China

Details

  • Type: Business and industry issue, Press release
  • Date: 4/30/2008

2007 final results for listed banks 

30 April 2008

 

Part I - Hong Kong

 

Hong Kong listed banks 1

In a thriving local economy, Hong Kong listed banks have reported strong growth

Net interest income remained the main income component, rising by 21.0% on the back of loan growth and improved treasury portfolio yields
Net fee and commission income grew strongly by 53.1%, with buoyant stock market activity bolstering fee income
Net loss and impairment charges on asset-backed securities, collateralised debt obligations and structured investment vehicles affected by the global credit crunch amounted to HKD 7.67 billion, based on disclosed information 2. The remaining exposure was HKD 12.57 billion and further mark-down or provision will likely be required in 2008
Impaired loan ratio continued to improve but impairment charges on loans went up by 54.5% due to loan growth and smaller write-backs
Contributions from associates and jointly controlled entities rose 211% over 2006. This was primarily due to one-off gains of HKD 4.8 billion on the dilution of investments in mainland banks and higher profits made by the associates
Overall, after-tax profit for listed banks increased by 36.8%
Capital adequacy remained strong under BASEL II with an overall average of 12.4%

 

HONG KONG ECONOMIC ENVIRONMENT

 

 

Hong Kong's economy expanded by 6.7% year-on-year in Q4 2007, and grew by 6.3% in 2007, slowing from 7% in 2006. This was largely a result of the export sector's weak performance, which grew at 7.2%, its slowest pace in six years. Import growth dropped slightly from 9.2% in 2006 to 9.0% in 2007.

Property and rental prices picked up in 2007, particularly in Q4. Office and domestic property prices surged 38.9% and 24.3% respectively year-on-year, while office and retail rental prices were also up by 15.5% and 12.2% respectively. Sustained economic growth, a booming stock market, and low interest rates helped to encourage speculative activity and boost property demand.
The steady flow of IPOs throughout 2007 continued to spark investors' interest in equities, which in turn drove up stock prices. The Hang Seng Index rose from 19,965 at the end of 2006 to its peak at 31,638 on 30 October 2007 and dropped back to 27,813 at the end of 2007. Stock turnover for 2007 was about 2.5 times that of 2006.
The year-on-year inflation rate rose to 3.8% in December 2007, and climbed to 6.3% by February 2008. The last time inflation hit 6.3% was in August 1997. Rising food and oil prices paired with the accelerating appreciation of the Renminbi in 2008 may further aggravate this trend.
The unemployment rate has improved, falling to a nine-year low. The seasonally adjusted unemployment rate fell from 4.4% in December 2006 to 3.4% in December 2007. Nominal payroll rose by 5.9% in Q4 2007, reaching a nine-year high partly due to accelerated inflation.

 

HONG KONG BANKING ENVIRONMENT

 

The prime rate fell 100 basis points between September and December 2007, following a cut in the US federal funds target rate in an attempt to restore calm in the financial markets suffering from sub-prime turmoil. In January and March 2008, the US announced further cuts totalling 200 basis points to rescue the credit market; banks in Hong Kong followed with a cut of 150 basis points.

The sector-wide net interest margin improved from 1.80% in Q4 2006 to 1.87% in Q4 2007, the highest level since Q1 2004. Better yields on treasury portfolios and more non-prime based loans contributed to the improved margin. Mortgage pricing remains competitive.
Growth in lending was broad-based over the past year, with a 20% year-on-year increase recorded at the end of December 2007. Customer deposits also grew by 23.6% year-on-year. The last time loans and deposits grew by 20% or more was during 1987 - 1990 and before that in 1981 - 1982.
Overall loan asset quality continued to improve. The classified loan ratio fell to 0.86% in Q4 2007, which was the lowest in the past decade. Credit card charge-offs fell to 2.73% in Q4 2007, one of the lowest levels achieved since 2000, while the mortgage delinquency rate gradually dropped throughout the year to reach 0.11% by December 2007. Mortgages in negative equity fell to 0.5% of the residential mortgage portfolio.

 

HONG KONG LISTED BANKS' PERFORMANCE

Balance sheet

 

The listed banks have continued to expand their balance sheets, loan books, and customer deposits by 23.2%, 19.5% and 23.0% year-on-year respectively.

