EY releases Listed Banks in China: 2021 review and outlook

EY today released Listed banks in China – 2021 review and outlook. Covering all 59 banks listed in China, the report not only revealed how they have changed in terms of operating results, business structure, asset quality and risk resilience in 2021, but also showed that these banks have maintained strategic focus in the complex and volatile environment, while continuing to build momentum in serving real economy, retail business transformation, digital transformation, green finance and inclusive finance. 

Simultaneously, EY also released the Overview of Q1 2022 results of 42 Chinese A-share listed banks, indicating that these banks’ results in the first quarter of 2022 were better than that of 2021. In Q1 2022, the net profit of these 42 A-Share listed banks rose 8.22% year-on-year (YoY), an increase of 3.67 percentage points as compared with the growth of Q1 2021, while the non-performing loan (NPL) ratio at the end of Q1 2022 further declined from the beginning of year. 

Significant rebound in operating results; operating income and net profit grew faster

Kelvin Leung, EY¹ Greater China Financial Service Banking & Capital Markets Leader, said: “In 2021, the overall macroeconomic situation has improved, the impact of COVID-19 has eased, and China’s economic growth has picked up. We see that the results of the listed banks in China have maintained growth momentum and rebounded strongly. This is reflected in the fact that these banks’ operating income has grown robustly, profits have recovered steadily; NPL ratio has reversed its rising trend, and asset quality has improved; both provision coverage ratio (PCR) and capital adequacy ratio (CAR) have risen, thus enhancing their risk resilience. Meanwhile, with the transitional period of the ‘new regulations on asset management’ coming to an end, and the transformation of wealth management business of the listed banks accelerating, the introduction of a raft of regulatory measures have tightened the regulatory requirements on the listed banks.”

The report shows that in 2021, the total operating income rose 7.75% YoY to RMB6,052.708 billion, up 2.84 percentage points from 4.91% growth in 2020; the total net profit stood at RMB1,994.789 billion, a YoY increase of 12.05%, up 11.95 percentage points from the growth rate of 0.10% in 2020. 

Net profit growth mainly benefited from rising operating income, continued growth of net fee and commission income and lower level of impairment loss provision. In 2021, the listed banks actively drove business transformation to operate more intermediary businesses including wealth management. The rise of the citizens’ demand for wealth management has led to rapid growth of agent and asset management businesses, and constant upward growth of fee and commission income that grew 8.04% YoY, 3.19 percentage points better than last year. At the same time, the listed banks were gradually recovering from the impact of the COVID-19 pandemic. And with better asset quality, they reduced the level of provision. 

Though the net profit of the listed banks was growing significantly, as the Chinese economy was still recovering, the listed banks continued to actively respond to the call of the government to support the real economy by lowering the enterprises’ financing cost. With multiple cuts of loan prime rate shrinking net interest margin, the net interest income growth of the listed banks in 2021 slowed by 2.45 percentage points to 4.46% from 6.91% in 2020. Meanwhile, in 2021, with the listed banks gradually recovering from the pandemic impact, social security payment relief policy discontinuing, and FinTech investment still rising, the cost-to-income ratio has rebounded. 

Improved asset quality; strengthened risk resilience

Despite the exposure to the real estate sector with the weighted average NPL ratio of corporate loans rising from 1.71% at 2020 year-end to 2.62% at 2021 year-end, the listed banks reversed the rising trend of the overall NPL ratio by enhancing credit risk control and increasing efforts in write-off and disposal of non-performing assets, reducing the weighted average NPL ratio to 1.37% at the end of 2021 from 1.50% at the end of 2020. 

Recently, a major focal point of the financial market is the financial risk of the real estate sector that has been in existence over the past few years and its impact on the banks’ asset quality. Steven Xu, EY¹ Greater China Financial Services Emerging Market Leader, said: “Both non-performing loan balance and NPL ratio of the real estate sector are rising, but the overall risk is controllable. Moving forward, to promote the healthy development of the real estate sector in the long run, financial institutions will continue to provide necessary credit services to the industry in accordance with government policies and its own risk management requirements.” In addition, Xu added: “It is important to note that despite the NPL ratio of the listed banks is declining, the risk of its non-credit assets is rising, and the prevention, control and mitigation of credit risk needs to be strengthened in the future.” Data shows that in 2021, the impaired debt investment of listed banks grew by more than RMB160.0 billion. Particularly, the proportion of impaired debt investments in total debt investments of national joint-stock banks increased from 1.65% to 3.09%, while that of city commercial banks increased from 1.86% to 2.81%. 

While major European and American banks significantly reduced impairment provision or made reversal of allowance in 2021, the Chinese listed banks maintained a prudent impairment provision policy despite the fact that the negative impact of the pandemic had eased – the weighted average loan PCR increased from 212.44% at 2020 year-end to 233.43% at 2021 year-end, and the weighted average allowance-to-loan ratio increased from 3.19% at 2020 year-end to 3.20% at 2021 year-end. In addition, the listed banks replenished capital through multiple channels, such as profit retention and issuance of convertible bonds, perpetual bonds and tier-2 capital bonds. The core tier-1 CAR improved from 10.97% at 2020 year-end to 11.08% at 2021 year-end and CAR from 15.24% to 15.75%, enhancing the risk resilience. 

