September 2015
Banking Newsletter Review and Outlook of China’s Banking Industry for the First Half of 2015
www.pwccn.com
Editorial Team： Editor-in-Chief：Jillson Jiang Deputy Editor-in-Chief：Jeff Deng Members of the editorial team： Jody Chen, Colin Hong, Ingree Li, Joanne Song, Daniel Ying, Javy Zhu (in alphabetical order of last names )
Advisory Board： Raymond Yung, Jimmy Leung, Margarita Ho, Richard Zhu, Michael Hu, William Yung, Vincent Yao, Yan Hu
Preface
We are pleased to present our Banking Newsletter (the Newsletter), PwC’s analysis of China’s Listed Banks and the wider industry, which is now in its 24th edition. The analysis covers 21 large listed banks (hereafter referred to as ‘Listed Banks’) are defined by the China Banking Regulatory Commission (CBRC) with the following four categories; Large Commercial Banks (LCBs) Industrial and Commercial Bank of China Limited (ICBC) China Construction Bank Corporation (CCB) Agricultural Bank of China Limited (ABC) Bank of China Limited (BOC) Bank of Communications Co. Ltd (BOCOM)
Joint-Stock Commercial Banks (JSCBs) China Merchants Bank Co., Ltd (CMB) Industrial Bank (CIB) Shanghai Pudong Development Bank Co., Limited (SPDB) China CITIC Bank Corporation Limited (CITIC) China Minsheng Banking Corporation Limited (CMBC) China Everbright Bank Company Limited (CEB) Ping An Bank Co., Ltd (PAB) Hua Xia Bank Co., Limited (HXB) City Commercial Banks (CCBs)
Bank of Beijing Co.,Ltd. (BOB) Bank of Nanjing Co., Ltd. (NJB) Bank of Ningbo Co, Ltd. (NBB) Shengjing Bank Co, Ltd (SJB) Huishang Bank Corporation Limited (HSB) Harbin Bank Co., Ltd. (HRB) Bank of Chongqing Co., Ltd. (BCQ)
For more information, please talk to your PwC contacts or any of those listed in the Appendix as Banking and Capital Markets Contacts.
Rural Commercial Banks (RCBs) Chongqing Rural Commercial Bank Co., Ltd. (CQRCB) The total assets of these banks as of 30 June 2015, accounted for 79.44% of the assets of China’s commercial banking sector. Unless otherwise stated, all the information in this newsletter comes from publicly available sources, such as the Listed Banks’ interim reports and statistics published by regulatory bodies, and are presented in RMB where applicable. Banking Newsletter PwC
September 2015 3
Table of Contents
1. Executive summary
05 4.Differentiated operating strategies
41
Banking Newsletter PwC
2. Macro environment
11 5. Features
55
3. The “turning points” for banks
17 6. Outlook
71
September 2015 4
Executive Summary
•
Macro environment at a glance
•
Three “turning points” for banks
•
Banks are adopting differentiated operating strategies
•
PwC’s policy recommendations
•
Highlights of Listed Banks’ performance
Banking Newsletter PwC
September 2015 5
Macro environment at a glance
Slowing economic growth
•
Developed countries, especially the U.S. recorded resilient growth. While most countries in the Eurozone were growing against the backdrop of another Greek debt crisis, Japan’s growth fell back to negative territory in 2Q 2015.
PBoC cut its benchmark interest rates three times in 1H 2015, in an attempt to bring down the cost of borrowing. Prior cuts in November 2014, and subsequently in August 2015, mean that the PBoC has reduced interest rates five times in less than a year.
•
Most emerging market economies’ growth slowed, with China’s Gross Domestic Product (GDP) growth sliding to 7.00% in 1H 2015, from 7.40% in 2014.
The PBoC also lowered the deposit reserve requirement ratio (RRR) several times in 1H and August, to boost liquidity for the real economy.
•
In addition to introducing easing measures, the PBoC also continued to push forward interest rate reform in 1H 2015.
•
The global economy was recovering in 1H 2015, though with varied pace .
•
•
Ample liquidity •
•
Falling interest rates
Market liquidity remained stable in 1H 2015, as the PBoC continued to cut interest rates and RRR. By the end of June 2015, the balance of broad money supply (M2) reached RMB 133.30 tn, with year-on-year growth of 11.80%. The growth rate at the close of 1H was higher than it was at the end of March 2015. By the end of June 2015, the aggregate loan balance was RMB 94.40 tn, representing a growth of 12.50% year-onyear. Year-to-date new loans reached RMB 6.80 tn, the aggregate deposit balance was RMB 136 tn, reflecting growth of 10.60% year-on-year, while new deposits recorded RMB 11.5 tn.
Banking Newsletter PwC
Volatile stock & foreign exchange markets •
The daily average turnover of Shanghai and Shenzhen markets during 1H 2015, was RMB 1.2 tn, surging up by 542.40% compared to the same period in 2014. Market capitalisation increased by 132.40% year on year.
•
In May and June, both Shanghai and Shenzhen markets experienced a period of turbulence, particularly toward the end of June.
•
The foreign exchange market was another source of volatility and the PBoC launched another round of RMB exchange rate reform.
September 2015 6
Three “turning points” for banks
1 The aggregate net profit of the 21 Chinese Listed Banks in this report reached RMB 722.80 bn in 1H 2015, up 2.78% year on year. The growth was 8.00 ppts lower than the same period in 2014. Profit growth at the five Large Commercial Banks (LCBs) was 0.97%. Growth at the eight Joint-stock Commercial Banks (JSCBs)’s slowed by 8.24 ppts to 6.45%. The seven City Commercial Banks (CCBs)grew 15.24%.
Slowing earnings growth
Banking Newsletter PwC
2 Net interest margin (NIM) and net interest spread (NIS) narrowed at the five LCBs’. Four out of eight JSCBs’ NIM and NIS expanded, three remained unchanged and one narrowed. Two out of seven CCBs’ NIM and NIS expanded, two remained unchanged and two narrowed. RCB’s NIM and NIS narrowed slightly.
Narrowing interest margin
3 The 21 Listed Banks’ nonperforming loan (NPL) balance reached RMB 857.90 bn, 27.12% more than that in 2014. The aggregate NPL ratio was 1.44%, up .023 ppts from 2014. LCBs and JSCBs’ NPL growth were higher than other Listed Banks. Most Listed Banks’ “special mention” loans and overdue loans increased at a faster pace than other types, suggesting that credit risk has not been fully exposed.
Deteriorating asset quality September 2015 7
Banks are adopting differentiated operating strategies
During the economic downturn, Large Commercial Banks (LCBs) increased the amount of write-offs and transfers of NPL.
Large Commercial Banks
They are also looking at a wide range of opportunities related to the government’s policy and strategy as a way to diversify their businesses. For example, the “One Belt One Road” initiative offers a new path for overseas expansion and RMB internationalisation. Bank of China (BOC), for example, has 635 branches overseas as of June 2015. The Industrial and Commercial Bank of China (ICBC) added 64 more overseas branches in 1H 2015.
The rate cut by the PBoC impacted Joint-stock Commercial Banks (JSCBs). The proportion of investment in fixed income and beneficiary trust receipts and similar assets increased markedly, in an attempt to boost yield. Additionally, JSCBs are also intermediary fee based business.
City Commercial Banks
Banking Newsletter PwC
expanding
their
Joint-stock Commercial Banks
City commercial banks (CCBs) are leveraging their relative flexibility in asset allocation to enhance pricing advantage in support of their net interest margins. The pricing advantage is more evident in corporate loans. Some CCBs are looking at diversification. Bank of Beijing, for example, has built a comprehensive business platform ranging from insurance, funds, consumer finance, leasing and rural banking. Bank of Nanjing has also established a portfolio of asset management services, private equity funds, and a rural banking business. September 2015 8
PwC’s policy recommendations
01 Short-term
02 Mid-term
03
Explore viable NPL disposal alternatives • Lowering the entry barrier to encourage private and foreign investors. • Encourage new disposal alternatives such as securitisation. • Strengthen product design, promote investor suitability and ensure a robust legal framework.
Embrace government initiatives • Domestically, strengthen structural reform to support the ‘Made in China 2025’ vision. • Internationally, take full advantage of the excellent opportunity offered by the One Belt One Road initiative by adding overseas presence.
Secure a landscape for industry development • Be open to new financial institutions such as privately-owned banks. • Put in place detailed guidelines that balance risk control and innovation that will ensure robust and balanced growth for the Internet finance industry.
Long-term
Banking Newsletter PwC
September 2015 9
Highlights of Listed Banks’ performance
Listed Banks
Highlights in 1H 2015
ICBC
Largest asset size and net income
CCB
Highest ROA, core tier-1 capital adequacy and capital adequacy
ABC
Lowest liabilities cost
BOC
Most international with largest number of shareholders base
BOCOM
Highest yield on interest generating assets among LCBs
CMB
Highest proportion in personal banking income, lowest cost on personal deposits
CIB
Lowest proportion in deposits, highest proportion in interbank liabilities
SPDB
Fastest growth in bank card income
CITIC
Fastest fall in yield on deposits
CMBC
Largest share of fee and commission income Fastest rise in share of personal banking income, highest growth in wealth management service fee Fastest rise in the share of fee and commission income
CEB PAB HXB
NJB
Fastest rise in special mention loans and loans that were past due but not impaired Lowest ratio for special mention loans, largest decrease in special mention loans, lowest ratio for loans past due but not impaired Fastest growth in net interest income, fee and commission income, and total assets
NBB
Fastest growth in deposits
SJB
Fastest growth in net profit
HSB
Lowest cost to income ratio
HRB
Highest yield on interest generating assets, growth in loans
BOB
BCQ CQRCB
Highest ROE Highest NIM and NIS
Banking Newsletter PwC
September 2015 10
Macro environment
•
Slowing economic growth
•
Falling interest rates
•
Ample liquidity
•
Volatile stock & foreign exchange markets
Banking Newsletter PwC
September 2015 11
Slowing economic growth
The global economy was recovering in 1H 2015, though the pace of recovery varied by region. Developed countries, especially the U.S. recorded resilient growth, leading to a strong dollar appreciation and mounting expectation of an interest rate hike. Most countries in the Eurozone kept growing, albeit against the backdrop of the Greek debt crisis. However, Japan’s growth fell back to negative territory in 2Q 2015.
the central government’s target and substantially higher than most other global economies. India’s growth was strong in 2Q 2015. But both Brazil and Russia recorded negative growth. South Africa’s GDP continued to grow year-onyear in 2Q 2015, though quarter-on-quarter growth was negative.
Most emerging market economies’ growth slowed, with China’s Gross Domestic Product (GDP) growth sliding to 7.00% in 1H 2015 from 7.40% in 2014. The growth in 2Q 2015 (7.40%) was the same compared to 1Q 2015. China’s growth is on a downward trend, nevertheless, a 7.00% growth rate is still within
Table 1 GDP growth, developed Vs. emerging
Figure 1
Economy
Growth in Q2 2015
US
3.70%
Japan
-1.60%
Euro Area
1.50%
12%
UK
2.60%
10%
Germany
1.60%
France
1.00%
Spain
3.10%
China GDP growth since 1992
16% 14%
8% 6%
Italy
0.70%
4%
Greece
1.60%
2%
Brazil
-3.10%
Russia
-4.60%
India
7.00%
South Africa
1.20%
Source：Statistics authorities of the respective economies
Banking Newsletter PwC
2009 Q1, 6.60%
2015 Q2, 7.00%
0%
Source：National Bureau of Statistics Note: Growth covers the period from the beginning of the year to the end of the quarter. The growth of 2013 Q2 covers the first two quarters in 2013.
September 2015 12
Falling interest rates
Price levels in China were stable in 1H 2015, as a result of the economic downturn. The Consumer Price Index (CPI), a proxy that measures the inflation standing at 1.30% during the period, suggested a mild price hike. The Producers Price Index (PPI), a proxy that measures input prices, on the other hand, was -5.50%, suggesting the issue of excess capacity in the manufacturing sector remains. As the inflation was stable, the PBoC cut its benchmark interest rates three times in 1H 2015, in an attempt to bring down borrowing costs. This means that in addition to the rate cut in November 2014 and subsequently in August 2015, PBoC has cut the interest rates five times in less
Figure 2 CPI & PPI
than a year, with both the lending and deposit rates reaching a record low during the period. The PBoC has also lowered the deposit reserve requirement ratio (RRR) several times in 1H, and again in August 2015, in an attempt to boost liquidity for the real economy. In addition to the easing measures, the PBoC continued to forge ahead with the reform agenda in 1H 2015, lifting rate restrictions on the deposits with maturity over one year or longer, reflecting another step towards full liberlisation of interest rates.
Figure 3 RMB benchmark interest rates 13%
4%
12% 3%
11% 10%
2%
9% 8%
1%
7% 6%
0%
5% 4%
-1%
3% -2%
2% 1%
-3%
0%
-4% -5% CPI Source：National Bureau of Statistics
Banking Newsletter PwC
PPI
1-year deposite rate
1-year (and below) lending rate
Source：The People's Bank of China
September 2015 13
Ample liquidity
Market liquidity remained stable in 1H 2015, as the PBoC continued to cut interest rates and RRR. By the end of June 2015, the balance of broad money supply (M2) reached RMB 133.30 tn, a year-on-year growth of 11.80%. The growth rate was higher than it was by the end of March 2015.
By the end of June 2015, the aggregate loan balance was RMB 94.40 tn, representing a growth of 12.50% year-on-year. Year-to-date new loans reached RMB 6.80 tn, the aggregate deposit balance was RMB 136 tn, with growth of 10.60% year-on-year, and new deposits recorded RMB 11.5 tn.
The M2 to GDP ratio stood at 1.46, slightly higher than it was by the end of March 2015. According to the PBoC, as a result of the surge of loans and securities investments, M2 growth was slightly higher in 2Q than in 1Q. The increase of securities investments was primarily the result of a robust stock market.
