Rising household debt is a cause for concern in China, but with banks looking for new ways to increase earnings, many view retail banking and wealth management as an opportunity that cannot be passed up. Kimberley Long reports.
In recent years, Chinese banks have suffered from low profitability, despite their huge balance sheets. The impact of non-performing loans (NPL) has eaten into profit margins, and highlighted the banks' reliance on corporate banking. By comparison, retail banking is largely underserved. The main product used by Chinese consumers is mortgages, with personal loans and credit cards rarely used when compared with Western habits. Banks are now exploring how they can refocus attention towards the untapped retail space, and boost earnings in the process.
China’s household debt levels have been increasing. Overall household debt comprised 52.6% of China’s gross domestic product (GDP) in December 2018, according to Trading Economics data. This number puts it on par with Germany’s 52.9%, but far behind the 76.3% of the US. China also came from a low starting point, with the household-to-GDP debt ratio being just 11.8% in 2008. Furthermore, Chinese households were only able to access bank loans for the first time in 2003. Although outpacing the economic growth of other developing nations, China’s household debt level is roughly on a par with the developed countries.
While this rising level of debt is being posited as a problem by some, others point out that it shows a country moving to a consumption-based growth model. China’s household income is rising at a faster rate than mortgage debt. Importantly, Chinese banks are looking to find different ways to raise funds and keep economic activity high to meet GDP growth targets – set at 6% to 6.5% for 2019 – and bolster their own profits.
Retail to the rescue?
Traditionally, Chinese consumers prefer saving to borrowing. Overall, China’s savings rate is 46% of GDP, according to the International Monetary Fund (IMF), one of the highest levels in the world. Household savings account for about half of this.
But high household savings can only be considered a positive to a point, especially in an economy that is moving towards becoming consumer and services focused. Chinese consumers are changing how they think about spending, and the country's banks are facilitating this by creating products in response to these new habits.
Recognising the need for change, some banks are developing their consumer banking offering by overhauling their businesses to make it more user friendly. Hu Yuefei, president of Shenzhen-based Ping An Bank, says: “Ping An has a strategy of transformation towards retail banking [based around] setting up a management team and business unit. The dedicated retail banking technology team has consolidated three apps into one to enhance the user experience.”
Mr Hu says there has been a strong customer response to Ping An refocusing on its retail banking and wealth management divisions. “We have seen 40% of the bank’s newly added customers come from the credit card and wealth management businesses,” he adds.
Personal loans are taking up an increasingly large percentage of Chinese banks' loan business. Zhang Jinliang, chairman of Postal Savings Bank China (PSBC), says: “At the end of 2018, PSBC’s personal loans accounted for 54.2% among its total lending, far higher than the industry average.” He adds that the bank is dedicated to continuing to support the business over the coming year.
In the cities
This changing consumption trend is extending far beyond the top-tier banks, as the smaller city banks are seeing an uptick in their retail banking businesses. A spokesperson for the Bank of Nanjing says: “By the end of 2018, the revenue of personal banking business reached Rmb4.3bn [$627m], accounting for 15.81% of operating income, an increase of 3.91% compared with the previous year.”
The growing wealth of urban and rural residents has provided new retail banking opportunities. Mr Zhang believes a diversification of the product suite will help the banks, and in particular expects personal loans to increase. “The changing resource allocation strategy, and corresponding loan growth, will help PSBC further enhance its ability to resist economic cycles, improve its pricing ability and ensure a steady increase in business performance,” he says.
This change in tactics is not solely consumer driven. The move to supporting retail banking growth has also come in response to regulatory pressure.
Grace Wu, senior director for financial institutions at rating agency Fitch, says China's banks need to behave differently to meet government targets. “The banks need to lend if China is to reach its GDP targets. Funds have to be set aside to replenish the capital as banks grow. At present, China’s debt problem is mainly characterised by banks lending to state entities. Greater competition and growth will be driven by retail lending.”