Wealth management business entered a new racetrack; transition and innovation maintained momentum

2021 was the final year of the transition period for implementing the new regulations on asset management, the listed banks largely completed the remediation of legacy wealth management business and achieved remarkable results in resolving the shadow banking risk. As the transition to net value-based management continues to advance, the contribution of wealth management business to the fee income of the listed banks increased significantly. According to statistics, in 2021, 43 listed banks disclosed the value of net value-based wealth management products (WMPs) in their annual reports, showing a balance of RMB22,711.3 billion. For the 31 banks that disclosed this data in both 2021 and 2020, the aggregate balance of net value-based WMPs increased by 68.07% in 2021 from 2020 year-end. By the end of 2021, 19 wealth management subsidiaries had been opened, which reported a total net profit of RMB24.367 billion for 2021, representing an increase of 149.07% YoY. Leung said, “With the formal implementation of the new regulations on asset management, the new wealth management business model will also face challenges in customer onboarding, investment research capability, risk management capability and system optimization. How the listed banks will improve core competitiveness and achieve healthy and sustainable growth of the wealth management business under the new market and regulatory environment is critically important.”

According to the report, the listed banks continued to drive retail transformation, gaining more profit contribution from the retail business. In 2021, the retail income accounted for 42.38% of total operating income, up 0.12 percentage point from 2020, and higher than the 40.29% of corporate business and the 12.10% of financial market business. Pre-tax profit of retail business represented 46.43% of total profit before tax, up 0.91 percentage point from 2020. In response to market competition and regulatory pressure, the listed banks continued to improve granular management of customer end, product end and risk control end, with some banks maintaining their leadership position in retail business through financial supply-side reform by seizing new opportunities such as pension finance. 

In 2021, all listed banks continued to increase investment in FinTech, while accelerating technology and business convergence and further speeding up the digital transformation of their businesses. While benefiting from improvements made in FinTech, the listed banks nonetheless faced challenges in data governance, scenario development and risk prevention and control. During the digital transformation, the listed banks need to establish a comprehensive digital governance architecture, further improve the systems and mechanisms associated to FinTech, drive the deep convergence of technology and business scenarios, attach great importance to data quality and security, and strengthen the protection of customer privacy. 

On 31 December 2021, the People's Bank of China (PBC) released the Fintech Development Plan (2022-2025). In January 2022, the China Banking and Insurance Regulatory Commission released the Guiding Opinions on the Digital Transformation of the Banking and Insurance Industry. Xu added: “Supported by policy guidance, digital transformation has been upgraded to become industry-wide strategy, with huge potentials. However, it should be noted that the success of the transformation cannot be achieved overnight, and it requires considerable resource investment. Therefore, to maximize the results of transformation, listed banks need to ensure that key metrics are set up and monitoring systems are designed in areas such as customer experience, revenue improvement, cost reduction, risk control and sustainable development.”

Stepped up effort to serve real economy; accelerate the development of green finance 

In 2021, while continuing to adopt a prudent monetary policy, the PBC cut the required reserve ratio by 0.5 percentage point in both July and December. Market liquidity was relatively abundant, and the total assets of listed banks maintained a growth trajectory. At the same time, in positive response to national policies, the listed banks continued to increase support to the real economy by continuing to increase the proportion of credit assets. 

The report shows that the listed banks have strengthened support for key areas and weak links of the national economy. Credit granted continued to experience relatively rapid growth, with loan balance rising 11.45%; the total manufacturing loans increased by 10.88%, up 1.38 percentage points from 9.50% in 2020.

Moreover, listed banks continued to increase their investment of inclusive loans. Forty-six listed banks disclosed their inclusive loans at the end of 2021, which totaled RMB11,102.0 billion, growing by 28.99% from the end of 2020, 17.54 percentage points higher than the overall growth rate of loans. In addition, the listed banks further improved financial services for low-income groups, enabled employment and entrepreneurship with financial supports, optimized the financing service system for micro, small and medium enterprises (MSMEs) throughout the whole lifecycle, and supported rural revitalization. They also drove the development of digital inclusive finance and explored inclusive finance to achieve common prosperity. 

In 2021, the listed banks actively responded to the national strategic goal to peak carbon emissions and achieve carbon neutrality, and continued to promote green finance. Forty-three listed banks disclosed their green loans as at the end of 2021, which totaled RMB11,198.0 billion. This represents an increase of 38.93%, up 26.47 percentage points from the growth rate of the prior year. Xu said: “As an important part of the financial system, green finance plays a pivotal role in serving green transformation and supporting the realization of peak carbon emission and carbon neutrality. However, the listed banks need to take into account the coordinated and orderly progress of green finance and transition finance, establish new models before breaking old ones, prudently manage the pace of transformation and maintain focus on climate and environmental challenges.”

Since the end of Q1 2022, there have been frequent COVID-19 outbreaks in China, and financial supervision had been stricter. The listed banks are facing more uncertainties and complexities. Leung believes that China’s long-term positive economic fundamentals have not changed. Driven by stabilizing growth, and serving the national strategy and real economy, the listed banks are seeing their business development being presented with new opportunities. “The listed banks need to further build core competitiveness and drive the upgrade of business models, while transforming from traditional on-balance sheet deposit and loan business-driven to comprehensive financial model-driven to build the core competitiveness of comprehensive financial service in the areas including assets + liabilities, finance + life, commercial bank + investment bank, deposits + assets under management and loan + finance product aggregate,” said Leung.

¹ Ernst & Young Hua Ming LLP

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Notes to Editors

About Listed banks in China: 2021 review and outlook report

This is the 15th 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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