Figure 4 M2 growth Vs. GDP growth 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00
Source：National Bureau of Statistics & the People’s Bank of China
Banking Newsletter PwC
September 2015 14
Volatile stock & foreign exchange markets
The Shanghai Stock Exchange Composite Index (SSECI) rose by 32.20% in the first six months of 2015, and the Shenzhen Stock Exchange Component Index (SZSECI) rose by 30.20%. The daily average turnover of Shanghai and Shenzhen markets during the first six months of 2015 was RMB 1.2 tn, up by 542.40% compared to the same period in 2014. Market capitalisation of Shanghai and Shenzhen stock exchanges reached RMB 47.20 tn by the end of June 2015, an increase of 132.40% year on year.
To stabilise the market, the PBoC, CSRC, CBRC, CIRC, SASAC, Huijing and MoF jointly announced measures in early July to restore market confidence which included encouraging large shareholders to increase stakes, rather than selling. The PBoC also agreed to improve liquidity. The foreign exchange market was another source of volatility, and PBoC launched another round of RMB exchange rate reform by depreciating the currency by over 2.00% in August 2015, leading to expectations of further depreciation.
In May and June, both Shanghai and Shenzhen markets experienced turbulence, especially during late June, which saw trading halted when stocks dropped by the daily limit of 10%. Figure 5 SSE Composite Index change SSE Composite Index
Figure 6 RMB exchange rate
Value traded (In billions)
5,500
1,600
5,000
1,400
4,500
1,200
4,000
1,000
3,500
800
3,000
600
2,500
400
2,000
200
1,500
0
6.45 6.40 6.35 6.30 6.25 6.20 6.15 6.10 6.05
Value traded Source：Shanghai Stock Exchange
Banking Newsletter PwC
Close Source：China foreign exchange trading system
September 2015 15
PwC
The “turning points” for banks •
Turing point 1：Slowing earnings growth
•
Turing point 2：Narrowing interest margin
•
Turing point 3：Deteriorating asset quality
Banking Newsletter PwC
September 2015 17
Turing point 1：Slowing earnings growth
The aggregate net profit of the 21 Listed Banks reached RMB 722.80 bn in 1H 2015, up 2.78% year on year. The growth was 8.00 ppts lower than the same period in 2014, due to the economic downturn, PBoC’s rate cuts and the further liberalisation of interest rates. Profit growth for the five Large Commercial Banks (LCBs) was below 2.00%. For eight Jointstock Commercial Banks (JSCBs), the profit growth rate slowed to a single-digit level. Seven City Commercial Banks (CCBs) recorded a relatively small slowdown of profit growth. While most banks recorded slower growth in net profit, BOB, NJB and SJB remained resilient, with double digit growth. In addition, PAB, NBB and BCQ all recorded profit growth over 10.00% . The profit growth trends in 1H 2015, show that the smaller sized banks such as JSCBs and CCBs maintained a relatively high growth rate. On the other hand, LCBs and larger JSCBs’ profit growth appear to have reached a turning point.
Banking Newsletter PwC
Figure 7 BOC BOCOM CCB ICBC ABC PAB CIB CMB HXB SPDB CMBC CEB CITIC SJB NJB NBB BOB BCQ CQRCB HSB HRB
Listed Banks net profit growth, 1H 2015 1.69% 1.66% 0.97% 0.70% 0.48% 15.02% 8.93% 8.68% 7.16% 5.51% 4.53% 2.49% 2.43% 27.75% 24.54% 15.58% 13.62% 10.27% 8.81% 8.20% 6.91%
Table 2 Listed Banks net profits, 1H 2015 Listed Bank Net profit（millions） ICBC 149,426 CCB 132,244 ABC 104,564 BOC 94,986 BOCOM 37,506 Large Commercial Banks 518,726 CMB 33,169 CIB 27,984 SPDB 24,126 CITIC 22,969 CMBC 27,272 CEB 16,267 PAB 11,585 HXB 9,312 Joint-stock Commercial Banks 172,684 BOB 10,062 NJB 3,601 NBB 3,567 SJB* 3,201 HSB* 3,073 HRB* 2,132 BCQ* 1,838 City Commercial Banks 27,474 CQRCB 3,919 All Listed Banks 722,803
YoY growth 0.70% 0.97% 0.48% 1.69% 1.66% 0.97% 8.68% 8.93% 5.51% 2.43% 4.53% 2.49% 15.02% 7.16% 6.45% 13.62% 24.54% 15.58% 27.75% 8.20% 6.91% 10.28% 15.24% 8.81% 2.76%
% change -6.45 -8.20 -12.17 -9.28 -4.01 -8.35 -7.51 -9.00 -11.75 -6.21 -6.52 -3.76 -18.72 -11.92 -8.24 +0.15 +5.21 -2.77 +11.86 -7.64 -18.91 -7.90 -1.37 -3.05 -8.00
September 2015 18
Profitability on a downward trend
Profitability at most of the Listed Banks’ exhibited a downward trend in 1H 2015, as a result of slowing earnings growth: both return on assets (ROA) and return on equity (ROE) were lower year on year.
Figure 8 Profitability – Return on assets, ROA 1.8% 1.7% CCB 1.6%
BCQ
CMBC
ICBC
1.5%
That said both BOB and NBB saw their ROA rise slightly over the period. NJB was the only bank to see its ROE rise. All three banks recorded a relatively higher net profit growth in 1H 2015.
ABC
1.4%
CMB CIB
CQRCB
BOB
BOC BOCOM
1.3%
CEB
SJB HRB
NBB
1.2%
CITIC NJB
1.1% SPDB
1.0%
HSB
PAB HXB
0.9% 0.8% 2015 1H
Figure 9
2014 1H
Profitability – Return on equity, ROE
26% CMBC CIB 24%
22%
BCQ
ABC ICBC CCB
CMB SPDB
HXB CEB
20%
NJB
BOC 18%
SJB
BOB
NBB HSB
BOCOM CQRCB
16%
CITIC PAB
14% HRB 12% 2015 1H
Banking Newsletter PwC
2014 1H
September 2015 19
Income grew more slowly than expense, with sluggish net interest income growth
Most Listed Banks’ income growth was slower than that of their expense in 1H 2015. JSCBs and CCBs saw a relatively higher growth rate, with NJB being the highest. LCBs saw a relatively lower growth rate of below 10.00%.
was because the proportion of fee and commission income was low as a percentage of their operating income. Both net interest income and fee and commission income growth was low for the five LCBs.
Listed Banks’ slower income growth was due to a lower growth in net interest income. While those JSCBs and CCBs recorded high growth in fee and commission income, their operating income growth remained relatively low. This
Figure 10 Net interest income Vs. Net fee income growth, 1H 2015 110% 100% 90% 80% 70% 60% 50%
40% 30% 20% 10% 0% -10% -20%
Banking Newsletter PwC
Net interest income
Net fee and comission income
September 2015 20
Loan provisions grew at a faster pace
The fact that expense growth Figure 11 Growth on allowance for impairment losses, 1H 2015 was higher than income in 1H 2015 can be attributed to higher 290% 270% growth in allowance for 250% impairment losses, as most 230% banks increased their provisions 210% in response to a deterioration of 190% non performing loans caused by 170% the economic downturn. 150% 130% 110% 90% 70% 50% 30% 10%
-10%
Increased allowance for impairment losses led to a higher proportion of preprovision profit eroded by credit asset quality concerns. This was most evident in JSCBs.
Figure 12 Allowance for impairment losses as % of profitbefore-provisions, 1H 2015 35% 30% 25% 20% 15% 10% 5% 0%
Banking Newsletter PwC
September 2015 21
Cost to income ratio continued to fall
Listed Banks imposed tough Figure 13 Cost to income ratio measures on cost control in light of the economic downturn, 40% HXB PAB which led to stable growth on cost items other than allowance for impairment losses in 1H 35% 2015. Most banks saw a fall in cost to income ratio in 1H 2015, except BOCOM and BOB. Among the Listed Banks, JSCBs saw the highest growth in staff costs, while LCBs’ saw slow or even negative growth in staff costs.
ABC 30%
25%
CQRCB NBBHRB
CMBC CEB CITIC CMB
BOC BOCOM ICBC CCB
NJB BCQ HSB
SPDB CIB
SJB BOB
20%
15% 2015 1H
2014 1H
Figure 14 Components of business & administration expenses, 1H 2015 50% 40% 30% 20% 10% 0% -10% -20% -30% Staff costs
Banking Newsletter PwC
Depreciation and amortisation
General operating and administrative expenses
September 2015 22
Turing point 2：Narrowing interest margin
Listed Banks’ net interest margin (NIM) and net interest spread (NIS) presented a narrowing trend in 1H 2015. While LCBs, CCBs and Rural Commercial Banks’ (RCBs) saw their NIM narrow, JSCBs’ NIM remained flat.
Listed Banks’ NIM, 1H 2015
2.49%
2.63%
-0.12ppts Large Commercial Banks
-0.12ppts
2.49% no change
Joint-stock Commercial Banks
Banking Newsletter PwC
City Commercial Banks & Rural Commercial Banks
September 2015 23
JSCBs’ NIM remained stable
All of the five LCBs’ NIS narrowed in 1H 2015. Among eight JSCBs, CMB, CIB, CEB and PAB narrowed, while SPDB and CITIC remained flat, CMBC also narrowed.
Figure 15 Net Interest Spread
3.1% 2.9%
Among seven CCBs, BOB and NJB’s NIS expanded, NBB and HSB remained flat, SJB, HRB and BCQ narrowed. CQRCB’s NIS narrowed also. Most banks’ NIM presented the same trend as that of NIS.
CQRCB
3.3%
2.7%
ABC CCB
CMB
ICBC
2.5% 2.3%
HRB CMBC CITIC
PAB HXB SPDB
BOCOM BOC
2.1%
BCQ
HSB NBB
NJB
SJB
CEB
CIB
BOB 1.9% 1.7% 2015 1H
Figure 16
2014 1H
Net Interest Margin
3.5% 3.3% 3.1% 2.9% 2.7%
CQRCB
ABC
BCQ CMB
CCB
HRB
ICBC
NBB
SPDB 2.5%
BOCOM BOC
2.3%
HXB PAB
CITIC
HSB
NJB
CIB CMBC
2.1%
CEB
SJB
1.9% 1.7% 2015 1H
Banking Newsletter PwC
2014 1H
September 2015 24
Yield on interest-generating assets fell
All Listed Banks’ saw lower yield on interest-generating assets in 1H 2015, compared to 1H 2014. LCBs recorded a slight fall in yield, with the drop being more evident for JSCBs and CCBs’. CMBC, CIB and NBB’s had the most evident decline over the period. In terms of yield, CCBs and JSCBs were higher than that of LCBs.
Figure 17 Yield on interest-generating assets - overall 6.5% BCQ CQRCB PAB
6.0%
CMBC HXB 5.5%
NBB HRB
CEB CITIC
SJB NJB
CIB
BOCOM
HSB
5.0% CCB 4.5%
ABC
CMB
BOB
BOC ICBC
4.0%
3.5% 2015 1H
Almost all banks had lower loan yield in 1H 2015, than in 1H 2014, except for PAB. PAB restructured its loan book during 1H 2015, and improved its pricing ability, which led to a higher loan yield.
Figure 18
2014 1H
Yield on interest-generating assets - loans
8.5% SJB HRB
PAB
8.0% 7.5%
SJB recorded the highest yield in loans followed by PAB. It is worth noting that the banks with a higher yield in loans were CCBs and RCBs. This reflects the ability of the smaller sized banks to adapt their loan portfolio quickly during the economic downturn, and charging customers with higher yields.
CQRCB
7.0%
HXB
6.5%BOCOM ABC CCB ICBC 6.0% 5.5%
CIB CEB CMB CITIC
BCQ BOB
BOC
5.0% 4.5% 2015 1H
Banking Newsletter PwC
HSB NBB
CMBC
2014 1H
September 2015 25
Excellent loan pricing for CCBs and RCBs
The pricing advantage of CCBs and RCBs was most evident in the corporate banking business. yield on corporate loans for NJB and HSB in 1H 2015, remained comparable to 1H 2014, even though PBoC had cut the benchmark interest rates on five occasions over past year. Citic’s yield on corporate loans in 1H 2015 changed slightly. In 1H 2015, Smaller sized banks in terms of assets, recorded a higher yield on corporate loans, while large banks saw a relatively lower yield on corporate loans.
Figure 19 Yield on interest-generating assets – corporate loans 8.5% SJB 8.0% HRB 7.5%
HSB
7.0% BOC 6.5%
CQRCB NBB
HXB ABC CCB ICBC BOCOM
CMBC
CIB CITIC
NJB
CEB
PAB
6.0%
SPDB 5.5% CMB 5.0% 4.5% 2015 1H
With regard to personal loans, PAB’s yield was the highest (9.99%) among Listed Banks in 1H 2015, well above that of HRB’s. There were no evident pricing advantages for CCBs and RCBs’ in personal loans. The yield of CCBs and RCBs were the same, and higher than the yield of LCBs’.
2014 1H
Figure 20 Yield on interest-generating assets – personal loans 10.5%
PAB
9.5%
NBB
8.5%
7.5% BOCOM 6.5%
CMB CMBC
HRB
CIB SPDB ABC CCB BOC ICBC
NJB CEB
CQRCB
HSB HXB
CITIC
5.5%
SJB
4.5% 2015 1H
Banking Newsletter PwC
2014 1H
September 2015 26
CCBs and RCBs recorded higher yield on investments
Most Listed Banks’ yield on investments remain unchanged in 1H 2015.
Yield on interest-generating assets – investments
Figure 21 7.0%
CCBs and RCBs’ yield on investments were higher than that of JSCBs and LCBs.
HRB CIB 6.0%
NJB
BCQ
SPDB
NBB
CQRCB
CEB
SJB
HSB
5.0% CMB BOCOM
CCB HXB CMBC
ICBC
4.0%
BOB BOC
PAB
ABC
3.0%
Most Listed Banks’ yield on interbank assets were lower in 1H 2015, as a result of the market liquidity stemming from PBoC’s growth-friendly monetary environment.
