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Liz Mak

A slowing economy battered Chinese bank results in the first half of the year, and Beijing's introduction of interest rate and foreign exchange reforms has added to the gloom hanging over the sector.
According to Citi research, net interest margin at Chinese banks fell by an average of eight basis points to 2.53 per cent in the second quarter of the year.
Meanwhile, Fitch Ratings said annualised non-performing loan (NPL) formation at Chinese banks it covered had doubled to 1.21 per cent in just a year.
However, dissecting the NPL figures shows that the worst-hit sectors have been manufacturers, retailers and wholesalers, reflecting the state of the coastal economy as well as the deceleration among state-owned enterprises.
Looking further afield uncovers another world, in the inner provinces, that is defying such trends.
Start with Bank of Chongqing, based in the sprawling southwest municipality where first-half economic growth came in at 11 per cent, the top regional performance in China.
Against a tide of flat to negative growth, Chongqing has been one of the rare banks still pulling in double-digit profit growth. Net profit rose more than 10 per cent year on year in the first half, while NPLs stood at just 0.9 per cent. The bank's loan book grew at an 8.5 per cent clip, hitting 181 billion yuan.
The bulk of its loans have been going to companies in the still-urbanising southwest. Its network spans Sichuan, Guizhou and Chongqing - all on the "one road, one belt" superhighway and close to neighbouring countries including Laos, Myanmar and Vietnam.
New card usage, the discovery of online banking, phone banking and even television banking in the southwest are helping the bank expose residents to the new-fangled idea of personal banking. New customer deposits grew by a spectacular 8.1 per cent - for a total of 13 billion yuan - in the first half, while annual card fees and handling charges rose by an eye-watering 102.5 per cent. Mortgage lending and card businesses might be boring bread-and-butter business reaching saturation point elsewhere, but in Chongqing, they are still growth drivers.
Industrialisation and urbanisation are only in the first wave in our province. That allows us to grow at a higher pace
Li Hongming, chairman, Huishang Bank
"Southwestern citizens have wealth management needs," Bank of Chongqing chairman Gan Weimin said. "We are rolling out services."
New channels were allowing the bank to reach out and cross-sell, with profits from wealth management growing at a 118 per cent clip.
Another perceived backwater doing well is Anhui, home to many of Beijing's migrant taxi drivers and coal, cement and steel industries struggling with excess capacity. Li Hongming, the chairman of Anhui's Huishang Bank, said those sectors were the first to be affected when the economy wilted.
"The next pillar of the province is a processing economy that is challenged by increasing costs and contracting markets," Li said.
"Companies work together; therefore they produce a domino effect together. They give rise to liquidity issues spread across the supply chain. Perhaps here it is not as bad as in the coastal provinces. That's our advantage. Industrialisation and urbanisation are only in the first wave in our province. That allows us to grow at a higher pace."
While the International Monetary Fund has been forecasting economic growth of just 6.8 per cent for China this year, Li said Anhui's had been growing by 8.9 per cent.
"We only have one branch outside the province [in Nanjing]," he said. "Our exposure is to the Anhui economy - it is Anhui culture all the way through."
With limited outreach or balance sheet size - Anhui's total assets stand at just 575 billion yuan - Li said there was still room to profit.
"If you have the gall, it is your ability to manage that will deliver the wins," he said.
"It is all a question of spread. Banking competition has been hard on deposit rates; that is the overall national trend. The resulting spread depends on individual banks' management of their operations.
"At Huishang, our profit would have gone up by 30 per cent this season, had it not been for provisions. Maintaining asset return by bolstering high-quality loans is now our target - that will lower overall credit cost and return asset quality.
"Banking profit depends on mismatches. Higher-rate assets can bring new sources of profit. Deposits are muted. Of course, you can now go to the interbank market to source capital, while your peer groups are also facing mismatches, too. The challenge then is to manage and balance the mismatch and liquidity concerns."
NPLs at Huishang stand at just 0.97 per cent, up 0.14 percentage point from a year ago, while the total balance sheet is growing at 19.14 per cent. Net interest income is up by 24.98 per cent at 6.7 billion yuan, with a net interest margin that has risen to 2.68 per cent.
"The Chinese financial market is large enough to provide opportunities for all," said David He, a partner at Boston Consulting Group. With the right shareholders, banks could still grow under the right context.
Banks like Li's and Gan's still have a long way to go in terms of growth. But Li says the removal of the mainland's loan-deposit ratio requirement, a past choking point stopping innovation, will open new opportunities for smaller banks with limited balance sheets.


Not all Chinese banks are basket cases

Bank of Chongqing is pulling in double-digit profit growth, thanks to a booming southwest municipality that was the top regional performer in China. Photo: SCMP Pictures

Capitalisation gap forming between China's biggest banks as Basel deadline looms

As a globally systemically important bank, Agricultural Bank of China's  core capital adequacy was far behind its Chinese peers at the end of June. Photo: Bloomberg

Fitch highlights mounting pressure on China bank profits

Annualised non-performing loan formation for mainland banks nearly doubled year on year in the first half of 2015. Photo: EPA

Business

Banking & Finance

Smaller, local players in central and western regions offer a glimpse of growth amid an industry beset by low margins and bad debt


.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Smaller, local players in central and western regions offer a glimpse of growth amid an industry beset by low margins and bad debt

Smaller, local players in central and western regions offer a glimpse of growth amid an industry beset by low margins and bad debt