Slower growth to hit banks

PUBLISHED : Thursday, 31 May, 2012, 12:00am
UPDATED : Thursday, 31 May, 2012, 12:00am


The era of high growth among mainland banks is looking increasingly hard to sustain, and the amount of local government loans becoming due in the next two years could exacerbate the situation.

Profit growth among the 17 mainland banks listed in Hong Kong or the mainland was 4 percentage points lower than in 2010, partly because of the difficulty of maintaining strong growth when some lenders are already large-scale and partly because of a slowdown in wider economic growth and a rise in bad loans, according to accounting firm Ernst & Young.

Last year six of the 17 listed banks posted an increase in non-performing loan charge-offs. And in the first quarter of this year, 11 listed banks saw a rise in bad loan recognition, said Keith Pogson, managing partner of Asia Pacific financial services at Ernst & Young.

'The days of ever-declining non-performing loan ratios in Chinese banks have ended,' Pogson said.

Mainland banks needed to change their business philosophies in order to maintain vitality, Pogson said, adding that part of the shift would involve becoming less reliant on interest income.

The banks have enjoyed fat profits in past years, partly because of a steady income spread between what they pay for deposits and what they earn from lending. The 17 banks made 886.7 billion yuan (HK$1.08 trillion) in profits last year, up 29 per cent year on year.

Many larger banks have already begun increasing the proportion of fee-based income generated from operations such as credit cards and investment products. Fee income can contribute up to 50 per cent of revenue at some global banks.

Fee income rose 1 percentage point to 18 per cent among the 17 banks studied. The figure stood at 23 per cent for the five largest lenders and 16 per cent for the rest of the group.

The imbalance comes from the fact that big banks have a lot more branch networks, international trading business and credit cards business, Pogson said.

Another challenge that mainland lenders face is a rise in credit costs, mainly related to local government financing vehicles (LGFVs), companies set up to borrow from banks on behalf of local governments, which are often barred from doing so themselves. Such loans reached about 5 trillion yuan by the end of 2010, according to the National Audit Office.

Ernst & Young said 30 to 40 per cent of the loans would expire between 2012 and 2014, giving the first insights into how the problem will be managed.

'We have seen that the China Banking Regulatory Commission has been more forgiving in the way they allow the loans to be restructured, particularly where the cash flow of the loans don't necessarily line up with the lending requirements, the interest to be paid on the loans, and the repayments of the loans,' Pogson said.

But he said banks at their present level of profitability should be able to 'munch' their way through any of these LGFV situations and digest the problem loans over a period of time.


The amount loaned to local government financing vehicles by the end of 2010, according the National Audit Office