Managing the wealth
As China’s wealth grows, international wealth management companies are increasingly looking at the country, and Asia more broadly, as a potential growth market. Nomura and JPMorgan are believed to be among the institutions in the process of establishing wealth management entities in China. As they enter into negotiations with the national regulator to gain access to this vast market, the regulator is striving to ensure local financial institutions can provide a meaningful level of competition. Consultancy Oliver Wyman reports that personal assets for investment in China stood at $22,000bn in 2017, and forecasts that this figure will grow to $37,000bn in the next five years.
The creation of wealth management services within China is a way of keeping funds onshore. Wealthy Chinese individuals and families have traditionally used wealth management services in Hong Kong and Singapore. Now the country's middle class, which has grown to about 500 million people, is looking to invest its money.
This growing middle class is not only concerned with where to invest, but is also taking a modern look at how they utilise the financial tools available to them. Jin Yu, chairman of Bank of Shanghai, says: “Customers can learn about products through their mobiles with apps such as WeChat.”
Banks are taking the lead from their customers to learn about the services they want. Gu Jianzhong, president of Shanghai Rural Commercial Bank (SRCB), believes a change is needed to ensure the bank remains competitive. “SRCB has Rmb120bn of wealth management product funds. The business is customer driven, which both satisfies wealth management customers’ demands for returns, and supports the business development of financiers by allocating non-standard assets.”
Risks and returns
Wealth management divisions in China had previously been run with the banks suggesting customers would see a guaranteed rate of return on their investments. These off-balance-sheet loans would have an implied return of up to 5%, a more attractive prospect than the 1.5% offered by a one-year deposit. However, the country's regulators have now clamped down on this, on the recommendation of the IMF. Chinese banks are now required to educate their customers on the risks involved, and not imply a guaranteed return on their investment. Further rules require banks to hold 10% of fees earned from managing wealth management products to protect against potential risks. Banks must comply with the new rules by the end of 2020.
Removing this risk has impacted upon how regulators are allowing banks to run their wealth management businesses. In December 2018, the China Banking and Insurance Regulatory Commission announced wealth management divisions would need to be held separately from the parent bank, with responsibility for their own profits and losses. This is being done with the intention of preventing business risk from 'infecting' the parent bank.
These tighter regulations will bring wealth management funds on balance sheet. The value of off-balance-sheet wealth management products was Rmb22,000bn at the end of 2018, a sum representing 24% of China’s total GDP.
The initial licences for subsidiaries were granted to the state banks, but the regulators have started to grant permission to other top-tier banks. One of the first commercial banks to receive such a licence was Everbright Bank.
Ge Haijiao, CEO of Everbright Bank, says the bank has a strategy to place greater emphasis on wealth management over the coming decade. “Our Sunshine wealth management division will start operations in the final quarter of 2019,” he adds.
The right balance
For customers using wealth management products for the first time, a wholly digitised approach may not be successful, according to Paul McSheaffrey, partner and head of banking at KPMG in Hong Kong, who says: “The new wealth management businesses need to find the balance between modern and traditional banking. Consumers need the comfort of face-to-face transactions when they are dealing with their money. Banks such as Everbright, which have a strong digital and physical presence, will be well positioned to do both.”
While the regulators are approving banks to open subsidiaries, banks are working out how they will run their operations. Without guidance, this could lead to a trial and error approach, with the associated risk attached, according to Charles Su, global market research and sales managing director at China Industrial Bank. He says: “Banks establishing wealth management subsidiaries need to clarify how they will run the business. Will they separate the internal staff into two different companies? Are the operating systems the main bank and the subsidiary are using different? The regulator will need to respond to the changes and define the structure of separation.”
However, not all banks will be able to switch to the new way of running wealth management operations in the short term. Mr Su says: “Some banks looking at wealth management divisions may not have the personnel they will need. They are uncomfortable with being put under a unified supervision system as asset managers.”
Credit impact
Rising household debt levels in China have run hand in hand with an increase in credit card use. At the end of 2018, overall credit card usage had reached Rmb15,400bn, a 23.4% increase on 2017. The People’s Bank of China reported that there were 686 million credit and debit cards in circulation in the country in 2018, a 16.73% year-on-year increase. The number works out to roughly one card per two people.
