Mainland banks urged to look beyond loans in pursuit of profits

PUBLISHED : Thursday, 21 June, 2007, 12:00am
UPDATED : Thursday, 21 June, 2007, 12:00am

Mainland banks need to diversify from their focus on lendings to state firms in order to raise profitability and lower risk in the face of structural changes in the financial sector, according to Fitch Ratings.

The mainland's banking sector, which remains the least profitable in Asia, should develop new products as large corporates increasingly turn to bond and equity markets to fund growth, Fitch Ratings said at a global banking conference in Beijing yesterday.

'The mainland's banks haven't shaken off their historic role to provide finance to large state-owned enterprises. They need to make the transition to higher-margin business,' David Marshall, managing director of Fitch's Asia business, said on the sidelines of the conference.

'Low profitability makes the mainland's banks ill-placed to absorb shock and any losses that arise.'

Many banks have been focusing on loans to large state enterprises at interest rates below the benchmark rate, even though they have been free to set higher rates for nearly three years.

Large corporate loans - those of more than 10 million yuan - accounted for 75 per cent of total lending by the top seven banks last year excluding the Agricultural Bank of China. In contrast, retail lending accounted for just 4.7 per cent of all loans.

Another risk from heavy reliance on loans for income was the fact that firms are increasingly using the bond market as an alternative source of funding. The government has proposed to give the China Securities Regulatory Commission power to approve corporate bond sales, a move analysts said would boost the appeal of the debt market.

'The mainland's banks need to beef up their retail businesses and provide other products and services, such as derivatives, hedging instruments and investment banking services,' Mr Marshall said.