CITIC
2015 1H
2014 1H
Figure 22 Yield on interest-generating assets – interbank activities 7.0%
HRB 6.0%
CIB HXB
BCQ
HSB
CEB CMB
5.0% BOCOM
CQRCB 4.0%
ABC
PAB
NBB
3.0% ICBC 2.0%
BOC
1.0% 2015 1H
Banking Newsletter PwC
2014 1H
September 2015 27
Cost on interest-paying liabilities fell
Listed Banks’ cost on interestpaying liabilities presented different trends in 1H 2015. Thanks to a large customer base, LCBs’ costs on interest-paying liabilities remained stable in 1H 2015. However, costs for both JSCBs and CCBs in 1H 2015 were lower than 1H 2014, as the banks seized the opportunity to absorb funds from interbank markets rather than from retail customers.
Figure 23 Cost on interest-paying liabilities – overall
4.0%
SJB HRB BCQ
PAB CEB
3.5%
NBB
CMBC
HSB
CIB
3.0% BOCOM
NJB
CITIC HXB
BOB CQRCB
2.5% CCB
CMB ABC
2.0%
BOC
ICBC
2015 1H
1.5%
The costs on deposits for Listed Banks rose in 1H 2015, as interest rate liberalisation deepened, and despite the fact that the PBoC cut the benchmark interest rates. The cost on deposits rose for Most LCBs, except ICBC. CMB, Citic, CEB, BOB and HSB all saw their costs on deposits fall in 1H 2015, compared to 1H 2014.
2014 1H
Figure 24 Cost on interest-paying liabilities – deposits SJB
3.5%
3.0% PAB
BCQ
CEB
CIB 2.5%BOCOM
HSB HRB
ICBC BOC 2.0%
南京 CITIC CMBC
CCB ABC
BOB NBB
HXB
CMB CQRCB
1.5%
2015 1H
Banking Newsletter PwC
2014 1H
September 2015 28
Cost on interest paying liabilities - corporate and personal loans
Listed Banks’ cost on corporate deposits remained broadly stable in 1H 2015, with ABC, CIB, PAB, SJB, HRB and CQRCB rising slightly, and the rest either remaining unchanged or falling.
Figure 25 Cost on interest-paying liabilities – corporate deposits 3.5%
SJB
3.0%
BCQ HRB
Citic and HSB’s cost on deposit recorded a relatively faster fall.
PAB
CEB HSB
CIB CMBC
2.5%BOCOM
CMB
ICBC
CITIC
NBB
CCB
2.0%
ABC 1.5% CQRCB 1.0% 2015 1H
In terms of personal deposits, most Listed Banks saw an upward trend in costs during 1H 2015, most notably for CCBs and RCBs. It is worth noting that CMB was not only among the few banks to see cost on deposits fall, but also had among the lowest cost on deposits of all Listed Banks. In addition, both Citic and CEB saw lower cost on deposit in 1H 2015, than in 1H 2014.
2014 1H
Figure 26 Cost on interest-paying liabilities – personal deposits SJB 3.5% CEB BCQ
CITIC
3.0%
NBB
2.5%
HRB
BOCOM
PAB CMBC
CCB 2.0%
CQRCB CIB
ICBC
HSB
ABC CMB
1.5%
1.0% 2015 1H
Banking Newsletter PwC
2014 1H
September 2015 29
Turing point 3：Deteriorating asset quality
The Listed Banks continued to experience deteriorating credit asset quality in 1H 2015, with the 21 banks’ non-performing loan (NPL) balance reaching RMB 857.90 bn, 27.12% more than in 2014. The JSCBs recorded the highest growth rate in NPL balance, which was 28.80%, rising to RMB 196 bn in 1H 2015. The LCBs’ NPL balance grew 26.96% to RMB 642.60 bn. The CCBs’ NPL balance grew 22.15% to RMB 17.03 bn.
NPL ratio, 30 June 2015 1.49% +0.24ppts
0.91% +0.07ppts
Large Commercial Banks
City Commercial +0.22ppts Banks & Rural Commercial Joint-stock Banks Commercial Banks
1.36%
Table 3 Non-performing loan balance & growth In millions ICBC CCB ABC BOC BOCOM Large Commercial Banks CMB CIB SPDB CITIC CMBC CEB PAB HXB Joint-stock Commercial Banks BOB NJB NBB SJB* HSB* HRB* BCQ* City Commercial Banks CQRCB All Listed Banks
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As of 30 June 2015 163,495 144,359 159,543 125,053 50,153 642,603 39,615 22,203 27,742 30,476 26,423 20,141 15,729 13,668 195,997 6,787 1,942 2,052 777 2,350 2,079 1,039 17,027 2,258 857,885
As of 31 December 2014 124,497 113,171 124,970 100,494 43,017 506,149 27,917 17,544 21,585 28,454 21,134 15,525 10,501 10,245 152,905 5,783 1,639 1,863 696 1,826 1,400 732 13,939 1,887 674,880
Growth 31.32% 27.56% 27.67% 24.44% 16.59% 26.96% 41.90% 26.56% 28.52% 7.11% 25.03% 29.73% 49.79% 33.41% 28.18% 17.36% 18.50% 10.17% 11.58% 28.70% 48.50% 41.99% 22.15% 19.65% 27.12%
September 2015 30
NPL ratio and balance continued to rise
The Listed Banks recorded an Figure 27 Change of NPL ratio aggregate NPL ratio of 1.44% in 1H 2015, up .023 ppts from 2014. 2.0% The NPL ratio of most banks was higher in 1H 2015, than in 2014. The exception was SJB. The NPL ratio of CMB, PAB and ABC rose rapidly over the period.
ABC 1.8% 1.6%
CCB
ICBC
CMB CEB
1.4%
HXB
1.2%
Among all listed banks, SJB recorded the lowest NPL ratio.
1.0%
BOC
BOCOM
PAB
HRB SPDB
CITIC HSB
CMBC
BOB
CIB
0.8%
NJB
BCQCQRCB NBB
0.6%
SJB
0.4% 0.2% 0.0% 2015 1H
The NPL balance of most Listed Banks grew by double-digit rates in 1H 2015, with PAB and HRB having the highest growth.
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2014
Figure 28 NPL balance growth, 1H 2015 ICBC ABC CCB BOC BO… PAB CMB HXB CEB SPDB CIB CMBC CITIC HRB BCQ HSB CQ… NJB BOB SJB NBB
31% 28% 28% 24% 17% 50% 42% 33% 30% 29% 27% 25% 7%
48% 42% 29% 20% 19% 17% 12% 10%
September 2015 31
Both corporate and personal NPL ratio deteriorated
By customer types, the LCBs recorded the highest NPL ratio for corporate loans in 1H 2015, followed by the JSCBs.
Figure 29 Change of NPL ratio – corporate loan
The CCBs and RCBs’ corporate NPL were relatively lower.
2.5%
Most Listed Banks’ corporate NPL rose except Citic and CQRCB. CMB’s NPL ratio saw the most rapid rise. SJB’s corporate NPL remained the same.
2.0%
3.0%
ABC BOC
CCB
CMB CEB
ICBC
CMBC CITIC SPDB
1.5%
HSB BOB
BOCOM CIB
1.0%
NJB CQRCB
PAB BCQ
SJB
0.5%
HRB
0.0% 2015 1H
2014
Note：HXB and NBB did not disclose this ratio.
Personal NPL was higher for most Listed Banks during 1H 2015. SJB, however; was lower.
Figure 30 Change of NPL ratio – personal loans 2.50% PAB
HRB
2.00%
1.50% CMBC CITIC
ICBC BOCOM ABC
CEB
1.00% BOC 0.50%
CCB
SPDB CMB CIB
NJB
SJB
CQRCB
BCQ HSB
BOB
0.00% 2015 1H 2014 Note：HXB and NBB have not disclosed change of NPL ratio for the period.
Banking Newsletter PwC
September 2015 32
Special mention loans on the rise
Most Listed Banks’ loans classified as “special mention” (second class according to 5 tier loan classification) were on an upward trajectory in 1H 2015, with BOCOM and the JSCBs rising most significantly. Smaller banks such as PAB, CEB and HXB recoded a relatively higher ratio for special mention loans.
Figure 31 Change of special mention loan ratio 5.0% PAB HXB
4.5% ABC
CITIC 4.0%
ICBC
CMBC SPDB
BOCOM
3.5%
CCB
3.0%
CIB
CEB
CQRCB BCQ
BOC
2.5%
2.0%
NJB CMB
1.5%
NBB
HSB
BOB HRB
1.0% 0.5% SJB 0.0% 2015 1H
2014
Figure 32 Distribution of loans by 5-tier classification, as of 30 June 2015 100% 1.11%
99% 1.05%
1.69%
98%
2.30% 2.30%
97% 96%
2.79%
2.42% 2.73% 3.24%
3.61%
3.20% 3.92%
2.45%
2.31% 2.57% 2.05%
3.42%
4.31% 4.46% 4.30%
4.13%
95% 94% 93%
92%
Loss
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Doubtful
Substandard
Special mention
Normal
September 2015 33
Overdue loans growing rapidly
Trends in overdue loans, another indicator of credit asset quality, suggest that risk is rising as most banks’ overdue loan balance and ratio were higher in 1H 2015 than in 2014. BCQ recorded the highest growth in overdue loan balance, of nearly 200% in 1H 2015, while the overdue loan ratio rose by 2.43 ppts to 3.82%. In addition, HXB, BOCOM, CMB, CIB and CMBC all saw their respective overdue loan ratios rise rapidly in 1H 2015.
Figure 33 Change of overdue loan ratio 6% PAB HXB
5%
4% BOCOM ABC 3% ICBC 2%
CEB CMBC CITIC CIB CMB
BCQ HRB
SPDB HSB CQRCB NJB
CCBBOC
BOBNBB SJB
1%
0%
2015 1H
2014
Figure 34 Overdue loan balance growth, 1H 2015 BOCOM 78.33% CCB 51.67% ABC 43.41% BOC 39.08% ICBC 37.37% HXB CIB 62.21% SPDB 55.77% CMB 57.36% CMBC 52.24% PAB 31.78% CEB 29.02% CITIC 9.01% BCQ SJB HSB 73.62% CQRCB 72.53% HRB 47.46% NJB 30.07% BOB 22.58% NBB -14.65%
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108.44%
198.93% 130.46%
September 2015 34
Loans that past due but not impaired increased
Most Listed Banks’ proportion of loans that past due but not impaired increased in 1H 2015, with JSCBs’ ratio rising notably. The ratio for LCBs, CCBs and RCBs were roughly the same.
Figure 35 Change of past-due-but-not-impaired loans ratio PAB
4%
HXB
3%
CEB CMBC CITIC CIB
2% BOCOM
HRB
SPDB
CQRCB HSB
ICBC ABC 1%
CCB
NBB BOB
CMB
BCQ
NJB SJB
0% 2015 1H
2014
Figure 36 Total credit risk exposures of loan, as of 30 June 2015
3.79% 0.95% 1.10%
0.65%
1.67%
2.10%
2.28%
2.53%
2.74%
3.37% 2.23%
1.52% 0.57%
Neither passed due nor impaired
Passed due but not impaired
0.77%
1.32% 0.66%
1.38%
Impaired
Note：BOC,CMB, SJB and BCQ did not disclose such information
Banking Newsletter PwC
September 2015 35
Overdue loans grew faster than NPL
While NPL exhibits the current Figure 37 NPL ratio Vs. overdue loan ratio, 1H 2015 picture of banks’ credit asset 6% quality, overdue loans can be a more useful indicator to predict future asset quality. 5% Both JSCBs and smaller CCBs’ had a much higher overdue loan ratios than NPL ratios.
4%
3%
2%
CMB CCBBOC BOCOM CMBC PAB CITIC SPDBHRB ABC NJB BCQNBB CEB HXB ICBC CIB 1% SJB HSB BOB CQRCB
0% NPL ratio
The overdue loan growth at most of the Listed Banks had grown much faster than NPL in 1H 2015, which suggests the Listed Banks’ credit asset quality risk has not yet been fully exposed.
Overdue loan ratio
Figure 38 NPL growth Vs. overdue loan growth, 1H 2015 199%
130% 108%
78%
74%
73%
62% 57% 56%
48% 52% 50% 52% 47% 43%39% 42% 42% 37% 30% 33% 31%28%28% 30% 29% 27%29% 25% 29%32% 23% 24% 20% 19% 17% 17% 9% 12% 10% 7% -15%
NPL growth
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Overdue loan growth
September 2015 36
Overdue loans with 90 days above increased
There is a commonly held belief that the longer an overdue period is, the lower the probability will be for the borrowers to repay loans. Analysis of the structure of overdue loans suggests that the bulk of overdue loans are those with overdue periods longer than 90 days. Consequently, a bank’s credit asset quality might further deteriorate if overdue loans turn into nonperforming loans.
Figure 39 Breakdown of overdue loans by days, as of 30 June 2015 5%
4%
3% 6%
1% 8%
15% 14% 14%
1%
1%
11%
21%
1% 14%
1%
1%
2%
1% 9%
10% 12%
12%
12%
22%
26%
1%
2% 7%
9%
18%
4% 15%
33%
30% 46%
43% 41%
11%
16% 25%
28%
37%
58%
7%
25%
30%
29%
44% 37% 27% 55%
50% 39%
47%
55%
29% 56%
46%
54%
53% 38% 39% 42% 36%
43%
60%
57% 49%
46% 49% 30%
37% 35%
66% 55%
36% 25%
17%
1-90 days
91 days -1 year
1-3 years
over 3 years
Note：BOC only disclosed overdue loans by two categories: below 90 days and over 90 days.
Banking Newsletter PwC
September 2015 37
Provision levels showed alarming signal
Provision levels of the Listed Banks showed an alarming signal in 1H 2015, according to two main indicators, namely; allowance to total loans ratio and provision coverage ratio.
Figure 40 Allowance to total loans ratio
The change for allowance to total loans ratios were small, with CMB, SPDB and PAB being relatively evident.
4.0%
5.0% 4.5% ABC
CQRCB NJB BOB
3.5% SPDB CMB CIB
3.0% CCB 2.5%
BOCOM ICBC BOC
HXB PAB CITIC
NBB BCQ CEB
2.0%
CMBC
HRB
SJB
HSB
1.5% 2015 1H
The provision coverage ratios at most Listed Banks were lower in 1H 2015, compared to 2014. This is due to an increasing loan impairment charges. Ratios at BOC and CEB were very close to the regulatory threshold of 150%.
