and efforts with national strategies to vigorously promote the progress of 'peaking carbon dioxide emissions', 'achieving carbon neutrality' and 'rural revitalization'. On the other hand, listed banks should actively perform social responsibilities and demonstrate customer-centric commitment, so as to enhance customer loyalty, increase the coverage ratio and availability of financial services, and improve the quality and efficiency of financial services.”

The year 2021 is the start of the 14th Five-Year Plan and a new phase of development for listed banks. Geoffrey Choi said: “In the new phase with both opportunities and challenges, listed banks need to turn pressure into motivation, fully implement the new development strategy, and maintain strategic commitment, while setting out long-term plans and continue to promote business transformation in order to achieve sustainable high-quality development.”

¹ Ernst & Young Hua Ming LLP

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Notes to Editors

About Listed Banks in China: 2020 review and outlook report

This is the 14th 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.

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