The growth in loan books for listed banks was broad-based. Mortgages grew 4.6% mainly due to the rise in property prices; competition in this sector remains fierce. Commercial loans grew by 13.8%, primarily led by the growth in property, financial and brokerage, as well as manufacturing loans. Loans for use outside Hong Kong also rose by 33.9%, and 52.4% excluding HSBC.
Capital adequacy remained strong under BASEL II with an overall average of 12.4%, and 13.1% excluding HSBC. The ratio was generally lower than that calculated under BASEL I mainly due to the capital charge on operational risk. Liquidity ratio was ample and annual average liquidity ratio remained above 40% for all listed banks.

 

Profitability

 

Despite investment write-downs, 2007 was a strong year for profitability due to robust economic conditions and a buoyant stock market. Overall, net profit after tax rose 36.8% over that of 2006. Three banks reported more than 50%.

Based on disclosed information, total investment write-downs exceeded HKD 7.67 billion for Hong Kong listed banks. Although the write-downs were not significant to the sector as a whole, on an individual basis a number of banks were affected considerably. Indeed, two medium-sized banks cited global credit crunch related write-downs as the key factor in the decline of their 2007 profit compared with 2006.
Net interest income remained the main component of operating income, rising by 21.0% on the back of loan growth and better treasury portfolio yields. Net interest margin remains under pressure due to intense competition in the lending business, especially in mortgages.
Gains from dealing activities and net fee and commission income grew strongly by 61.7% and 53.1% respectively. Buoyant stock market activities raised brokerage fee income as well as fees earned from sales of structured products. Net fee and commission now accounts for a significant portion of total operating income at 28.2%.
In light of this, total operating income rose by 26.7%.
Operating expenses increased by 23.2% largely due to business expansion, particularly in the mainland.
Overall, core operating profit before impairment allowances rose by 29.1%, or 37.9% before investment write-downs.
Contribution from associates and jointly controlled entities soared by 211%. This was primarily attributable to one-off HKD 4.8 billion gains on the dilution of investments in mainland banks and a HKD 3.1 billion increase in share of their profits over 2006.
Overall, after-tax profit increased by 36.8%, or HKD 27.4 billion, over that of 2006.

 

Asset quality

 

Listed banks' loan asset quality continued to improve in a benign credit environment. All the listed banks reported improvement in their impaired loan ratios, with the impaired loan ratio for the sector dropping from 0.77% to 0.57%. Almost all the banks reported a drop in actual impaired loans, which overall fell by 12.4%.

Impairment charges on loans went up by 54.5% or 17.4% if we exclude BOCHK which recorded write-backs in 2007 and 2006. Higher charges were driven partly by loan growth.
At the end of 2007, the allowance coverage of impaired loans was 28.6%, down from 30.5%. Loan impairment allowances are not 100% provided as they are made after taking into account collateral values and other expected recoveries.
The asset quality of the investments held by some of the listed banks was affected by the global credit crunch. Based on disclosed information, listed banks had at least HKD 20.24 billion in nominal value tied up in asset-backed securities, collateralised debt obligations and structured investment vehicles. Of this, HKD 7.67 billion was charged against 2007 profit. However, not all listed banks were exposed to those investments which were affected by credit crunch.
Disclosed information also indicates that remaining exposure to these investments is HKD 12.57 billion. Some banks have indicated that further provision will be required in 2008.

 

Part II - Mainland China

 

Mainland China listed banks 3

 

Mainland China listed banks have reported strong growth despite tightened monetary policies

Net interest income surged by 36.7% due to loan growth and widened lending/deposit spread
Net fee and commission income rose significantly by 115.5%, with buoyant stock market activities bolstering fee income
Net impairment charges on investment portfolio affected by distress in the global credit market amounted to RMB 22.6 billion, based on disclosed information. The carrying value of this portfolio was RMB 33.3 billion as at 31 December 2007
Loan asset quality continued to improve. Impairment charges on loans climbed slightly by 2.7%
Overall, profit after tax rose by 55.9%
Fund raising activities helped raise the capital adequacy ratio (CAR). The average CAR for all listed banks improved to 12.8% at the end of 2007, from 12.4% a year earlier. CAR for those banks listed in China also rose to 10.9%, from 8.6% a year ago

 

MAINLAND CHINA ECONOMIC ENVIRONMENT

 

Mainland China continued to record rapid economic growth. Real GDP grew by 11.9% in 2007, the strongest economic performance in 12 years. This has been driven by booming exports and strong investment growth.