2014
Figure 41 Provision coverage ratio 500% SJB
450%
CQRCB
400%
NJBBOB
350%
NBB
300% 250% 200% 150%
ABC
CIB HXB CMB SPDB PAB
BCQ HSB CMBC
CCB BOCOM ICBC BOC
CITIC HRB
CEB
100% 50% 0%
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2015 1H
2014
September 2015 38
Capital adequacy remains stable
Most of the LCBs’ had a higher core tier-1 capital adequacy ratio (CAR) in 1H 2015, than in 2014. But some JSCBs and CCBs had a core tier-1 ratio that was lower in 1H 2015 than in 2014. This suggests small and mid-sized banks have been facing more pressure with regard to capital.
Figure 42
Core tier 1 capital adequacy ratio
14%
13% CCB ICBC
12%
HRB
CQRCB
BOCOM 11%
BOC
CMB BCQ SJB NJB HSB
10% ABC
CEBCMBC CITIC
9%
HXB SPDB
NBB
PAB
BOB
8% CIB 7% 2015 1H
A number of Banks saw capital adequacy ratio (CAR) fall in 1H 2015.
2014
Figure 43 Capital adequacy ratio 15% CCB ICBC
14%
BOC BOCOM ABC
13%
NBB CMB
SJB HRB
NJB 12%
11%
CITIC CEB CMBC
BOB
SPDBCIB PAB
CQRCB
BCQ
HSB HXB
10% 2015 1H
Banking Newsletter PwC
2014
September 2015 39
Differentiated operating strategies • Overview • Large commercial banks • Joint-stock commercial banks
• City commercial banks & rural commercial banks
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September 2015 41
Overview: Income mix exhibited differentiated growth patterns
China continued to push through Figure 44 Operating income – by types, 1H 2015 economic structural reform and 8% 7% 3% 11% 6% 3% 2% 7% 3% 4% 4% 6% 4% 11% 1% interest rate liberlisation in 1H 19% 12% 2015 under the “new normal” 16% 17% 19% 19% 9% 21% 21% 30% environment. Listed Banks’ 22% 20% 20%30% 29% 25% 21% 33% profitability continue to slow as operating income growth slowed and risk on the rise. Against this backdrop, we noticed that different groups of Listed Banks, i.e. Large Commercial Banks (LCBs), Joint-stock Commercial Banks (JSCBs), City Commercial Banks and Rural Commercial Banks (RCBs) have been adopting differentiated operating strategies. Interest income is still Listed Banks’ major source of income. But as restrictions on interest rates continued to be lifted, most banks have been transforming themselves into a “less capitalintensive” business model by increasing the proportion of fee and commission income as well as investment income. As a result those banks have built a diversified business portfolio.
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80% 71% 72%
68%
73%
63%
71% 61%
71% 67%
78%
-1%
Net interest income
87%
82%
82%
76% 75%
Net fee and comission income
80% 84%
2% 2% 1% 17%
6% 18%
93% 81%
80%
-4%
Other non-interest income
Note：Other non-interest income include: net trading gain/(loss),revaluation loss/(gain) on financial instruments at fair value through profit or loss, net foreign exchange gain/(loss), Other operating income.
September 2015 42
Overview: Income mix exhibited differentiated growth patterns (continued)
Analysis of business segments Figure 45 Operating income – by businesses, 1H 2015 suggested that most banks 3% 2% 1% 1% 3% 5% 7% still heavily rely on 5% 8% 8% 6% 5% 8% corporate banking business 18% 26% 18% 25% 15% 13% 14% 14% 27% 17% 31% except CMB and CQRCB. 35% 31% 21% 37% 35%
The proportion of personal banking business for LCBs and JSCBs were higher than that of CCBs. Likewise, the proportion of personal banking business for LCBs were higher than that of JSCBs. This was due to the fact that larger banks have a more extensive branch network and easier to build retail customer base.
37%
37% 27%
35% 34% 29%
43% 23%
25% 9%
29% 5%
12%
17% 20%
32%
45% 45%
54%
53% 43%
50%
51%
58%
66% 51%
54%
59% 56%
61% 48%
37%
33%
-4%
Corporate banking
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28%
15%
Personal banking
Treasury
Others
September 2015 43
Overview：assets & liabilities portfolio revealed differentiated strategies
Listed Banks’ assets and Figure 46 Total assets, as of 30 June 2015 liabilities revealed 3% 3% 3% 5% 4% 3% 4% 3% 3% 6% 3% 5% 2% 2% 2% 2% 2% 2% 6% 2% 2% differentiated strategies too. 10% 10% 9% 11% 12% 11% 12% 9% 11% 12% As of 30 June 2015, 21 Listed 14% 12% 12% 14% 16% 14% 16% 14% 16% 11% 12% 5% Banks’ total assets were RMB 10% 6% 5% 11% 11% 13% 14% 13% 8% 12% 20% 110.34 bn, up by 9.59% from the 8% 15% 10% 8% 9% 17% 22% 19% 21% end of 2014. CCBs recorded the 31% 21% fastest growth followed by JSCBs, 20% 34% 21% 22% 20% 25% 28% 23% 49% 32% both of which grew at a double 22% 24% 29% 17% 41% 51% 40% 25% 25% digit rate. While loans were still the largest portion of LCBs’ assets, JSCBs such as CIB, and CCBs such as NJB, NBB and SJB have had investments to eb the largest portion.
51%
54% 48%
53% 51% 49%
46%
49%
44% 46% 45%
51%
44%
33%
Loans
Investments
27%
Interbank
34% 32%
41% 38% 40% 38%
Cash&deposits with central bank
Others
Figure 47 Total liabilities, as of 30 June 2015 2% 2% 4% 3% 2% 6% 5% 6% 4% 4% 4% 2% 2% 2% 5% 2% 2% 2% 3% 2% 6% 1% 1% 2% 4% 3% 3% 4% 5% 2% 3% 5% 5% 9% 2% 1% 1% 1% 3% 5% 2% 8% 9% 12% 11% 15% 14% 22% 14% 22% 22% 26% 23% 33% 23% 25% 22% 24% 25% 19% 25% 23% 23% 41% 21%
82% 78% 81% 77%
69% 72%
68% 70%
66% 68% 68%
73%
65%
72%
69%
65% 65%
68%
72%
58% 51%
Deposits
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Interbank
Debt issued
Due to central bank
Others
September 2015 44
Large commercial banks: Income mix remained stable
Compared with last year, LCBs income structure are generally the same in 1H 2015. BOC’s fee and commission income fell in 1H 2015. According to the bank, it was mainly due to the fulfilment of social responsibility and support of real economy and small and medium sized enterprises by waving service fee.
Figure 48 Operating income – by income nature 5%
8%
5%
7%
3%
4%
6%
11% 11%
17% 18%
22% 22%
20% 21%
71% 72%
72% 74%
2015 2014 1H 1H
2015 2014 1H 1H
2015 2014 1H 1H
2015 2014 1H 1H
2015 2014 1H 1H
ICBC
CCB
ABC
BOC
BOCOM
Net interest income
20% 17% 21% 22%
80% 79%
73% 74%
68% 67%
LCBs’ share of net interest in total operating income remained at around 73%.
Net fee and comission income
Other non-interest income
Compared with JSCBs and CCBs, Figure 49 Operating income – by business segments LCBs started earlier in 3% 3% diversification, with businesses 5% 3% 8% 6% 8% 5% 8% 7% ranging from securities, trust, 12% 15% 18% 13% fund, insurance, leasing other 21% 22% non-bank financial institutions. 37% 36% LCBs’ diversified business 33% 35% 35% 34% platform help them to deepen 29% 27% business interaction, actively promote cross-selling and product innovation, to enhance the synergy. In 1H 2015 LCBs 53% 54% insurance, leasing and other 45% 45% 45% 48% 43% 45% operating income increased by 32% compared with the same period in 2014. The growth was 2015 2014 2015 2014 2015 2014 2015 2014 substantially higher than that of 1H 1H 1H 1H 1H 1H 1H 1H traditional banking business. ICBC
CCB
Corporate banking
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8%
ABC Personal banking
BOC Treasury
6%
4%
14% 18%
27%
27%
54% 51%
2015 2014 1H 1H BOCOM
Others
September 2015 45
Large commercial banks: assets & liabilities grew steadily
Asset growth was relatively Figure 50 Change of total assets – large commercial banks stable. Compared with 31 3% 2% 3% 3% 5% 5% 4% 5% 3% 3% December 2014 LCBs total 14% 16% assets grew by 8.91% in 1H 16% 17% 16% 17% 14% 16% 16% 15% 2015 similar with the growth of 8% 5% 8% 7% 8% 6% 10% 9% 9% 8% 8.98% in 2014. LCBs’ interbank assets and liabilities increased in share in 1H 2015. This was due to the market liquidity was ample in 1H 2015, most banks expanded their interbank businesses.
22% 22%
21% 22% 23% 22%
20% 18%
20% 19%
53% 54%
51% 54%
51% 52%
54% 55%
2015 2014 1H
2015 2014 1H
2015 2014 1H
2015 2014 1H
2015 2014 1H
CCB
ABC
BOC
BOCOM
ICBC Loans
Investments
48% 48%
Interbank
Cash&deposits with central bank
Others
Figure 51 Change of total liabilities – large commercial banks 6%
7%
1%
1%
14% 10%
78% 82%
6%
1%
1%1%
12%
9%
81% 83%
6% 1%
11%
6%
1% 1%
8%
82% 84%
4% 3% 2%
4%
6%
2%1%
2% 2%
14% 14%
4%
1% 2%
25% 23%
77% 75%
68% 70%
2015 2014 1H
2015 2014 1H
2015 2014 1H
2015 2014 1H
2015 2014 1H
ICBC
CCB
ABC
BOC
BOCOM
Deposits
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5%
Interbank
Debt issued
Due to central bank
Others
September 2015 46
Large commercial banks: assets & liabilities grew steadily (continued)
On top of their domestic business, LCBs have been fully embracing the government’s “building an open and new economy“ strategy, and respond positively to the "One Belt and One Road" initiative, as the pace of RMB internationalisation continued to promote a global strategy. As of June 30, 2015, BOC overseas branches across six continents in 42 territories, reaching 635 overseas branches. ICBC in 1H 2015 also added 61 overseas branches; CCB, BOCOM and ABC added five, four and one respectively. ICBC acquire Standard Bank’s London Holdings Company and officially changed its name to ICBC Standard Bank. BOCOM has also completed the acquisition of a Brazilian banks in 1H 2015, Banco BBMS.A. The average income of overseas business of LCBs as proportion of total income rose from 3.5% in 1H 2014 to 4.6% in 1H 2015. As of 30 June 2015, LCB’s overseas business contributed 7% of pre-tax profit and 14.44% of total assets.
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September 2015 47
Joint-stock commercial banks: fee & commission income rose in proportion
JSCBs subject to capital and Figure 52 Operating income – joint-stock commercial banks deposit base, in light capital 7% 8% 3% 2% 4% 6% 6% 5% 7% 2% 3% 4% 4% business vigorously explore, intermediate business 19% 14% 18% 21% 22% 23% 21% income accounted growing 30% 21% 25% 29% 22% 28% trend. From the income 30% 28% 33% structure, in addition to CMB and CMBC, remaining six in the first half fee and commission income accounted for operating income exceeded last year, of 82% 84% 79% 76% 76% 75% 74% 71% 73% which CIB, CEB, PAB and HXB 71% 71% 67% 67% 63% 64% 61% is particularly significant, sustained investment bank CIB Asset management and wealth management fee income driven -1% by growth. Meanwhile, the 20152014 20152014 20152014 20152014 20152014 20152014 20152014 20152014 JSCBs in opening up new 1H 1H 1H 1H 1H 1H 1H 1H 1H 1H 1H 1H 1H 1H 1H 1H CMB CIB SPDB CITIC CMBC CEB PAB HXB channels of connection, comply Net interest income Net fee and comission income Other non-interest income with the national implementation of the "Internet +" strategy, vigorously innovative mobile banking, direct banking, online payment, online banking, banks and other micro-channel network of financial products and services, and accelerate the transformation of the traditional outlets transformation, enhance the customer experience, and promote revenue growth.
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September 2015 48
Joint-stock commercial banks: fee & commission income rose in proportion
Citic, CEB andPAB’s parent groups has financial full license, enabling them to generate synergies with other financial institutions within the group, such as PAB might have support from Ping An Group to obtain a large number of client resources through insurance companies, and bring in substantial income from cross-selling. CIB currently has a lease, trust, fund, consumer loans and other subsidiaries, and through the Trust has futures license; CMB and CMBC have lease and fund subsidiaries, allowing them to explore the potential of traditional banking business, leading to net interest income as proportion of operating continues to rise year on year.
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Figure 53 Growth in Wealth management, agency, custodian & other fiduciary services and bank card business, 1H 2015 63.51% 53.28% 46.72%
34.19%
32.91%
13.02%
Large commercial banks
Joint-stock commercial banks
City commercial banks & rural commercial banks
Wealth management, agency, custodian & other fiduciary services Bank card
September 2015 49
Joint-stock commercial banks: investments rose in proportion in total assets
JSCBs in 1H 2015 as a whole showed a decline in the proportion of loans and interbank and rise in investments. In the downward interest rate environment, thanks to the central bank's liquidity easing, JSCBs leveraged more low-cost interbank funding, bonds and increased the trust beneficiary and other investment services so that the overall net interest margin compared with the same period last year were flat or rise.
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Figure 54 Investment as proportion in total assets – joint-stock commercial banks
28.49%
23.87%
2015 1H
2014
September 2015 50
Joint-stock commercial banks: eyes on overseas expansion
In the new normal, JSCBs according to their actual circumstances take a different business strategy. Overall, the JSCBs, while maintaining the existing market share, and actively promote the group, integrated management, increase product innovation and channel innovation, started the globalization strategy. Under the premise to ensure that the domestic market share, followed by larger JSCBs also state “One Belt and One Road" strategy, as well as the pace of internationalization of the RMB, he began to get involved in overseas markets. In addition to setting up a branch in Hong Kong, CMB has opened a branch in New York, Singapore, London representative office in Taiwan. SPDB is expected to open a number of overseas branches in the country’s thirteenth five-year plan period, the establishment of a working application CITIC London, Sydney and other areas in the overseas institutions are also in an orderly way.
