Chinese banks: Go forth and be efficient
The formula for Chinese banks to win by sheer size and transaction volumes no longer applies as efficiency now the mantra
If the latest data from the China Banking Regulatory Commission offers any definite signs for clues, in mainland banking, a point of saturation has been reached. And the game of dominance by sheer size and transaction volume is truly well and over. This is the year where a demarcation line has been reached: mainland Chinese banks may need to learn to be asset light and revenue efficient.
For the first time in the industry, banking assets in China are shrinking instead of growing. The drop in total assets and liabilities, which are made up cash deposits by majority, are slipping across the board. This is so both in the big state-owned banks as well as in joint stock banks.
Elaine Zhou, senior associate analyst for equity research at Macquarie Capital Securities explained it is a reflection of the trend that has already set in for mainland banks.
“Before, it’s very asset focused. A lot of people are focused on the asset side because market demand was high. They [banks] can always find some windows to loan the money to someone.”
Under the slowing economy, strong credit demand is no longer guaranteed. Even for existing loans that have already gone out to the economy, as banks hand in their third-quarter results, the confirmation is there that dud loans are still foaming up on banks’ balance sheets. Banks cannot just be big and focus on being transactional.
Rather, the new trend for banks from here is: less is more. It is in that context that banks are have been shrinking down their balance sheets and to rein in their own growth. The new winning strategy now is to develop strategies for sticky funding, Zhou noted.
“Funding will be key for margin sustainability,” Zhou said, “If they have strong funding on the deposits side, they can be more picky on lending.”
In that sense, Ping An offers an interesting case study. It was an insurer. Starting tentatively from 2007, it has long had an embedded advantage in place that others didn’t: overtime it has built out from its insurance balance sheet and clients to extend into banking, trusts, securities and asset management - all of them offer some manner of financing in the economy.
The old cliché “Eight is great” at still regularly exhorted at Wells Fargo, which is seen as the gold standard in monetizing relationships and maximising the banking revenues they are able to extract from a given set of clients. With every banking relationship, the ideal bank should be able to cross-sell at least eight products for maximum revenue extraction.
And it is here at Ping An where exactly that is done. Even further, other than bank loans, wealth management products, and insurance, analysts noted they have gone so much further by starting up their own so-called “online-offline ecosystem”, where the next wave of e-finance: such as peer-to-peer lending and even a quasi-virtual currency transaction platform that are keeping customers coming back and staying engaged.
Whereas most mainland banks typically have loan portfolios that are 70 to 80 per cent made up by corporate loans, Ping An’s integrated balance sheet model that was built out initially from insurance offers a client base that was formed largely with high-net-worth clients.
Just within what it calls the “core finance business”, it boasts some 90 million clients - 46 per cent of which are high-net-worth, said Myung Wook Kim, insurance analyst, Asia Pacific at JP Morgan. The representation of wealthy customers at Ping An compared to the general population is close to double, Kim added.
That in its own way is a formidable funding base. The advantage is two fold: by having a large retail and high-net-worth client base, funding is more stable compared to banking with corporate customers. On the other side of side of the ledgers, Ping An also has a much larger profitable segment of retail clients they could extend loans to. And that’s not something to be overlooked.
“Net interest margins in retail loans would typically be 25 basis points higher than in the corporate side. Cross-selling is also easier,” Zhou said.
Retail borrowers do not bargain quite as hard as corporate clients. “When interest rates change, corporates are the first to respond,” Zhou noted.
For banks in general, repricing both loan assets and deposits every time the central bank comes around with a rate cut isn’t just as fun. And the central bank has done just that for six times already since November last year.