Both retail sales growth and consumer price inflation surged to an 11-year high. Inflation reached 6.5% year-on-year in December 2007 and rose further to 8.3% in March 2008. Retail sales revenue increased by 16.8% in 2007 and 20.6% for Q1 2008, supported by rising income.
Property prices continued an upward trend, even though the central bank raised downpayment requirements in September 2007 for residents acquiring a second home. National housing prices rose by 10.5% year-on-year in December 2007.
Stock trading was very active which boosted brokerage, funds and wealth management related fee income for the banks. Total stock turnover in 2007 for the Shanghai and Shenzhen stock exchanges was 5.1 times that of 2006.
The Renminbi's value against the US dollar appreciated by 6.5% in 2007, with the exchange rate rising from USD 1 to RMB 7.8087 at the end of 2006 to RMB 7.3046 at the end of 2007. This further appreciated to RMB 7.03 at the end of March 2008. A generally weaker US dollar was certainly one of the factors contributing to the quick appreciation of the RMB.

 

MAINLAND CHINA BANKING ENVIRONMENT

 

The statutory RMB deposit reserve ratio was raised ten times in 2007 from 9% at the beginning of 2007 to 14.5% at the end of 2007. This was further raised to a record high of 16% by the end of April 2008 to curb credit growth.

Interest rates were raised six times in 2007. Benchmark lending rates were raised by 0.99% to 1.35% while benchmark fixed deposit rates were raised by 1.53% to 1.71%, depending on their tenors. Benchmark savings deposit rates on the other hand did not catch up with the hike as it was once raised by 0.09% for five months during 2007. Since savings deposits accounted for half of the customer deposits, overall deposit costs did not increase as much as the benchmark fixed deposit rates. Net interest spread widened as a result.
Total deposits for all financial institutions rose 15.2% year-on-year at the end of 2007, with savings deposits accounting for 51.2% of the total corporate and personal savings, up from 48.3% a year ago. The buoyant stock market encouraged investors to keep their money in savings deposits for investment flexibility.
Total loans in all financial institutions grew by 16.4% year-on-year in 2007 to RMB 27.8 trillion. Personal loans grew 30.4% year-on-year to RMB 5.07 trillion. Corporate loans rose by 13.1% to RMB 22.71 trillion, of which discounted bills dropped by RMB 0.44 trillion.
The non-performing loan (NPL) ratio of commercial banks continued to improve to 6.17% in Q4 2007, from 7.09% in Q4 2006. It began to stablise as more banks cleaned up their loans books prior to listing.

 

MAINLAND CHINA LISTED BANKS' PERFORMANCE

Balance sheet

 

Under tightened macro-adjustment measures, the mainland listed banks achieved balance sheets and loan growth of 20.5% and 15.9% year-on-year respectively. Personal loans surged by 33.7% overall, and by 60.3% for those listed in China only. Corporate loans also rose by 18.5%. Discounted bills, on the other hand, dipped by 42.1% as the banks continued to scale down the bill discounting business which carried lower yields.

Deposits with central banks rose by 61.8% year-on-year as the central bank raised the statutory RMB deposit reserve ratio.
Customer deposits rose 12.5% year-on-year, and the loan to deposit ratio stood at 64.5%.
Some listed banks acquired overseas financial institutions and expanded into other domestic financial service sectors in 2007. A major overseas investment was ICBC's acquisition of 20% of Standard Bank in South Africa for RMB 33.8 billion. Some listed banks set up domestic leasing companies, fund management joint ventures, or acquired minority stakes in domestic banks.
Total funds raised by the listed banks in the stock market amounted to RMB 190.9 billion in 2007. Seven banks raised capital through initial public offers (IPO) in 2007, of which 71.4% of these total funds were raised through A-shares IPO, and 17% through H-shares IPO. Remaining funds were raised either through private placement or exercise of warrants issued to shareholders as part of the state-share reform plan. Two listed banks raised subordinated debt in mainland China.

 

Profitability

 

Mainland banks posted very strong results, with net profit after tax surging by 55.9%. Growth in earnings was driven by a widening of customer loan and deposit spread, loan growth, strong fee income and improved loan quality.