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Figure 55 Change of total liabilities – joint-stock commercial banks 4% 3% 1% 2% 3%
22%
2% 1% 5% 5% 1% 4%
2% 1% 4% 1% 5% 4%
19% 23% 23%
2% 3% 4% 1% 3%
5% 5% 1% 5% 3%
22% 19% 25% 26%
2% 2% 1% 5% 3%
2% 3% 4% 2%
2% 2% 1% 1% 2% 1%
21% 24% 23%
22% 21%
25%
68% 70%
68%
75%
73% 74%
20152014 1H
41% 35%
70%
75%
51%
69% 69%
72% 74% 66% 64%
55%
20152014 1H
20152014 1H
20152014 1H
20152014 1H
20152014 1H
20152014 1H
20152014 1H
CMB
CIB
SPDB
CITIC
CMBC
CEB
PAB
Deposits
Interbank
Debt issued
Due to central bank
HXB
Others
September 2015 51
City commercial banks & rural commercial banks: fee & commission to be increased
Thanks to the completion of a number of CCBs IPO or private placement and to achieve rapid development of regulatory assets in 1H 2015, the growth in total assets increased by 13.92%, year on year, with revenue growth of 24.78%. In terms of income structure, in addition to BOB, interest income accounted for 78.48%, the other CCBs accounted for more than 80%. Interest income for Listed Banks, accounting for a traditional loan interest income is lower, on average accounted for 49 percent, while joint-stock banks accounted for 59%, while the five LCBs was 70%. While investment in bonds, high-yield products accounted for interbank and non-standard assets was 47.6%. In the case of the economic downturn and the limited size of the loan, and increase investment in business investment in the city to improve their profitability.
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Figure 56 Operating income – by income nature 3% 3%
2%
19% 17%
16% 12%
80%
83%
1% 3%
11%
5%
19% 17%
13%
12% 8%
88%
87%
2%
5%
1%
2%
6% 4% 17% 17%
18% 13%
81%
83%
9%
87%
82%
84%
-4% -4%
-2%
20152014 1H 1H
20152014 1H 1H
20152014 1H 1H
20152014 1H 1H
20152014 1H 1H
BOB
NJB
NBB
SJB
HSB
80%
93%
89%
78%
Net interest income
2% 2%
Net fee and comission income
81%
80%
20152014 1H 1H
20152014 1H 1H
HRB
BCQ
93%
20152014 1H 1H CQRCB
Other non-interest income
September 2015 52
City commercial banks & rural commercial banks: income driven by corporate banking
With respect to the strategic transformation started LCBs and JSCBs, CCBs relatively late, intermediate business income in the proportion of its overall revenue is still relatively low. 7 Ayutthaya net accounting firm intermediary business revenue accounted for 16%, 26% jointstock banks, five state-owned banks was 20%. But we still see that the first half of 2015, in the middle of CCBs income each year have been rapid growth in financial services revenue grew by 135%, reflecting the development of CCBs wealth management business. NJB to achieve intermediate business income doubled year on year, bond underwriting and other investment banking has formed a characteristic in the industry.
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Figure 57 Operating income – by business segments 1%
1% 1%
2%
18% 17% 25%
25%
20%
17%
18%
19% 26%
31%
37%
35% 15%
23%
1% 1%
27%
27% 35% 34%
5% 11%
25%
17% 5%
29%
9%
18% 12%
26% 20% 29%
32% 31%
74%
66% 66%
64% 54%
54%
59%
56% 54%
46%
61% 48%
64%
44%
33% 35%
20152014 1H 1H
20152014 1H 1H
20152014 1H 1H
-2% 20152014 1H 1H
20152014 1H 1H
20152014 1H 1H
20152014 1H 1H
BOB
NJB
NBB
SJB
HSB
HRB
BCQ
Corporate banking
Personal banking
Treasury
20152014 1H 1H CQRCB
Others
September 2015 53
City commercial banks & rural commercial banks: investments remained high in assets
Asset Allocation city Figure 58 Change of total assets – city commercial banks & rural commercial banks commercial banks and agricultural firms are more 2% 2% 2% 2% 2% 2% 2% 2% 2% 1% 6% 5% 2% 2% 2% 2% dependent on investment business. Assets structure, 10%12% 10%13% 9% 13% 11%14% 12%16% 12%13% 14%13% 12%16% 5% loans accounted for ups and 10% 7% 9% 13% 14% downs, but with the industry 20%20% 15%20% 15% 22%26% 19% 22% 19% trend of investment and JSCBs the same, namely: investment 49% 32%23% 39% 24%23% 29% rise, with the industry down. 51%48% 40% 28% The fastest growing asset classes in which the investment is NBB, SJBs and CMBs, the proportion of total assets have increased substantially. NJB’s investment asset class expanding, due from banks and placements are also quite active, leading to its interbank assets accounted rise, not fall.
25% 25%
30%
44%43% 27%30%
41%44%
34%37%
32%31%
25%22%
38%35%
40%38%
38%38%
20152014 1H
20152014 1H
20152014 1H
20152014 1H
20152014 1H
20152014 1H
20152014 1H
20152014 1H
BOB
NJB
NBB
SJB
HSB
HRB
BCQ
Loans
Investments
Interbank
CQRCB
Cash&deposits with central bank
Others
Although in recent years the pace Figure 59 Change of total liabilities – city commercial banks & rural commercial banks of cross-regional business 3% 2% 2% 2% 2% 2% 2% 2% 3% 2% 4% 3% 0% 0% 2% 1% 2% 1% 6% 7% 3% 1% 3% 1% 4% 2% 1% slowdown, some CCBs continue 8% 4% 9% 9% 6% 10% to develop the province of other 15% 21% 23% 25% 22% 22% 26% 30% 33% 29% surrounding cities. BOB, for 23% 19% 28% 23% 23% example, have built a 25% 21% comprehensive business platform ranging from insurance, fund, consumer finance, leasing and rural banks. NJB has also established fund, asset 72% 71% 72% 74% 71% 69% 68% 68% 65% 65% 65% 68% management, private equity fund, 65% 65% 58% 59% and rural banking business.
20152014 1H
20152014 1H
20152014 1H
20152014 1H
20152014 1H
20152014 1H
20152014 1H
BOB
NJB
NBB
SJB
HSB
HRB
BCQ
Deposits
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Interbank
Debt issued
Due to central bank
20152014 1H CQRCB
Others
September 2015 54
Features
•
Exploring securitisation of banks’ NPL assets
•
How can privately-owned banks compete?
•
Managing shareholder value through a multi-factor approach
•
How can banks deal with Internet finance?
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September 2015 55
Exploring securitisation of banks’ NPL assets
With increasing uncertainty in the global economic recovery, as well as downward pressure on the domestic economy, banks are seeing more non-performing loans (NPLs), which in turn are impacting regional and domestic credit risks. In order to maintain a strong capacity for absorbing risk, Listed Banks are increasing provisions. However, due to the rapid growth of bad loans, the bank's provisions for coverage levels are still facing a downward trend. Consequently, in addition to traditional measures such as collection, transfer and write-offs, Listed Banks are having to explore a variety of new approaches to dispose of, and manage “bad assets”.
Since the third pilot asset securitization in May 2012, securitization has been gradually, but steadily advancing. Progress has been marked by the continuous development of institutions, active market participation, and an improvement of product recognition. As a result of the rapid growth of the securitization business, together with the development of NPL, there will be a shift in the underlying assets of securitisation, from good to bad assets. In this environment, timely disposal of NPL by securitization will help to broaden the channels, facilitate the processing speed, and improve the asset quality of Commercial Banks.
securitization of NPL should draw on previous experience together with strong risk control. As the securitisation of NPL involves assets structure, costs, product design, and a higher risk of default than normal assets, a higher standard of information disclosure as well as risk assessment are required. China, currently has limited historical data regarding the disposal of bad loans and lacks a comprehensive set of data to project future cash flows of NPL, as well as recovery timeframes. As a result, NPL securitisation will pose three key challenges:
Regarding regulatory policy, in May 2015, the State Council decided to further promote the securitization of credit assets, and spur reform and innovation to revitalize existing funds. The Deputy Director of the CBRC Prudential Regulation Bureau stated that although the securitization of credit assets so far used quality assets as underlying assets, there was no limit in asset classes. He also noted that, this year more consideration would be given to the prospect of allowing a NPL securitization pilot. Subsequently, during a policy briefing at the State Council, PBoC’s Deputy Governor, Mr. Pan, said that
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September 2015 56
1. Structural Design There are uncertainties with the allocation of NPL repayments due to a lack of cash flow estimations concerning underlying assets. It is unclear what degree of security the prioritised tranche might enjoy, as the proportion of the sub-class tranche remains uncertain. As a result, the pricing for each tranche remains uncertain.
These three challenges cannot be addressed overnight. However, there is a general expectation that that there will be issuers in the market willing to break the ice (in a relatively conservative manner), laying a more solid foundation for the future development of NPL securitisation. At the same time, banks in the securitisation of NPL should maintain close communication with regulatory bodies to ensure compliance.
2. Product sales
Key recommendations include;
Due to the uncertainties that derive from the structural design, the sale of assets are challenging, as investors tend to demand higher returns. Further, since the Chinese asset securitisation market is still in early stages of development, investors are not familiar with the potential risks of each tranche, and are consequently more cautious when it comes to securitised products with NPL as underlying assets. This, in turn, leads to reluctance in accepting such products.
Adding liquidity arrangements to the trading mechanism to ensure investors with priority are able to collect the repayment on time. This is particularly important as the timing of cash flow collection of the underlying assets is uncertain.
3. Confirmation of termination The prerequisite of NPL termination is the full transfer of risk and return of the underlying assets to a third-party. If the issuing bank still holds the sub-class tranche for the sake of sales, the risk and return is not actually transferred.
Issuing banks ensuring that contracts specify responsibilities when providing clear settlement services, as they are in the best position of understanding the NPL borrowers circumstances. For example, this could include collateral, where the guarantor and the property controlled by the guarantor could be used to ensure fulfilment of the responsibilities, thereby, protecting the best interests of investors. Further, Issuing banks can collect detailed information such as loss ratio, collection time, and discrepancies between expected and actual collection times. This information would help improve the cash flow model for NPL, assist with more accurate estimates of the cash flow, and improve capacity for designing and assisting pricing, leading to better matching of risk and returns for investors. Future development of NPL securitization will take time. It will involve ongoing collaboration across the industry and close communication with regulatory bodies.
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September 2015 57
How can privately-owned banks compete?
Bringing in private capital by allowing small and medium sized banks (privately-owned banks) to set up, helps improve the landscape of China’s banking sector by enhancing the competitiveness, and vitality of the markets. The emergence of privately-owned banks not only challenges the existing banks’ operating model, but also puts a fresh onus on innovation. What remains to be seen is the differentiated operating strategies and sustainable growth of privately-owned banks. In addition, further deregulation will be required to fully unleash these banks’ technological potential.
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September 2015 58
In recent years, China has maintained a positive approach to guiding private capital into the banking sector. The State Council and the CBRC have issued a series of Opinions and Guidelines supporting private investment in the financial sector. A summary of the key developments are charted in the following timeline;
2005.02 State Council: "Opinions on Support and Encouragement of Private and Other Non-public Economic Development."
2012.05 CBRC: "Implementation Opinions on Encouraging and Guiding Private Capital into the Banking Sector."
2013.11 CPC Central Committee: "Decision on Deepening Reform." The Decision officially made qualified private capital legal, paving the way for the establishment of small and medium sized banks and other financial institutions.
2015．03 State Council: "2015 Government Work Report." Presented the conditions required to continue to promote private capital according to the law, facilitating the establishment of small and medium sized banks and other financial institutions.
2010.05 State Council: "Opinions on Encouraging and Guiding Healthy Development of Private Investment."
2013.07 State Council “Guidance on Financial Support for Economic Restructuring and Transformation." Related to the establishment of privately-owned banks assuming their own risk.
2014.03 CBRC announced the first batch of five private banks in a pilot approved by the State Council, marking the official launch of the private banking pilot.
2015.06 The first batch of five pilot banks all opened for business.
2015.06 CBRC "Guiding Opinions on Promoting the Development of Privately-owned Banks.", provided clear policy guidance for privately-owned banks.
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September 2015 59
With the implementation of a series of reforms, China continues to accelerate the pace of financial reform and encourage establishment of privately-owned banks. Increasing numbers of private shareholders are investing in privately-owned banks. In light of banking reformation and transformation, privately-owned banks must seize opportunities, while addressing key challenges.
Structural reform of banking sector
Innovative operating and business models
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As privately-owned banks are rooted in the private sector, they are well positioned to understand the key drivers and success factors of the sector. This includes awareness of the needs of small and medium sized enterprises as well as other target customers, which complements the traditional, large banks by providing customised products and services. At this stage, the first five privately-owned banks remain in early stages of business development, and are smaller in size, which makes it difficult to challenge the competitive advantages of the established banks.
Some privately-owned banks are look at how they can use the Internet and other resource advantages to form new business models that could break barriers set by the physical limitations associated with traditional banking. However, the current supervision requirements and policies are preventing a major reshape of banking at this time. For example, current regulations require customers to go a branch to open an account. As a result "Remote Account Opening" and other bold new concepts remain difficult to implement.
September 2015 60
Support value chain upgrade
Sustainable and differentiated strategies
Technological breakthrough requires deregulation
Initiatives such as "Made in China 2025“ and "Industry 4.0“ have placed focus on macroeconomic-oriented transformation in China's industry value chain. This includes the role of privately-owned banks, and their capacity to leverage their industry backgrounds and nuanced understanding to provide specialized, targeted financial services along the value chain. But privately-owned banks also need to enhance their approach to customer channel expansion, IT system investment, awareness and risk control to meet regional and industry levels. Shareholders of privately-owned banks are more diversified and close to the industry, which helps to build a broad-based, loyal group of customers. Banks must also strike a balance between new business models and prudent supervision systems to ensure sustainable development remains at the heart of operations. Sustainability will require a number of factors including selection of the shareholders, the management of related-party transactions, competition as well as cooperation with other financial subsidiaries. China's financial institutions have been rapidly adopting technology in recent years, especially in relation to payment platforms and enhancing customer experiences. The regulatory authorities may consider giving privately-owned banks approval to open accounts remotely, while lifting regional and other related restrictions.
