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Asia-PacificJuly 1 2013

China's banks go from strength to strength

China's economy started to slow in 2012, but the profitability of the country's banks showed no signs of waning, with indicators from lenders both large and small showing strong growth.
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China's banks go from strength to strength

Economic growth may have slowed in China in 2012, but the country's banking sector still managed to show improved profitability, with the five largest public sector banks reported to have recorded a more than 11% increase in net profits to a combined Rmb750bn ($120.7bn). On top of this, the average non-performing loan (NPL) ratio at these banks was down to 0.99% in 2012, a 0.1% decrease from 2011. NPL provisions at the banks are sufficient to cover 300% of estimated NPLs.

Chinese economic growth was down to 7.8%, but China’s biggest bank, Industrial and Commercial Bank of China (ICBC), saw its profit before tax increase 13.55% to $49.5bn, and China Construction Bank saw its net profits rise by 14.1% to $31.1bn. ICBC's deposit balance hit Rmb1,488,000bn, making it the world’s largest bank by deposits, and its market capitalisation reached $236.4bn, the fifth consecutive year it has topped the global rankings by this measure.

ICBC also boasts the largest continuously expanding customer base in China. It has 393 million individual customers, 4.38 million corporate customers, 2.85 million corporate internet banking customers and 141 million individual internet banking customers.

Inclusive growth

It was not just China's biggest banks that did well. Medium-sized Beijing Rural Commercial Bank (BRCB) saw its total assets increase by more than 13% and net profits increase by 40%, which was attributed to improved management. According to Yang Ming, general manager of BRCB's international business department, income from wealth management increased 60% in 2012, while nearly 50 new branches were added in Beijing.

Shanghai Rural Commercial Bank (SRCB), which is now 20% owned by Australia’s ANZ Bank, also performed well. SRCB's president, Hou Funing, says that the bank has achieved a market share of 6.02% on the back of 12 years of continuous growth. The bank is also bolstering the retail side of its business, where it has a 5.44% deposit market share and is expanding its community banking offering. In 2013, SRCB has already launched 100 foreign exchange shops and a new mobile banking platform.

Shenzhen-based China Merchants Bank (CMB) has a network of only 930 branches but has established the largest private banking operation of all Chinese banks, with Rmb440bn in assets under management and 20,000 customers.

CMB's president, Ma Weihua, said recently: “The economic slowdown caused by China’s economic transformation, market-based interest rate reforms, financial disintermediation, and bank financing restrictions will pressure banks heavily and drive them to implement urgent reforms. Banks should shift their focus to young consumers, retirement financial services and consumption and mobile payments. They must also improve their management systems to compete with the global leaders.”

In 2012, CMB showed a 26.4% increase in pre-tax profit to Rmb59.6bn, and its NPL ratio stood at just 0.61%. Profitability measures also showed increases, with return on average equity and return on average assets both up at 24.78% and 1.46%, respectively. 

Top 10 chinese banks ranking

This is a condensed version of the table that appeared in the magazine.

Renminbi influence

Shanghai Pudong Development Bank (SPD) also recorded growth and expansion in 2012. By the end of the year, the bank's total assets stood at Rmb3145.7bn, its outstanding balance of loans at Rmb1544.6bn, its outstanding balance of deposits at Rmb2134.4bn, and after-tax profit at Rmb34.19bn. It added 83 banking outlets in 2012, taking its total number to 824, in addition to its 37 main branches.

Shen Si, executive director of SPD, says that the internationalisation of the renminbi is a long-term process that is making progress and has various domestic and regional considerations. The process, he says, will continue but will take 10 years to complete.

Au King Lun, chief executive officer of Hong Kong-based Bochk Asset Management, points out that in 2010 the percentage of China’s trade done in renminbi was 0% but that, by 2012, the percentage of the $3900bn of foreign trade conducted in local currency had risen to 14%. He believes that this figure will only increase in the future, adding that the internationalisation of the renminbi has only just started. He is excited about London coming on board in 2013, and becoming a trading hub for the currency in Europe.

Tianjin-based China Bohai Bank has established its second five-year development plan from 2011 to 2015, and, with the help of the UK’s Standard Chartered Bank, which has a 19.9% stake in the bank, Bohai hopes to expand its corporate and retail network. The bank's chairman, Liu Baofeng, says he intends to expand the bank in three major areas: wholesale, retail and financial markets (including wealth management).

Moderate outlook

So what is the outlook for banks in 2013? The relative poor performance of economies in Europe and the US makes it difficult for China’s economy to show improved growth, but the new government in Beijing is determined to improve consumption rather than exports, hence growth may be put on a more sustainable footing from which the banks can benefit.

Bohai's Mr Baofeng believes that 2013 will provide “moderate growth” for the Chinese banking sector. SPD’s Mr Si believes banks such as his will continue to improve efficiency and management expertise. CMB’s executive vice-president, Ding Wei, says that his bank’s prospects depend upon it maintaining its innovative edge. “We need more innovation and, in particular, we see mobile and mobile payments for the young in China as hugely important," he says.

Banks are still expanding on the back of China's strong economy but how much more growth they can achieve will depend on how much the government can push domestic growth through reforms and consumption initiatives, and also how quickly economies in the West can spring back to life.

Rating's outlook

In April 2013, Moody’s Investors Service affirmed China’s government bond rating of Aa3 but changed the outlook from 'positive' to 'stable'. Moody’s notes: “China’s credit fundamentals remain consistent with the Aa3 rating, underpinned by continued robust economic growth, strong central government finances and an exceptionally strong external payments position. Credit-positive structural reforms under the new leadership are expected over time, but their scope and pace may not be sufficient over the course of the next 12 to 18 months to justify a rating upgrade.”

Moody’s is predicting robust economic growth in China against a background of low inflation. It predicts that the country's real gross domestic product (GDP) will grow at between 7.5% and 8% in 2013 and 2014. Beyond this, Moody’s considers that urbanisation and productivity gains will support growth in the 6% to 7% range for the rest of this decade.

China’s strong central government finances are reflected in small budget deficits of between 1% and 2% of GDP since the 2008 global financial crisis, moderate gross financing requirements of about 8% of GDP, and a debt burden of slightly less than 30% of GDP, which is gradually declining.

Strong position

China's external position remains exceptionally strong. Neither the government nor the banking sector relies on external funding, thereby reducing any vulnerability to global financial market disturbances. While many analysts are speculating about China’s decline, they often ignore the lack of external funding argument, which shows China to be far less vulnerable than many other economies.

In macro terms, China’s current account has narrowed sharply since Beijing’s adoption in 2005 of a renminbi appreciation policy, but it remains in surplus. Most importantly, China’s net international investment position was about 22% of GDP in the third quarter of 2012, according to Moody’s, meaning that its external assets were $1800bn greater than the system-wide external liabilities, according to the latest data. Only a handful of highly rated advanced industrial economies – such as Norway, Switzerland, Japan, Hong Kong and Singapore – have a stronger international investment position.

In looking at possible concerns, Moody’s points out that credit growth is increasingly driven by lending by the non-bank, shadow banking system, which is beyond the scope of the central bank’s policy instruments. Moody’s believes, however, that the total stock of shadow bank credit is not currently overly large and does not pose systemic risks.

Moody’s is also aware of the large number of reform initiatives in the pipeline under the new government. These could cover a wide range of issues, including efforts to rein in corruption. Of course, it is uncertain how and if these reforms will be implemented and how long they will take to gain traction. While the outlook does look stable, there are still plenty of uncertainties to be resolved.

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