Impairment write-down for investments was approximately RMB 22.6 billion as a result of distress in the global credit market. However, this was not considered very significant to the sector as a whole since the charge was only about 5.1% of the profit before tax, and only a few of the bigger listed banks were affected.
The net interest margin expanded because the benchmark savings deposit rates did not catch up with the hike in loans and fixed deposits interest rates. In addition, a rising A-share and property market also encouraged investors to shift from time deposits to lower cost savings accounts.
Net fee and commission income surged by 115.5% to RMB 115.3 billion. Over half of this came from agency, custodian, trust and wealth management commission; 16% came from bank card fee; and 15% came from settlement and clearing. Net fee and commission income for all listed banks accounted for 13.2% of total operating income, compared with 8.5% in 2006.
In light of this, total operating income rose 38.1%.
Operating expenses grew by 32.3% for all listed banks in China. Cost to income ratio fell to 42.9% for 2007, from 44.8% a year ago.
Loan impairment charges rose by 2.7%.
Profit before tax rose 57.1%, while tax charges rose slightly after the adjustment for deferred tax assets and liabilities due to the reduction in income tax rate from 33% to 25% for the next financial year.
Overall, net profit after tax surged by 55.9%.

 

Asset quality

 

The NPL ratio continued to improve given the strong macro and robust corporate earnings growth, and dropped from 3.3% at the end of 2006 to 2.5% at the end of 2007 for all listed banks. Gross NPL dropped by 12.7%.

Allowances coverage for NPL was 61%, an improvement from 53.2% at the end of 2006. Loan impairment allowances are made after taking into account the value of collateral and other expected recoveries in the advances.
Based on disclosed information, the carrying value of the investment portfolio which was affected by the global credit crunch of all listed banks was approximately RMB 33.3 billion at the end of 2007. Whether further provision would be required in 2008 depends on the recovery of the credit market in the US. Three mainland banks listed in Hong Kong have exposure to investments affected by the credit crunch.

 

Commenting on the Hong Kong listed banks' results, Babak Nikzad, partner in charge of KPMG's Financial Services practice in Hong Kong, said:

"We are pleased to see that the Hong Kong listed banks registered a very strong growth of 36.8% in profit after tax, despite investment write-downs. Net interest income remained the main income component and rose by 21.0% on the back of 19.5% loan growth and better yields on treasury portfolios. Hong Kong banks have cut interest rates following the slash in US federal fund target rates to rescue their credit market. In Hong Kong, the prime rate fell by 100 basis points in 2007 and 150 basis points in the first quarter of 2008. Bigger banks saw improvements in net interest margins, and benefited from improved deposit spreads in current and savings accounts and better yields on balance sheet management portfolios. However, net interest margins are now under more pressure due to intense competition in the lending business and the zero deposit rate.

Non-interest income surged by 36.0%, or 49.7% if investment write-downs are added back. Buoyant stock market activities boosted fee income. Contribution from associates and jointly controlled entities rose 211% over 2006, partly due to a one-off gain of HKD 4.8 billion on the dilution of investment in mainland banks following their IPOs."

Martin Wardle, a partner in KPMG's Financial Services practice, commented:

"Disclosed information suggests that total global credit crunch affected investment write-downs exceeded HKD 7.67 billion for Hong Kong listed banks. Although this was not significant to the sector as a whole, it was important to a number of banks and caused a few medium-sized banks to report a decline in profit when compared with 2006. The disclosed remaining exposure is HKD 12.57 billion, and some banks have already indicated that further provision will be required in 2008. The level of additional impairment provision for 2008 will depend on the recovery of the US mortgage and credit market. However, not all listed banks were hit by the global credit crunch, and a few have little or no exposure to this type of investments.

Loan asset quality of listed banks continued to improve significantly in a benign credit environment. All the listed banks reported improvements in their impaired loan ratios. However, despite healthy delinquency statistics in Hong Kong, lenders should remain cautious of the negative economic impact of the global credit crunch, global inflation and a potential US recession. High rental and property prices, together with high commodity prices, will add pressure to the small-to-medium enterprises, particularly those businesses where their profit margin is heavily eroded by surging costs. Lenders should also ensure borrowers use their loans for their declared purposes rather than for speculation."