Bringing in private capital by allowing the set up of small and medium sized banks (privately-owned banks) is helping to improve the landscape of China’s banking sector and enhance the competitiveness and vitality of the markets. The emergence of privately-owned banks not only challenges the operating model of existing banks, but also stimulates innovation across the sector. However, how sustainable growth of the differentiated operating strategies of privately-owned banks will be, remains to be seen.
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September 2015 61
Managing shareholders’ values through a multi-factor approach
Chinese stock markets have been through a roller-coaster year since last summer, impacting hundreds of millions of domestic investors, as well as the global markets. Listed Banks’ stock price movement has been more than a matter of household wealth. It has involved the preservation and appreciation of state-owned financial capital. This section reviews 16 A-share listed banks’ stock returns from 1 July 2014 to 30 June 2015, the period in which the stock market was most turbulent, and views findings through a multi-factor approach. The analysis seeks to balance measures between so-called "good company" and "good stock". Although banks’ management cannot manipulate stock price movement, they are still advised to focus on these factors in delivering shareholder value.
When it comes to investment, the purpose for both individual and institutional investors’ are the same; a steady growth of portfolio. Historical experience shows that for the mid and long term, stock offers the highest risk-adjusted return of all financial assets – if you choose the right ones. So it all comes down to stock selection, to identify those top performers which can beat the market.
In this section, we look at 16 A-share listed bank stocks in Shanghai and Shenzhen. H-share stocks are not included as they are traded in a market with substantive differences spanning the investors’ preferences, risk appetites, and regulation. Nevertheless, the analysis uses internationally accepted factors to measure stock price performance.
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Four banks outperformed As the 16 banks are traded in Shanghai or Shenzhen markets, the CSI 300 index’s gain is used as the market rate of return. The results showed that in a 12-month period from 1 July 2014 30 June 2015, the CSI 300 index has risen by 106.05%. In the same period, only the returns from NJB, NBB, BOCOM and CEB’s were higher. NJB’s return peaked at 186% during the period, and significantly outperformed the other three banks. NBB slightly outperformed the market followed by BOCOM and CEB.
The difference between the top performers and the majority of those lagging behind was substantial. For instance, NJB’s return was four times higher than the two lowest among the 16 bank stocks reviewed.
September 2015 62
Good company Vs. good stock The rise and fall of stock prices are largely due to fundamental factors such as industry environment and a company’s financial results. In a developed market, investors should be able to distinguish between a "good company" and "good stock." The so-called "good companies” refer to organisations with steady growth of earnings and dividends, good financial health and robust corporate governance. In the case of a "good bank”, criteria should include resilient NIM and NIS, sound asset quality, adequate provisions, a strong capital base, and quality customer service experiences. "Good stock" features would include a steady rise in price, reasonable valuation, ample liquidity and a loyal shareholder base.
Figure 60 Listed Banks’ stock returns, July 2014 - June 2015 186%
CSI 300 return106.05%
131%
112% 110%
91%
87%
86%
83%
81% 73%
72% 65%
60%
56% 47%
47%
"Good company" and "good stock" can be two sides of the same coin. They do not always equate to each other, but do tend to complement each other.
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September 2015 63
Multi-factor management approach
Can a bank be a "good company“ and provide "good stock"? The following section tries to answer this question by introducing ten relevant factors, in an attempt to establish a comprehensive shareholder value management system. Findings are summarised as follows;
Table 4
Proxy and description of each factor
Factor
Proxy and description
Volatility
Standard deviation of daily return - a higher score is desirable
Liquidity
Average daily trading amount – a higher score is desirable
Valuation
P/E – a lower score is desirable
ROE
ROE – a higher score is desirable
Dividend
Payout ratio – a higher score is desirable
Earnings
Profit growth – a higher score is desirable
Ownership Shareholders
Stake of single largest shareholders – a lower score is desirable Number of shareholders – a higher score is desirable
Diversity
Proportion of fee and commission income – a higher score is desirable
Assets allocation
Proportion of foreign exchange assets – a higher score is desirable
Figure 61 Multi-factor shareholder value management diagram
Volatility
Liquidity
Valuation
ROE
Dividend Banking Newsletter PwC
Earnings
Multi-factor shareholder value management
Ownership
Shareholders
Diversity
Assets allocation September 2015 64
Analysis shows that the best performer was NJB, which achieved particularly strong results with regard to ROE, earnings and ownership. NBB scored well in volatility, earnings and ownership. BOCOM’s strength lies in the volatility and shareholders. CEB achieved a high score in volatility and liquidity while BOC thrived in shareholders, asset allocation and dividend. The same approach was used to analyse underperformers. The results show that underperforming banks record relatively low scores in volatility and liquidity, in addition to having obvious weaknesses in other factors.
Factors that are difficult to quantify It is worth noting that the top five performers in stock returns all rank in the middle of our multifactor assessment. This shows that the rise and fall of stock prices are also driven by some factors that can’t be measured directly. For example, effects from the mixed ownership reform outlook for BOCOM, CEB’s parent group, and the restructuring theme of BOC’s “One Belt and One Road."
ABC recorded a high score in the shareholders So focusing purely on the fundamentals may not category, as well as dividends and valuation, but be enough to boost a company’s stock price. It is did not appear to score highly as a diversified also important for management to relate a business. PAB was prominent in earnings and company’s growth story and development diversification, but other factors were not as blueprint in a manner that is appealing to strong. The advantages of ICBC and ABC were existing and potential investors. similar, both scoring well in asset allocation and diversification. Their weakness were also similar, such as ownership and earnings. CMBC showed Figure 62 Multi-factor analysis of top performers strength in diversification, ownership and ROE, but had a low score for dividend. BOB demonstrated certain advantages in ownership Volatility 股价波动 and earnings, but showed room to improve in other factors. Liquidity Assets allocation 资产配置 成交活跃
业务多元 Diversification
Valuation 估值
股东基础 Shareholders
净资产回报 ROE
股权分散 Ownership
Dividend 现金分红 盈利增长 Earnings
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南京 NJB 宁波 NBB BOCOM 交行 CEB 光大 BOC 中行
September 2015 65
How can banks deal with Internet finance?
Internet finance is playing a substantial role in the development of the domestic financial industry. Lending via the Internet has seen explosive growth since 2014, and has already led to myriad innovations with financial products. Indeed, new technology is constantly being developed and brought to market. This rapid expansion is applying pressure to traditional commercial banks. In 2015, as a consequence of external pressures including economic forces, increasing regulation, and rising awareness of risk among investors, there has been a convergence of Internet finance and traditional banking. Banks face up to reform & innovation Internet finance benefits from unique advantages brought about by information processing, including big data, cloud computing, and artificial intelligence. Such developments have enabled IT firms to enter into areas that had
previously been the domain of traditional banking, by providing new and enhanced experiences for customers. The changes are adding to the financial industry, though exerting more pressure on the traditional banking community.
Figure 63 Commercial banks’ Internet practice and non-financial institutions’ cross-border Internet finance practice 1999
June,2012
CMB launched “All In One Net”, which established an Internet service system including selfservice banking, telephone banking and mobile banking.
CCB launched "E.CCB.COM", which relies on a self-built electric business platform to carry out small loans.
2012
2012
BOCOM launched “EMALL BOCOM", which provides a one-step service to consumers via a binding bank payment function for commodity marketing.
CMB’s first joint Unicom launched mobile payment products called CMB mobile wallet.
2013 CMBC launched its “Community Finance” strategy, which provides comprehensive family financial services for consumers. The move reflects when Traditional commercial banks began to use the Internet to establish credit intermediary platforms to provide financing services.
2013
The first year for development of Internet finance, Alipay launched “Yu E Bao” in June, 2013.
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2014~2015
2013
2014 The period of development and innovation, for Internet finance transforms into a phase of explosive growth.
CMB and ICBC launched “WeChat banking”.
Banking’s explosive period for Internet innovation. New products emerge. Strong capital strength and market position enable banking to rapidly expand the Internet financial markets.
2015 Economic pressure, greater awareness of risks and new regulation underpin a trend of convergence in the Internet finance industry.
September 2015 66
The rapid development of Third-party payments offers a prime example of how the expanding role of Internet finance is encroaching on the intermediary business of Commercial Banks. Commercial Banks have made full use of core strengths such as extensive customer bases, strong capital, and established reputations and are using these to set up their own online banking systems. Consumers can make inquiries, payments, remittances, and utilise other individual account functions at home at any time. The improved efficiency of Commercial Banks, based on the Internet and related technology, has also brought about reductions in costs. In short, Commercial Banks are using Internet technology to improve their efficiency and reduce costs. Regulators have been monitoring the rapid rise of Internet finance, particularly as industry convergence accelerates and a range of policies are being considered. Traditional Banks should continue to adapt to Internet finance and stay at the forefront of the information technology evolution.
1Customer
2Big Data
3Risk
Centric
Application
Management
Structural adjustment: customer centric business model Banking has historically been a heavily regulated industry, and banks have traditionally adopted a relatively conservative approach to management. As a result, Commercial Banks face distinct challenges in adapting to the rapid changes brought on by Internet finance.
Banks will benefit from embracing advances in customer experience by implementing “Customer Centric” strategies. These should include; Strategy
•
Target customers, clearly outlining the bank’s competitive advantages.
Coordination with other corporate strategies, In order to meet the challenges and opportunities • brought about by Internet finance, banking generating input from the business units. services should become more intricately combined with Internet finance instruments. This Management would spur more investment in technology and • Establish consolidated customer strengthen the advantages that Commercial segmentation, detailed criteria and a customer Banks have in electronic banking, with allocation mechanism, to fulfil customer needs developments notably in structural adjustments, and decrease internal cost. data applications and risk management. • Amend product-oriented organisation structure and establish a “Customer Centric” customer management model.
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September 2015 67
• Tackle out-dated attitudes, for instance helping Business Units to appreciate benefits brought by customer management. Execution and Support • Establish standardised procedures for crossline marketing, sales and services, and improve initiatives to attract high-value customers within business units. • Adjust relevant motivating mechanisms to advance the customer management capabilities of front-line staff.
management that are attuned to identifying customers’ potential requirements, for instance, with regard to consumption and investment. This information would enable design of more efficient operating frameworks, with innovative financial products that are more closely aligned to the evolving needs of customers.
1Customer
2Big Data
3Risk
Centric
Application
Management
• Ensure sales opportunities are managed, allocated and followed-up effectively. • Strengthen IT infrastructure and integrate customer recourses across the business. • Develop system structure to be flexible and exclusively focused on the core business, while strengthening customer analysis capabilities and expediting customer operations.
The Internet finance industry is characterized by intense competition, rapid product updates and short life cycles. Conversely, many processes at Commercial Bank can be lengthy, with a range of constraints that stem from a compliance culture and involving various business elements that emphasize specification, and include monitoring measures, such as business license and postsupervision, as well as system control. As a result it is often difficult to respond quickly to customer requirements or innovate new solutions. Corporate cultures impact innovation. As banks and Internet finance combine more closely, organisations need to consider how to ensure the business is “Customer Centric.”
Data applications: utilize data and strengthen big data applications The rapid development of information technology, data management, and applications will continue to impact the financial service industry, in tandem with clients’ demands and the evolving market environment. Big data will play a pivotal role in the banking industry. Analysis based on big data will be a very important factor both for business development and risk management.
In addition, the release of BCBS’s “Principles for effective risk data aggregation and risk reporting” as well as CBRC’s “Fine Standard of Banks’ Regulatory Statistical Data Quality Management” and “Directive on Capital Management Rules (Trial Version)” also reflect the regulators’ high expectations in this area.
A potentially productive approach could entail establishing separate subsidiaries with more agile Banking Newsletter PwC
September 2015 68
A massive amount of data that banks have can and should be channelled into the data service system across each bank’s entire network. Banks should also be looking at converting business procedure data into management information to support business management and decision making. Establishing a fully integrated and multi-risk datamart would ensure bank-level data storage would be well-ordered and supportive of a range of risk management applications. A further benefit would be enhanced convenience for analysing data across business lines. Setting-up a long-term mechanism to monitor and improve the quality of risk data and to safeguard the accuracy, completeness, comprehensiveness, timeliness and flexibility of risk data should also be a priority for banks. In addition, designing applications for risk data as part of a big data strategy would open new opportunities for banks. Applications could span areas such as customer analysis, risk analysis, enterprise operations and performance evaluation.
1Customer
2Big Data
3Risk
Centric
Application
Management
Broaden the remit of risk management Commercial Banks are an essential component of the financial system and play a critical role in maintaining financial stability. The risk management level of Commercial Banks affects the whole system for risk prevention and control capacity at Commercial Banks. The credit of large state-owned Commercial Banks and Jointstock Banks are the most widely recognized, Banking Newsletter PwC
especially in China. Each Commercial Bank will have to incorporate the new risks associated with Internet finance into their overall risk system, in reference to respective risk tolerance frameworks. This is particularly important given the role of Commercial Banks in securing financial stability, and consequently represents an area where development of internet finance offerings by Commercial Banks differs notably from those of non-financial organisations.
As a result of structural adjustment and applications utilising big data, banks can consider developing a range of tools for risk data analysis. Comprehensive risk data would, among other things, support banks in undertaking risk modelling, model validation and monitoring, which would support comprehensive risk management reporting, regulatory reporting, and public disclosure. In addition to setting up criteria for risk management reporting, banks would also see advantage in developing of comprehensive, clear and forward-looking risk reports from the perspective of both risk control and performance enhancement. Establishing a reporting mechanism for risk management reports could include aspects such as setting reporting requirements, procedures, frequency, and confidentiality. The Internet finance sector should be appropriately managed. Looking ahead, we should be careful not to be penny wise, pound foolish.