Chinese banks have traditionally been reluctant to push credit card use, and Ms Wu from Fitch says: “Credit card rates are capped at 18%. For many banks the rates have not been sufficient to cover the risk.”
This approach has now changed. Zhu Yuguo, chairman of the board at Bank of Changsha, says: “We issued 539,700 new credit cards in 2018 – an important channel for expanding the retail business.”
One of the factors attributed to the success of mobile payments in China has been the relatively late uptake of card use in the country when compared with Western consumers. While this has helped to encourage the growth of mobile payment companies, it also demonstrates how Chinese customers are unfamiliar with buying on credit. However, the upside of this means they are comfortable with using technology to do their banking.
To take advantage of this, China's banks are increasingly deploying technology to increase accessibility to consumer loans. Harbin Bank has refocused its retail lending operations by adopting a credit factor model to streamline the work process, with the help of artificial intelligence (AI). A spokesperson for Harbin Bank says: “The approval of household loans [at Harbin] has been shortened from five days to between five and 10 minutes. Our robotic process automation project also helps to simplify and enhance an efficient business process.”
Bank of Shanghai’s Mr Jin says the bank has developed online consumer loan options, which have expanded the availability of the product. “We extend up to 300,000 loans every day, with an average value of between Rmb2000 and Rmb3000," he adds.
While the number of loans being approved is rising, the total average sum of individual loans remains relatively low. A paper released in 2018 by Natixis states that currently there is no systemic risk from China's rising credit card debt, as the level of debt is small compared with the size of household assets. However, the report cautions that as the country shifts towards a consumption-based growth model, a “reckless” increase in credit card lending could become a serious issue. As credit card lending increases, the banks will have to increase their focus on ensuring the quality of the consumers who are borrowing.
More change to come
Even with the regulatory push towards consumer lending, some concerns are brewing over the impact it could have on NPLs. The National Audit Office reported at the start of 2019 that some banks in Henan province have seen 40% of their loans become bad debt during 2018, although it did not record how this was split between retail and corporate lending. While it remains unlikely that the Chinese government will allow these banks to go bankrupt, it does raise questions about how widespread the NPL issue is.
Rising household debt levels come amid worries of high unemployment in China. The National Bureau of Statistics Urban Surveyed Unemployment Rate was put at 5% in April 2019, a slight decline on the 5.2% seen the previous month. However, this government figure does not include rural or migrant workers.
While consumers are starting to worry about how they will pay off their debts, the Chinese government is not yet taking steps to curb consumption growth. Instead, the government increased the tax threshold for personal monthly income from Rmb3500 to Rmb5000, a move which means 80 million people no longer have to pay any income tax.
On top of this, banks will soon have a government-sanctioned tool for verifying the quality of their borrowers. The implementation of the China social credit rating system will look at personal credit in a new way, making use of the wide range of data available about individuals. The People's Bank of China has created a database of consumer payment histories, containing details on utility bill payments, which is governed by the newly established Baihang Credit Scoring. The move will give many Chinese consumers a credit score for the first time, and the tool will help banks to assess eligibility for lending.
This move towards greater digitisation of consumer data seems to fit in with the development of the mobile banking sector. KPMG’s Mr McSheaffrey says: “The consumer lending market, for both lending and debt services, is ripe for disruption. A lot of the changes will be leveraged via mobile.”
Mobile payments companies have already experimented in consumer lending in China. TenCent trialled the TenCent Credit system to users of the company's WeChat and QQ messaging platforms at the beginning of 2018. By assessing various aspects of the customer’s known data from mobile payment transactions to the quality of their social networks, customers could be offered a loan. Although the service was taken down after a few days, it gave a taste of what could be to come.
Quite how China moves forward with regards to retail banking and wealth management remains to be seen, but few seem to doubt that both will have a big impact upon the country's financial landscape.
