Financial regulation

Chinese bankers’ top concern is slowing profit growth, not bad loans, PwC survey shows

Bankers are now less concerned about non-performing loans this year, according to PwC and China Banking Association survey

PUBLISHED : Wednesday, 10 January, 2018, 8:11pm
UPDATED : Wednesday, 10 January, 2018, 11:00pm

Slowing profit growth has replaced bad loans as the chief concern for Chinese bankers, after China launched sweeping new rules and formed a super regulator to tighten financial oversight, PwC said on Wednesday.

Bankers fear the tighter regulations could increase liquidity risks and hit interest income, a major source of revenue for Chinese banks.

Nearly 75 per cent of Chinese bankers cited slowing profit growth and narrowing spreads as their main concern, according to an annual survey jointly conducted by PwC and the China Banking Association.

The survey was based on interviews with 1,920 bankers from 163 institutions in mainland China, covering 31 provinces.

Increasing non-performing loans and asset quality came second on the list, with 69.5 per cent of respondents worrying about it.

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That marked a change from 2016, when bankers were most upset about continued rise in non-performing loans, with 87 per cent of respondents putting it on the top of their list.

“Last year, we all witnessed a major shift in the regulators’ attitude and behaviour in overseeing the financial system,” Richard Zhu, head of financial services at PwC North China, said via video link from Beijing. “The bankers have clearly felt the pressure.”

In 2017, China launched sweeping new regulations to reduce the leverage and curb risks in the financial system, including setting up a super regulator, namely the Financial Stability and Development Commission, after the 19th party congress in October.

“The central government wants the financial system to reduce the leverage and increase their funding support to the real economy. But bankers are afraid a rapid decrease in the leverage could cause liquidity risks to banks,” Zhu said.

Rules have also tightened on banks’ interbank investment and financing and off-balance sheet assets, which have a considerable impact on their loan business and relevant income, he added.

Still, Zhu said the creation of the super regulator would be beneficial for the banking sector in the longer term.

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According to the survey, Chinese bankers said restrictions on lending and implementation of Macro Prudential Assessment (MPA), a new financial monitoring system that came into effect in 2017, has had the biggest impact on their banks.

It also showed they were less alarmed about bad loans from last year, which PwC attributed to the improvement in Chinese banks’ asset quality last year.

“Worries about bad loans are always there, but we noticed a decrease in the NPL ratio in banks’ financial results in the first half of last year,” said Monica Ng, financial services partner for PwC.

“It shows banks may have gradually absorbed the pressure from rising NPLs.”

The top three risk factors facing the industry were unchanged in 2017 from 2016 — credit risk due to economic downturn, market risk due to interest rate, exchange rate, stock price volatility, and liquidity risk due to maturity mismatches.

Still, those citing credit risk have fallen from 81.3 per cent in 2016 to 64.8 per cent in 2017, indicating “growing confidence in asset quality”, said Ng.

Separately, the auditor found Chinese bankers were responding to the rapid advance of fintech and developing AI and blockchain solutions to strengthen their financial services.

More than 40 per cent of respondents said research and evaluation were under way on internet of things, cloud technology, blockchain, artificial intelligence and big data.