September 2015 69
PwC
Outlook
Banking Newsletter PwC
September 2015 71
Three policy recommendations to seize the opportunities in challenging environment
The global economy is still in the recovery process. We expect the recovery in 2H 2015 will be as divergent as the 1H and uncertainty will continue to be the main feature: while growth in developed economies will accelerate, emerging market economies’ growth will continue to slow. China’s downward pressure calls for structural reform and manufacturing upgrading. Banks operating environment remains challenging. It is expected to they will continue to face the following challenges:
Profit growth continue to slow
Some banks’ 2015 full-year net profit might be "zero growth" or "negative growth".
NIM & NIS narrowed further
Interest rate cuts will continue to challenge banks’ pricing ability on the asset side. With the interest rate liberlisation almost completed, banks’ cost control on liabilities side might face higher requirements.
Credit asset quality deterioration
Special-mentioned class loans and overdue loans will continue to be converted to non-performing loans, causing further pressure to banks’ asset quality.
More Challenges in risk management
A-share market will continue to fluctuate, with the expectation of RMB exchange rate depreciation building up. market risk and liquidity risk management for banks are more challenging than ever.
That said, opportunities come hand in hand with challenges. The launch of the a series of national initiatives such as One Belt and One Road, the joint development of Beijing, Tianjin and Hebei, the Yangtze River economic belt, Made in China 2025, Internet+ etc. , offer banks a broader stage for development.
Banking Newsletter PwC
September 2015 72
As such, we proposed that the Listed Banks and regulators in the short, medium and long term, to focus on the following three aspects to ensure the sustainable development of the banking sector.
Short term – Explore viable NPL disposal alternatives
Listed banks non-performing assets still remain on its balance sheet, and the existing disposition approach is not conducive to defuse the quality of risk assets. We suggested that the relevant policy-makers should "revitalize" the perspective of non-performing assets by opening markets, i.e. allowing those who willing to invest or have the ability to digest these bad assets, regardless domestic or foreign capital , to enter the market, as well as encouraging new securitization disposal. In the early stages of market opening up. Product design, investor suitability and relevant laws and regulations need to be put in place.
Mid term – Embrace the government initiatives
“One Belt and One Road" and "Made in China 2025" and other initiatives currently proposed by the Government, will be the new growth engine in the medium and long term. Banks should actively follow up these initiatives, supporting domestic enterprises to implement industrial restructuring, industrial upgrading; externally banks should expand international presence in order to provide funding to companies and projects that in line with "One Belt and One Road" strategic enterprises, to help them "going out" .
Long term – Secure a landscape for industry development
To support the real economy, the development of an inclusive financial system, banks cannot do it single-handedly. Current internet financial institutions and privately-owned banks are just emerging, which are good supplement besides banks, to provide financial products and services to enterprises and individuals. Following the release of the Internet Finance Regulatory Guidance, related government departments should draft the implementation details to encourage and nurture related businesses, and be tolerant to their development. As privately-owned banks are new kind of financial institution, supervision should be flexible enough to create space for their development.
Banking Newsletter PwC
Regulators in the development of policy, should be in-depth study of new industry characteristics, risks and advantages, having a good grasp of regulatory standards, controlling risks without restricting the development of these new financial institutions and ensuring they have equal opportunity to participate market in competition. September 2015 73
Appendix
•
Financial highlights of Listed Banks
•
Definitions
•
Banking and Capital Markets Contacts
•
PwC Offices in China
Banking Newsletter PwC
September 2015 75
Financial highlights of Listed Banks (I)
Large Commercial Banks (In RMB millions) Operating Results in 1H 2015
ICBC
CCB
ABC
BOC
BOCOM
LCBs Total
Operating income
356,242
311,042
274,147
239,561
96,722
1,277,714
Net interest income
252,087
224,619
219,493
163,391
71,059
930,649
Non-interest income
104,155
86,423
54,654
76,170
25,663
347,065
Net fee & commission income
77,120
63,645
47,643
50,044
19,386
257,838
Other non-interest income
27,035
22,778
7,011
26,126
6,277
89,227
(162,893)
(143,094)
(141,343)
(115,574)
(48,742)
(611,646)
Business tax and surcharges
(21,667)
(18,234)
(15,059)
(13,549)
(7,290)
(75,799)
Business & administration expenses
(79,550)
(68,809)
(81,063)
(59,533)
(24,506)
(313,461)
Allowance for impairment losses
(41,951)
(41,249)
(39,321)
(28,576)
(12,045)
(163,142)
Other business expenses
(19,725)
(14,802)
(5,900)
(13,916)
(4,901)
(59,244)
Operating profit
193,349
167,948
132,804
123,987
47,980
666,068
Profit before tax
194,678
169,207
134,679
124,482
48,289
671,335
Income tax expense
(45,252)
(36,963)
(30,115)
(29,496)
(10,783)
(152,609)
Net profit
149,426
132,244
104,564
94,986
37,506
518,726
405
349
249
4,240
182
5,425
149,021
131,895
104,315
90,746
37,324
513,301
ABC
BOC
Operating expenses
Non-controlling interests Profit attributable to shareholders
Financial Position, as of 30 June2015 Total assets Loans and advances, net Loans and advances Less: Allowance for impairment losses Investments Interbank assets Cash & deposits with central bank Others assets Total liabilities Deposits from customers Interbank liabilities Debt securities issued Due to central bank Other liabilities Total owners’ equity Non-controlling interests Total equity attributable to equity shareholders
Banking Newsletter PwC
ICBC
CCB
BOCOM
LCBs Total
22,417,295
18,219,186
17,459,554
16,298,593
7,122,155
81,516,783
11,374,947 11,642,085 (267,138) 4,882,824 1,823,420 3,615,260 720,844 20,803,658 16,287,768 2,893,708 284,903 332 1,336,947 1,613,637 10,612
9,889,596 10,157,079 (267,483) 3,802,132 1,431,466 2,617,781 478,211 16,906,736 13,696,977 2,056,124 211,547 40,099 901,989 1,312,450 11,020
8,346,156 8,727,449 (381,293) 4,018,438 1,788,927 2,829,814 476,219 16,337,512 13,406,292 1,748,194 209,317 1,705 972,004 1,122,042 1,713
8,700,360 8,897,154 (196,794) 3,288,382 1,263,529 2,248,752 797,570 15,031,444 11,536,547 2,166,567 268,727 403,588 656,015 1,267,149 47,064
3,623,674 3,709,152 (85,478) 1,422,010 652,691 1,111,252 312,528 6,630,355 4,514,566 1,635,484 133,432 63,724 283,149 491,800 3,021
41,934,733 43,132,919 (1,198,186) 17,413,786 6,960,033 12,422,859 2,785,372 75,709,705 59,442,150 10,500,077 1,107,926 509,448 4,150,104 5,807,078 73,430
1,603,025
1,301,430
1,120,329
1,220,085
488,779
5,733,648
September 2015 76
Financial highlights of Listed Banks (II)
Joint-stock Commercial Banks (In RMB millions) Operating Results in 1H 2015
CMB
CIB
Operating income
104,135
72,258
70,701
70,038
76,902
45,538
46,575
28,328
514,475
Net interest income
66,104
55,120
52,940
49,744
46,994
32,105
31,118
23,241
357,366
Non-interest income
38,031
17,138
17,761
20,294
29,908
13,433
15,457
5,087
157,109
31,097
14,922
14,693
17,480
25,145
13,558
13,722
5,335
135,952
6,934
2,216
3,068
2,814
4,763
(125)
1,735
(248)
21,157
(60,997) (36,809) (39,490) (39,928) (41,597) (24,063) (31,308) (15,942)
(290,134)
Net fee & commission income Other non-interest income Operating expenses Business tax and surcharges Business & administration expenses Allowance for impairment losses
(6,266)
(4,493)
CITIC
CMBC
(5,065)
(5,047)
CEB
PAB
(3,543)
HXB
(3,380)
JSCBs Total
(2,075)
(35,833)
(25,414) (14,715) (14,292) (18,172) (21,025) (12,081) (15,005) (10,368)
(131,072)
(29,171) (15,846) (20,292) (16,691) (15,011)
(121,812)
Other business expenses
(5,964)
SPDB
(8,387) (12,923)
(3,491)
(146)
(284)
(413)
-
(514)
(52)
-
(8)
(1,417)
Operating profit
43,138
35,449
31,211
30,110
35,305
21,475
15,267
12,386
224,341
Profit before tax
43,384
35,582
31,526
30,120
35,529
21,490
15,259
12,416
225,306
(10,215)
(7,598)
(7,400)
(7,151)
(8,257)
(5,223)
(3,674)
(3,104)
(52,622)
33,169
27,984
24,126
22,969
27,272
16,267
11,585
9,312
172,684
193
240
223
383
494
26
-
49
1,608
32,976
27,744
23,903
22,586
26,778
16,241
11,585
9,263
171,076
CEB
PAB
HXB
Income tax expense Net profit Non-controlling interests Profit attributable to shareholders
Financial Position, as of 30 June2015 Total assets Loans and advances, net Loans and advances Less: Allowance for impairment losses Investments Interbank assets Cash & deposits with central bank Others assets
CMB
CIB
SPDB
CITIC
CMBC
5,221,221 5,125,903 4,603,740 4,561,277 4,301,073 3,000,336 2,570,508 1,917,232 2,565,277 1,673,831 2,106,342 2,253,593 1,906,497 1,386,947 1,159,045 985,727 2,646,157 1,722,946 2,174,434 2,308,003 1,949,336 1,418,201 1,187,834 1,011,014 (80,880)
(49,115)
(68,092)
JSCBs Total 31,301,290 14,037,259 14,417,925
(54,410)
(42,839)
(31,254)
(28,789)
(25,287)
(380,666)
1,305,284 2,082,646 1,559,275 1,429,531 593,451 688,062 286,529 227,928
745,190 922,556
844,377 344,234
555,498 439,280
395,859 226,826
8,917,660 3,728,866 3,520,285
621,035
467,479
505,979
532,917
473,449
344,523
298,618
276,285
136,174
213,885
145,615
117,308
253,381
80,255
118,067
32,535
1,097,220
Total liabilities
4,888,303 4,834,473 4,314,744 4,270,195 4,012,760 2,791,880 2,419,628 1,805,434
29,337,417
Deposits from customers
3,441,792 2,445,022 2,988,843 3,081,463 2,628,626 1,894,576 1,655,112 1,320,604
19,456,038
Interbank liabilities
1,096,782 2,005,840
Debt securities issued Due to central bank
985,580
931,266 1,003,638
666,355
592,978
397,368
7,679,807
142,466
250,145
212,802
161,537
180,901
152,372
108,254
31,221
1,239,698
25,000
40,000
40,897
10,050
6,432
11,040
2,921
17,520
153,860
Other liabilities
182,263
93,466
86,622
85,879
193,163
67,537
60,363
38,721
808,014
Total owners’ equity
332,918
291,430
288,996
291,082
288,313
208,456
150,880
111,798
1,963,873
843
3,407
3,300
8,081
8,034
531
-
690
24,886
332,075
288,023
285,696
283,001
280,279
207,925
150,880
111,108
1,938,987
Non-controlling interests Total equity attributable to equity shareholders
Banking Newsletter PwC
September 2015 77
Financial highlights of Listed Banks (III)
City Commercial Banks & Rural Commercial Banks (In RMB millions) Operating Results in 1H 2015
BOB
NJB
NBB
SJB*
HSB*
HRB*
CQB*
CCBs & RCBs total 10,528 76,442
CRCB*
Operating income
21,518
10,915
9,007
6,990
7,707
5,514
4,263
Net interest income
16,887
8,921
7,598
5,626
6,700
4,452
3,412
9,772
63,368
Non-interest income
4,631
1,994
1,409
1,364
1,007
1,062
851
756
13,074
3,986
1,793
1,743
620
902
946
766
684
11,440
645
201
(334)
744
105
116
85
72
1,634
Operating expenses
(8,745)
(6,306)
(4,569)
(2,819)
(3,752)
(2,753)
(1,825)
(5,388)
(36,157)
Business tax and surcharges
(1,443)
(836)
(506)
(697)
(602)
(442)
(276)
(725)
(5,527)
(4,259)
(2,315)
(2,709)
(1,231)
(1,343)
(1,554)
(1,016)
(3,421)
(17,848)
(3,034)
(3,123)
(1,348)
(891)
(1,807)
(757)
(533)
(1,241)
(12,734)
(9)
(32)
(6)
-
-
-
-
-
(47)
12,773
4,609
4,438
4,171
3,955
2,761
2,438
5,140
40,285
Net fee & commission income Other non-interest income
Business & administration expenses Allowance for impairment losses Other business expenses Operating profit Profit before tax
12,748
4,633
4,437
4,171
4,005
2,785
2,439
5,140
40,358
Income tax expense
(2,686)
(1,032)
(869)
(970)
(932)
(653)
(601)
(1,221)
(8,964)
Net profit
10,062
3,601
3,568
3,201
3,073
2,132
1,838
3,919
31,394
7
6
30
-
32
150
3,194
3,067
2,102
1,838
3,887
31,244
Non-controlling interests 26 33 16 Profit attributable to 10,036 3,568 3,552 shareholders * SJB, HSB, HRB, CQB, CRCB are listed in Hong Kong Exchanges. Financial Position, as of 30 June2015 Total assets
1,624,228
731,302 657,313
Loans and advances, net
