Beware 2016, PwC cautions China’s banks
China’s banks are entering a “zero profit growth” era and may see greater asset deterioration this year, warns auditor PwC.
The auditor cautioned that listed banks must keep an eye on further deterioration in non-performing loans and overdue loan levels. At the same time, they should look to pursue more capital-light businesses, such as intermediary dealings, that will not require as much capital.
James Tam, financial services partner at PwC Hong Kong, said the industry’s biggest banks will likely see persistent capital pressure as new global banking regulations are rolled out over the next two to three years.
For unlisted banks with more vulnerable balance sheets, PwC said they should evaluate the possibility of listing as a means of bolstering their capital at the earliest opportunity.
This is despite the fact that many mainland Chinese banks are still holding out for prospects of listing on the domestic A-share market where they would likely receive higher valuations than those they would receive from sceptical overseas investors if they choose to list in Hong Kong.
“Banks should still try to list. Does it matter whether a bank gets HK$1.2 or HK$1.4 billion? With leverage, after a year, the capital will more than make back their returns,” said Jimmy Leung, banking and capital markets leader at PwC China.
“Banks can apply the new funds to their business, and after the margins, it is a good business. We know many are working on their H-share offerings and some are still looking into the A-share route this year.”
PwC believes four to six small to medium-sized mainland banks will probably end up listing in Hong Kong. “Banks have better control with their timing in the Hong Kong H-share market, where the market is fully liberalised,” said Leung.
“In the mainland A-share market, they may receive better valuations, but if at the same time they get delayed by a year or two, it really makes no difference in the end. The expediency and the funds they can raise from Hong Kong can more than compensate,” he said.
PwC is also calling on banks to focus on executing their business plans and to watch their capital levels as the auditor still sees a deterioration in the quality of banks’ assets.
Leung estimated that the industry-wide non-performing loan ratio could worsen to 1.8 to 2 per cent by year end, from 1.67 per cent at the end of 2015. PwC said asset quality deterioration is a continuing trend after banks saw a hefty 49 per cent rise in non-performing loans last year.