Mixed H1 performances for banks

By Li Xuanmin Source:Global Times Published: 2017/9/4 18:08:39

Mid-year statements show profit gains in contrast with revenue slumps, changes in assets

An employee from Bank of China shows rural residents in Dexing, East China's Jiangxi Province, how to apply for small loans via the bank's mobile application. File photo: VCG

China's 25 A-share listed commercial banks released their mid-year financial report cards at the end of August. While revenues of some joint-equity commercial banks slid in the first half, those of the four big banks surged partly thanks to rising market interest rates and narrowing net interest margins. Despite the differences in revenues, however, almost all commercial banks have achieved profit growth as their assets qualities were on the way toward improvements. As such, experts suggest that in the future, domestic banks should explore new growth engines such as the mass banking sector in order to dilute potential financial risks.

By the end of August, all 25 commercial banks that are listed on the Chinese mainland bourses had disclosed their mid-year financial statements, posting mixed performances for the first half of 2017 amid the central government's efforts to deleverage and curb financial risks.

Profits of the 25 A-share listed banks surged 4.92 percent year-on-year to 774.63 billion yuan ($118.29 billion) in the first six months, according to their financial statements.

In particular, profits from China's four major banks - Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China (ABC), China Construction Bank (CCB) and Bank of China (BOC) - stood at 511.92 billion yuan during that period, representing 66.09 percent of the total revenues.

However, in contrast to these profit gains, almost half of the banks, mostly joint-equity commercial banks, experienced revenue slumps during this same period.

Diversified revenue growth

"Domestic banks' first-half financial performances differed largely [from one another's]; revenues earned by major banks ballooned yet those of joint-equity commercial banks generally dived," Fang Heying, vice president of China CITIC Bank, said at the bank's mid-year meeting in August.

For example, the revenues of joint-equity and city commercial banks Industrial Bank, headquartered in Fuzhou, East China's Fujian Province, and China Minsheng Bank, headquartered in Beijing, declined 15.78 percent and 9.51 percent in the first half, respectively, while ICBC and ABC said their incomes climbed 1.25 percent and 6.36 percent, respectively, during that same period.

One of the reasons behind the sliding revenues of joint-equity commercial banks is the narrowed net interest margins  - or the difference between the interest rates banks pay for deposits and other funds  - and how much they collect from loans and investments, Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, told the Global Times on Sunday.

In the first half, the net interest margins of China's listed banks, except from those of the four largest banks, dropped 0.3 percent on average compared with the very beginning of 2017, according to a report released by the China Securities newspaper.

As China's central bank pushed up interest rates to contain leveraged investment, "small and medium-sized banks were under more pressure in the falling net interest margin," Dong said.

But China's bigger lenders, in contrast, took advantage of this opportunity and gained revenues thanks to their plentiful supply of low-cost deposits, which produced a "scale effect," Dong pointed out.

For example, as of the end of June, the net interest margin of BOC had slumped 0.06 percent to 1.84 percent, according to the company's financial statement. But the rate represented a 0.01 percent bounce back from that in January.

"For a bank that has 19 trillion yuan in assets, the 0.01 percent improvement can translate into 2 billion yuan in interest income," Zhang Qingsong, vice president of BOC, said at the bank's mid-year meeting.

Dong also indicated that strains rising from the government's crackdown on shadow banking will be mostly felt by small and medium-sized banks because they rely so such on fundraising channels in order to collect funds for off-balance-sheet investments.

Meanwhile, all domestic banks faced such issues as losing streams of non-interest incomes, including commission fees, service charges and insurance sales, after regulators mulled over strict supervision policies, experts noted.

In the first half, net incomes from ICBC's commission and service fees slipped from 5.45 billion yuan to 76.67 billion yuan, according to a statement the company sent to the Global Times over the weekend.

Nanjing Bank also experienced a similar trend whereby incomes from the commission and services sector declined 35 percent year-on-year.

Changes in assets

The 25 listed banks' asset and balance sheet growths have shown signs of deceleration, mainly as some interbank businesses are no longer feasible under the new regulatory framework rolled out this year which urges banks to cut off risky assets, Liu Xuezhi, a senior analyst at Bank of Communications, told the Global Times on Sunday.

As of the end of June, interbank assets and liabilities held by China's commercial banks had declined 5.6 percent and 2.3 percent year-on-year, respectively, according to a statement on the website of the China Banking Regulatory Commission (CBRC).

And for the first time in seven years, interbank borrowings recorded negative growths, according to data released by CBRC.

Under the new rule, almost all domestic banks have adopted a strategy to "slow down balance sheet expansion and adjust assets structures," Liu pointed out. For example, Industrial Bank, which used to be at an advantage due to strengths in the interbank business, saw its interbank financing business shrink by 270 billion yuan in the first half, the 21st Century Business Herald reported over the weekend.

At the same time, domestic banks' assets structures are improving, Dong said, noting that assets qualities have largely contributed to the 25 banks'  swelling profit-making ability.

Tian Huiyu, president of China Merchants Bank, also attributed the bank's two-digit profit growth in the first half to better assets structures, financial news website caixin.com reported over the weekend.

At the end of May, the proportion of nonperforming loans for all Chinese banks was 1.99 percent, down 0.16 percentage points from the same period last year, Reuters reported.

Domestic banks have also stayed on guard to protect themselves from bad loans. ABC, CCB and ICBC each raised their bad debt provisions by 10 percentage points in January to 181.8 percent, 160.15 percent and 145.81 percent, respectively.

However, senior bank executives predicted that pressure will persist in the second half in terms of managing bank assets.

"There are so many uncertainties facing global economic recovery, prompting quick changes in market expectations… Also, as supply-side reform deepened and companies with overcapacity were forced out of the market, banks will still be exposed to high credit risks in the near future," Pan Yuehan, chief risk officer of BOC, said at the bank's mid-year work meeting.

Against the backdrop, Liu suggests that domestic banks should focus on improving their major business sectors, while also beefing up efforts to explore new growth engines.

Within the mid-year reports, a number of banks, including Minsheng Bank, announced that they will strategically conquer the business sector with credit cards, small loans and consumer finance. Meanwhile, some unveiled plans for retail banking, eyeing up serving families and small businesses.

"The mass banking sector is the key to domestic banks' next stage transformation strategies," Dong said, urging banks to embrace new technology as a way to cut costs and further cultivate the market segment.


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