Commenting on the Mainland listed banks' results, Joan Ho, partner in charge of KPMG's Financial Services practice in southern China, said:

"This is the first issue in which we cover all the Mainland China listed banks. We are delighted to see that the Mainland China listed banks registered a very strong growth of 55.9% in net profit after tax despite the tightened monetary measures imposed by the central bank. Strong economic activity driving loan growth, widened interest spread, a buoyant stock market driving fee income growth and improved loan quality were key factors to the after-tax profit growth. Looking ahead, the reduction in the income tax rate in 2008 should improve this year's bottom line net profits.

Write-down in investments affected by the distress in global credit market was limited to a few large size listed banks. The carrying value of this portfolio was about RMB 33.3 billion at the end of 2007. Whether further provision may be required in 2008 depends on the recovery of sub-prime credit market in the US. Besides exposure to sub-prime related securities, the banks also have exposure to prime and alt-A related investments. More investments could become impaired should the US credit market continue to deteriorate in 2008.

A record high Renminbi deposit reserve ratio would limit the credit available for refinancing. Improvement in the non-performing loan ratio may slow down and even become challenging in view of a possible global recession paired with domestic macro-economic controls. Banks should monitor the loan account performance more closely to identify any signs of deterioration. This is particularly important for small-and-medium size borrowers and those accounts which expanded very rapidly in the last two years riding on the back of the buoyant domestic stock market which has recently slumped."

Walkman Lee, a partner in KPMG's Financial Services practice, added:

"Fund raising was active in 2007 for Mainland banks. Seven banks launched an IPO in the Shanghai or Shenzhen stock exchanges. One of the seven banks launched a dual IPO in both Shanghai and Hong Kong stock exchanges. Three of the seven were city commercial banks which were pioneers among their peers. Fund raising through subordinated debt was comparatively less active. Total funds raised in the year amounted to RMB 190.9 billion from equity, and RMB 31 billion from subordinated debt. Looking forward to 2008, fund raising activity is expected to slow down.

Some listed banks began to expand their business overseas or domestically into other financial services sectors, such as leasing and fund management, after gaining regulatory approval. Business diversification would help the Mainland banks to expand revenue channels and also to grow into national or global players. Mainland banks should ensure that there is adequate board and management oversight, and have a sound business risk management model in place to manage the new business sectors or equity investments."


 

Remarks:

  1. The 13 Hong Kong banks included in our analysis are: BOC Hong Kong (Holdings), The Bank of East Asia, CITIC International Financial Holdings, Chong Hing Bank, Dah Sing Banking Group, Fubon Bank (Hong Kong), Hang Seng Bank, Hongkong and Shanghai Banking Corporation, ICBC (Asia), Public Financial Holdings, Standard Chartered Bank (Hong Kong), Wing Hang Bank and Wing Lung Bank.
  2. Disclosed information refers to results announcements and media reportings.
  3. The 14 mainland banks included in our analysis are: Bank of China, China Construction Bank, Bank of Communications, China Merchants Bank, China CITIC Bank and Industrial & Commercial Bank of China which are listed in both Shanghai and Hong Kong stock exchanges, and also Bank of Beijing, Bank of Nanjing, Bank of Ningbo, China Minsheng Banking, Huaxia Bank, Industrial Bank, Shanghai Pudong Development Bank, Shenzhen Development Bank which are listed in the Shanghai or Shenzhen stock exchanges.

 

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For any further enquiries, please contact the following banking specialists at KPMG:

Babak Nikzad
Partner in charge, Financial Services practice in Hong Kong
 +852 2978 8297
 babak.nikzad@kpmg.com.hk

 

 

Martin Wardle
Partner in charge, Financial Services practice in Hong Kong
 +852 2826 7132
 martin.wardle@kpmg.com.hk


Joan Ho
Partner in charge, Financial Services practice in southern China
 +852 2826 7104
 joan.ho@kpmg.com.hk

 

Walkman Lee
Partner, Financial Services practice in Hong Kong
 +852 2978 8230
 walkman.lee@kpmg.com.hk

For media enquiries, please contact:

Nina Mehra

Senior Manager, Media Relations

KPMG China

 +852 2140 2824 (Direct)

   +852 9724 6092 (Mobile)

 nina.mehra@kpmg.com

 

 

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