713,919
197,306 225,900
Loans and advances Less: Allowance for impairment losses Investments Interbank assets Cash & deposits with central bank Others assets
736,992
204,049 231,683
BOB
(23,073) 386,456 326,235
NJB
(6,743)
NBB
(5,783)
373,532 321,626 71,971 35,550
HRB*
CQB*
588,290 575,156
391,787
282,810
CCBs & RCBs total 5,523,667 672,781
188,428 236,487
149,761
112,995
254,905
2,079,701
191,854 241,983
153,152
115,767
264,601
2,140,081
(5,496)
(3,391)
(2,772)
(9,696)
(60,380)
235,838 185,639 84,760 73,457
97,603 74,944
82,453 41,844
170,274 150,664
1,853,421 859,425
SJB*
(3,426)
HSB*
CRCB*
169,922
71,263
61,575
67,159
69,809
47,092
40,368
83,944
611,132
27,696
17,230
12,662
12,105
9,764
22,387
5,150
12,994
119,988
1,520,725
686,971 619,209
550,023 536,257
360,567
265,621
627,860
5,167,233
Deposits from customers
981,337
476,256 358,183
354,900 349,426
258,229
181,479
454,699
3,414,509
Interbank liabilities
352,410
132,813 127,337
179,569 125,686
78,576
69,600
143,864
1,209,855
Debt securities issued
120,371
59,433
95,487
3,100
50,127
8,495
6,774
17,461
361,248
Due to central bank Other liabilities Total owners’ equity Non-controlling interests Total equity attributable to equity shareholders
20,035 46,572 103,503 244
2,350 16,119 44,331 355
38,202 38,104 89
12,454 38,267 441
160 10,858 38,899 1,165
919 14,348 31,220 697
7,768 17,189 -
382 11,454 44,921 1,454
23,846 157,775 356,434 4,445
103,259
43,976
38,015
37,826
37,734
30,523
17,189
43,467
351,989
Total liabilities
Banking Newsletter PwC
September 2015 78
Financial highlights of Listed Banks (V)
Large Commercial Banks Financial Ratios for 1H 2015 Profitability (Jan - Jun 2015) Return on average total assets (ROA) Return on weighted average equity (ROE) Net Interest Spread (NIS) Net Interest Margin (NIM) Cost to income ratio Income Mix (Jan - Jun 2015) Net interest income Non-interest income Fee and commission income Other non-interest income Asset Quality (As of 30 Jun, 2015) Non performing loan (NPL) balance, in millions NPL ratio Overdue loan balance, in millions Overdue loan ratio Allowance to total loans ratio Provision coverage ratio Capital Adequacy (As of 30 Jun, 2015) Common Equity Tier 1 capital adequacy ratio Tier 1 capital adequacy ratio Capital adequacy ratio Total equity to total assets ratio Risk-weighted assets to total assets ratio
ICBC
CCB
ABC
BOC
BOCOM
1.39% 18.86% 2.34% 2.53% 22.33%
1.51% 20.18% 2.48% 2.67% 23.23%
1.25% 19.96% 2.61% 2.78% 29.57%
1.20% 16.31% 2.03% 2.18% 24.85%
1.12% 15.24% 2.10% 2.27% 25.69%
70.76% 29.24% 21.65% 7.59%
72.22% 27.78% 20.46% 7.32%
80.06% 19.94% 17.38% 2.56%
68.20% 31.80% 20.89% 10.91%
73.47% 26.53% 20.04% 6.49%
163,495 1.40% 289,274 2.48% 2.29% 163.39%
144,359 1.42% 202,053 1.98% 2.63% 185.29%
159,543 1.83% 238,951 2.74% 4.37% 238.99%
125,053 1.41% 175,158 1.97% 2.68% 157.37%
50,153 1.35% 111,482 3.01% 2.30% 170.43%
12.13% 12.40% 14.17% 7.20% 57.37%
12.35% 12.35% 14.70% 7.20% 57.58%
9.30% 10.02% 12.95% 6.43% 63.72%
10.63% 11.62% 13.69% 7.77% 63.47%
10.86% 10.86% 13.12% 6.91% 62.98%
Joint-stock Commercial Banks Financial Ratios for 1H 2015 CMB Profitability (Jan - Jun 2015) 1.33% Return on average total assets (ROA) Return on weighted average equity (ROE) 20.40% 2.60% Net Interest Spread (NIS) 2.77% Net Interest Margin (NIM) Cost to income ratio 24.40% Income Mix (Jan - Jun 2015) 63.48% Net interest income 36.52% Non-interest income 29.86% Fee and commission income 6.66% Other non-interest income Asset Quality (As of 30 Jun, 2015) 39,615 Non performing loan (NPL) balance, in millions 1.50% NPL ratio 82,933 Overdue loan balance, in millions 3.13% Overdue loan ratio 3.06% Allowance to total loans ratio 204.17% Provision coverage ratio Capital Adequacy (As of 30 Jun, 2015) Common Equity Tier 1 capital adequacy ratio 10.50% Tier 1 capital adequacy ratio 10.50% Capital adequacy ratio 12.40% 6.38% Total equity to total assets ratio 58.22% Risk-weighted assets to total assets ratio
Banking Newsletter PwC
CIB
SPDB
CITIC
CMBC
CEB
PAB
HXB
1.17% 21.54% 2.22% 2.44% 20.76%
1.10% 18.70% 2.22% 2.42% 20.21%
1.06% 16.79% 2.14% 2.32% 25.95%
1.31% 20.98% 2.19% 2.35% 27.34%
1.13% 17.30% 2.03% 2.27% 26.53%
0.97% 15.77% 2.57% 2.71% 32.22%
0.99% 17.42% 2.45% 2.63% 36.60%
76.28% 23.72% 20.65% 3.07%
74.88% 25.12% 20.78% 4.34%
71.02% 28.98% 24.96% 4.02%
61.11% 38.89% 32.70% 6.19%
70.50% 29.50% 29.77% -0.27%
66.81% 33.19% 29.46% 3.73%
82.04% 17.96% 18.83% -0.88%
22,203 1.29% 58,120 3.37% 2.85% 221.21%
27,742 1.28% 60,322 2.77% 3.13% 245.45%
30,476 1.32% 82,786 3.59% 2.36% 178.53%
26,423 20,141 1.36% 1.42% 75,643 58,245 3.88% 4.11% 2.20% 2.20% 162.13% 155.18%
15,729 1.32% 60,612 5.10% 2.42% 183.03%
13,668 1.35% 47,579 4.71% 2.50% 185.01%
8.15% 8.95% 11.03% 5.69% 62.62%
8.16% 9.11% 11.11% 6.28% 68.52%
8.98% 9.03% 11.88% 6.38% 69.79%
8.85% 8.85% 10.96% 5.87% 61.24%
8.71% 8.71% 10.72% 5.83% 66.86%
9.15% 9.17% 11.57% 6.70% 72.59%
9.24% 10.23% 11.92% 6.95% 67.21%
September 2015 79
Financial highlights of Listed Banks (IV)
City Commercial Banks & Rural Commercial Banks Financial Ratios for 1H 2015 BOB NJB Profitability (Jan - Jun 2015) 1.28% 1.10% Return on average total assets (ROA) Return on weighted average equity (ROE) 19.98% 20.84% No data 2.49% Net Interest Spread (NIS) No data 2.65% Net Interest Margin (NIM) Cost to income ratio 19.79% 21.20% Income Mix (Jan - Jun 2015) 78.48% 81.73% Net interest income 21.52% 18.27% Non-interest income 18.52% 16.43% Fee and commission income 3.00% 1.84% Other non-interest income Asset Quality (As of 30 Jun, 2015) 6,787 1,942 Non performing loan (NPL) balance, in millions 0.92% 0.95% NPL ratio 10,906 3,242 Overdue loan balance, in millions 1.48% 1.59% Overdue loan ratio 2.83% 3.30% Allowance to total loans ratio 306.97% 347.15% Provision coverage ratio Capital Adequacy (As of 30 Jun, 2015) Common Equity Tier 1 capital adequacy ratio 8.60% 9.41% Tier 1 capital adequacy ratio 8.60% 9.41% Capital adequacy ratio 11.51% 12.30% 6.37% 6.06% Total equity to total assets ratio 74.00% 64.11% Risk-weighted assets to total assets ratio
Banking Newsletter PwC
NBB
SJB*
HSB*
HRB*
CQB*
CRCB*
1.18% 19.70% 2.38% 2.39% 30.07%
1.17% 17.21% 2.02% 2.17% 17.61%
1.16% 16.55% 2.46% 2.68% 25.24%
1.16% 14.00% 2.43% 2.68% 28.18%
1.33% 22.40% 2.33% 2.58% 23.84%
1.21% 17.49% 3.04% 3.25% 32.50%
84.35% 15.65% 19.35% -3.70%
80.50% 19.50% 8.87% 10.63%
86.93% 13.07% 11.70% 1.36%
80.74% 19.26% 17.15% 2.11%
80.04% 19.96% 17.97% 2.00%
92.82% 7.18% 6.50% 0.69%
2,052 0.89% 3,468 1.50% 2.50% 281.79%
777 0.40% 1,138 0.59% 1.79% 440.92%
2,350 2,079 0.97% 1.36% 5,510 5,484 2.28% 3.58% 2.27% 2.21% 233.88% 163.15%
1,039 0.90% 4,423 3.82% 2.39% 266.76%
2,258 0.85% 5,210 1.97% 3.66% 429.37%
9.12% 9.12% 12.64% 5.80% 63.14%
9.99% 9.99% 11.50% 6.50% 64.89%
9.84% 9.84% 11.16% 6.08% 61.48%
9.32% 9.32% 11.51% 6.68% 69.69%
9.70% 9.70% 11.24% 6.76% 67.88%
12.02% 12.02% 12.53% 7.97% 66.08%
September 2015 80
Definitions
Terms
Definition or formula
Non performing loan (NPL) Refers to the sum of Substandard, doubtful and loss loans in accordance with 5-tier classification balance NPL ratio
NPL balance / Total loans and advances to customers × 100%
Overdue loan balance
In case of one day overdue for any principal or interest, the whole loan is classified as overdue
Overdue loan ratio
Overdue loan balance / Total loans and advances to customers ×100%
Provision coverage) ratio
Allowance for impairment losses on loans / NPL balance ×100%
Return on average assets (ROA)
Net profit / average balance of total assets × 100% × annualised coefficient
Return on weighted average equity (ROE)
Net profit / average balance of the sum of owner's equity and minority's interest × 100% × annualised coefficient
Net interest margin (NIM)
Net interest income / average balance of interest-earning assets × 100% × annualised coefficient
Net interest spread (NIS)
Average yield of interest-earning assets - average cost of interest-bearing liabilities x annualised coefficient
Other non-interest income
Non-interest income other than net fee and commission income, including net income from treasury business, fair value gains and losses of financial assets, income from other businesses, etc.
Cost-to-income ratio
Business and administration expenses / operating income x 100%
Current ratio
Current assets / current liabilities × 100%
Loan to deposit ratio
Balance of loans / Balance of Deposits × 100%
Net capital base
Net capital base calculated as stipulated by the Capital Rules for Commercial Banks (Provisional) and other regulations
Tier-1 capital after deductions
Tier-1 capital after deductions calculated as stipulated by the Capital Rules for Commercial Banks (Provisional) and other regulations
Net core tier-1 capital
Net core tier-1 capital calculated as stipulated by the Capital Rules for Commercial Banks (Provisional) and other regulations
Capital adequacy ratio (CAR)
Net capital base / (credit risk-weighted assets + market risk-weighted assets + Operational riskweighted assets + capital floor adjustment × 100%
Tier-1 CAR
Tier-1 capital after deductions / (credit risk-weighted assets + market risk-weighted assets + Operational risk-weighted assets + capital floor adjustment × 100%
Core tier-1 CAR
Net core tier-1 capital / (credit risk-weighted assets + market risk-weighted assets + Operational riskweighted assets + capital floor adjustment × 100%
Banking Newsletter PwC
September 2015 81
Banking and Capital Markets Contacts
Assurance
Advisory
Tax
Raymond Yung – Beijing
James Chang – Beijing
Oliver Kang – Beijing
Tel: +86 (10) 6533 2121
Tel: +86 (10) 6533 2755
Tel：+86 (10) 6533 3012
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Margarita Ho – Beijing
Addison Everett – Beijing
Matthew Wong – Shanghai
Tel: +86 (10) 6533 2368
Tel: +86 (10) 6533 2345
Tel: +86 (21) 2323 3052
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Richard Zhu – Beijing
William Gee – Beijing
Florence Yip – Hong Kong
Tel: +86 (10) 6533 2236
Tel：+86 (10) 6533 2269
Tel：+852 2289 1833
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Jimmy Leung – Shanghai
William Yung – Shanghai
Tel: +86 (21) 2323 3355
Tel：+86 (21) 2323 1984
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Michael Hu －Shanghai
Matthew Phillips – Hong Kong
Tel: +86 (21) 2323 2718
Tel: +852 2289 2303
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Assurance – Risk & Quality
Tracy Chen – Shanghai Tel: +86 (21) 2323 3070
Shirley Yeung – Guangzhou
Chris Chan – Hong Kong
Tel：+86 (20) 3819 2218
Tel：+852 2289 2824
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Nigel Dealy – Hong Kong
Tel: +852 2289 1221 Charles Chow – Shenzhen
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Tel: +86 (755) 8261 8988
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Banking Newsletter PwC
September 2015 82
PwC Offices in China
Beijing
Shanghai
Hong Kong
26/F, Office Tower A, Beijing Fortune Plaza 7 Dongsanhuan Zhong Road, Chaoyang District Beijing, P.R.C Zip: 100020 Tel: +86 (10) 6533 8888 Fax: +86 (10) 6533 8800
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Shenzhen
Guangzhou
Tianjin
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Dalian
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Chongqing
Ningbo
Xiamen
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Suzhou
Nanjing
Xi'an
Room 1501, Genway Tower
Unit 12A01, Nanjing International Centre
7/F, Block D, Chang'an Metropolis Center
188 Wang Dun Road, Suzhou Industrial Park Suzhou, P.R.C Zip: 215028 Tel: +86 (512) 6273 1888 Fax: +86 (512) 6273 1800
201 Zhongyang Road, Gulou District Nanjing, P.R.C Zip: 210009 Tel: +86 (25) 6608 6288 Fax: +86 (25) 6608 6210
88 Nanguan Street Xi'an, P.R.C Zip: 710068 Tel: +86 (29) 8469 2688 Fax: +86 (29) 8469 2600
Macau
Wuhan
Shenyang
29/F, Bank of China Building 323 Avenida Doutor Mario Soares, Macau Tel: +853 8799 5111 Fax: +853 8799 5222
Unit 04, 41/F Wuhan Wanda Centre 96 Linjiang Avenue, Jiyuqiao, Wuchang District Wuhan, P.R.C Zip: 430060 Tel: +86 (27) 5974 5818 Fax: +86 (27) 5974 5800
Room 705, EnterpriseSquare Tower A 121 Qingnian Avenue, Shenhe District Shenyang, P.R.C Zip: 110013 Tel: +86 (24) 2332 1888 Fax: +86 (24) 2326 3888
Banking Newsletter PwC
September 2015 83
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