Chinese banks are implementing major changes in their business model in an environment that has become vastly different post-financial crisis. Transformation is the new buzzword for Chinese banks in 2010. From mere operational expansion, they are now adopting a strategy that focuses on intensive growth, according to the findings of the second Chinese Bankers Survey Report 2010 from PricewaterhouseCoopers (PwC) and China Banking Association (CBA).
“Transformation is a top strategic priority that Chinese banks, especially the joint-stock commercial players, believe they must adopt to respond to the changes taking place around them. The competition has become more intense, not to mention, there’re now more capital restrictions in place. The speed of financial disintermediation has also greatly affected the banks’ credit business. The changes the banks are making aren’t merely cosmetic. They’re migrating their customer base to focus more on SMEs [small and medium-sized enterprises], and at the same time, turning their attention to the global marketplace. The banks are increasing their emphasis on developing intermediary and high-end retail business, as well as integrating their operations,” said Raymond Yung, PwC’s financial services leader for China.
Banks have also adjusted their portfolio structures. More loans are now being issued to the alternative energy and equipment manufacturing industries. Logistics, agriculture, health care and education, are also key targets for lending. Three-quarters of the respondents say that they would “limit credit investment to businesses that are at overcapacity, high polluting, or high energy consuming.”
A majority of the 44 banks that took part in the survey this year believe that increasing competition from their peers and increased pressure to attract investment present the biggest challenges in 2010. With an improvement in China’s overall economic climate, banks believe non-performing loans (NPLs) will remain at low levels in the next three years. Nonetheless, the respondents are worried that NPLs may rise sharply in the longer term.
Almost half (47%) of the respondents surveyed believe that local government-backed debt carries a relatively high risk. They say the long investment period and large-scale nature of government projects make it difficult to realise the sustained commercial profitability of the undertakings.
“The survey reveals Chinese banks tend to focus on achieving a balance among risk management, business growth, and risk-adjusted profitability. Having said that, credit risk is still considered the biggest and most serious, with concerns over compliance risk rising. This is likely due to the frequent introduction of new regulations by the central government as well as the substantial changes in industry policy since 2009,” said Yung.
A greater number of banks are showing an increasing interest in SME-related financial services, which was identified as a key future growth area in the survey. On the other hand, many banks are re-assessing their real estate lending strategy. As a result of China’s tightening policies on the property industry, the priority ranking for personal residential mortgage loans dropped from first place in 2009 to fifth in this year’s survey.
With Chinese companies aggressively expanding their operations overseas, and the increasing clout of the renminbi (RMB), over two-thirds of the respondents say the time is right to go global. The banks are particularly focusing their near-term sights in the Asian region.
Banks gave top marks to the China Banking Regulatory Commission’s policies. “Chinese banks are generally very happy with the measures taken by the regulator after the financial crisis. They feel guidelines such as the countercyclical capital requirements and the introduction of leverage ratio standards, provide a boost to the Chinese banking industry,” said Yung.
The respondents also expect more restructuring ahead for China’s banking industry. Players that have the ability to innovate will stay ahead in an environment that has become increasingly competitive.
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