Chinese banks need new growth drivers as interest incomes falls, says PwC

Big five mainland China banks see largest decline in net interest margins

PUBLISHED : Wednesday, 21 September, 2016, 9:50pm
UPDATED : Wednesday, 21 September, 2016, 11:01pm

PwC has added its voice to calls for Chinese banks to develop new drivers for growth, following sluggish profit growth announced by mainland lenders in the first half of the year.

The 30 listed Chinese banks achieved total net profit of 774.5 billion yuan for the six months to June, a year on year growth rate of 4.6 per cent, according to PwC’s Review and Outlook of China’s Banking Industry in H1 2016.

“Across all the categories of banks that we looked at, interest income fell as a proportion of total revenue in the first half of 2016,” PwC China’s financial services leader Jimmy Leung said on Wednesday.

“There was moderate growth in non-interest income, including fee income ... but we are looking at a ‘new normal’ of single digit growth for the larger banks.”

The proportion of banks’ income generated from interest has been falling as lenders seek to diversify their income models. However, it still makes up 66 per cent of the income of China’s ‘big five’ banks – ICBC, Bank of China, Agricultural Bank of China, Construction Bank of China and Bank of Communications – and 80 and 90 per cent of the income of China’s listed city commercial banks and rural commercial banks respectively, according to PwC’s calculations.

China Construction Bank has been pursuing a strategy of transitioning away from purely interest income since 2012.

“When we set out on our transition in 2012, we didn’t feel that we had any advantages over other big banks, but looking back, an advantage may be that we set out on the transition earlier, and moved faster,” CCB president Zhang Jianguo told a press conference in Beijing earlier this month.

Banks’ interest income fell in the first half because their net interest margins narrowed further, due to repeated cuts in interest rates by the People’s Bank of China, China’s central bank, and changes in VAT regulations.

Looking back, an advantage may be that we set out on the transition earlier, and moved faster
Zhang Jianguo, president, China Construction Bank

The net interest margin is the difference between the interest rate a bank charges on loans and gives on deposits, stated as a proportion of its interest earning assets.

The ‘big five’ contributed just over two thirds of the total profits of all listed mainland banks, but saw a growth rate of just 3.11 per cent, according to PwC. The growth rate was pushed higher thanks to Bank of China’s sale of its stake in Nanyang Commercial Bank.

In contrast, the 13 listed city commercial banks saw their net profits rise by 18 per cent as a group. However, because of their small size, they only contributed 6 per cent to the listed banks’ total profits.

One reason why city commercial banks posted better profit figures was that their net interest margins fell by just 0.15 percentage points compared to the 0.35 percentage point decline of those of the five largest banks.

“The large commercial banks primarily lend to large SOEs, whereas the city and rural commercial banks lend to smaller local companies. This means that [city and rural commercial banks] can charge higher interest rates, partly because the risk of lending to these smaller companies is much greater,” said PwC’s banking and capital markets partner James Tam.

Inevitably, this leads to further concerns about asset quality, and while the non performing loan balance of banks slowed in the first half, Tam said the proportion of special mention loans had increased. “So asset quality risk needs to be monitored,” he said.

PwC said in the report that the internationalisation of the renminbi, One Belt One Road initiatives, green bonds and demand for cross border financial services from Chinese companies going global were all major opportunities for the banking sector.