China

Details

  • Type: Business and industry issue, Press release
  • Date: 9/22/2008

2008 interim results for listed banks 

Hong Kong, 22 September 2008

 

Part I - Hong Kong

 

Hong Kong listed banks1

 

2008 first-half results showed some growth in underlying profits despite a generally poor investor sentiment. However, investment write-downs following the global credit crisis had an impact and overall, net profit after tax dropped by 6.4%.

Net interest income rose 15.4% due to loan growth, expansion of higher-yield lending and improved yields on treasury portfolios.
Net fee and commission income grew by 13%, a lower rate of growth than seen in recent years, as IPO and stock brokerage activities slowed down
Net losses and impairment charges on equities, asset-backed securities (ABS), collateralised debt obligations (CDOs) and structured investment vehicles (SIVs) affected by the global credit crunch exceeded HKD 8.2 billion in the first half of 2008, based on disclosed information.2
The impaired loan ratio remained low at 0.54% while impairment charges on loans went up by 28.4%, but off a low base.
Contributions from associates and jointly controlled entities dropped by 33.9% as the one-off gain of HKD 4.8 billion on the dilution of investments in mainland banks following their IPOs in the first half of 2007 was not repeated this year.
Capital adequacy remained strong under BASEL II.
Liquidity remained strong although most banks saw a decline in their average liquidity ratio.

 

HONG KONG ECONOMIC ENVIRONMENT

 

Hong Kong's economy grew steadily by 7.3% year-on-year in the first quarter of 2008, mainly due to strong domestic consumption and increased investments, and dropped to 4.2% year-on-year in the second quarter, the lowest level in almost five years. This was largely a result of the general market slowdown. Import growth rose slightly by 4.7%.
Property prices have been consistently rising, leading to higher rental prices in the second quarter. Property prices for office, domestic and retail properties climbed 32.7%, 23.9% and 17.8% respectively, year-on-year, while rental prices for office, domestic and retail properties rose 21.2%, 20.8% and 8.6% respectively, year-on-year. Low interest rates and limited supply helped to encourage speculative activity and boost property demand.
As the initial public offering (IPO) boom subsided, stock market adjustments and investment sentiments were less bullish. The Hang Seng Index fell from 27,813 at the end of 2007 to 22,102 at the end of June 2008, and has since fallen further to 17,632 on 18 September, a 36.6% drop since the beginning of this year. Stock turnover for the first half of 2008 was about 73% of that of the second half of 2007.
The annual inflation rate hit a ten-year high of 6.3% first in February and then again in July. Food prices surged by 11.7%, the highest increase in food prices in almost 17 years. Costs of living are also on the rise, with housing costs climbing to a five-month high of 6.7%, utilities increasing from 7.4% in June to 7.9% in July, and transport hitting another ten-year high from a 3.9% increase.
The unemployment rate remained low in the first half of 2008 with the seasonally adjusted unemployment rate falling from 3.4% in December 2007 to 3.2% in July 2008. Nominal payroll rose by 3.1% in the first quarter of 2008.

 

HONG KONG BANKING ENVIRONMENT

 

The prime rate fell by a total of 250 basis points, following cuts in the US federal funds target rate of 325 basis points in total since September 2007 in an attempt to stabilise troubled financial markets.
The sector-wide net interest margin improved from 1.90% in the fourth quarter of 2007 to 2.00% in the first quarter of 2008, the highest level achieved since the first quarter of 2003. A lagged effect of asset re-pricing following the interest rate cut, together with low cost customer deposits and better balance sheet management contributed to the improved margin. Mortgage pricing remains competitive although retail banks have been under pressure to raise mortgage rates.
Growth in lending for all authorised institutions was 13% for the first six months, or 17% year-on-year. Retail banks saw exposures to non-bank mainland Chinese entities climb from HKD 550.4 billion or 7.8% of total assets at the end of 2007 to HKD 689 billion or 9.5% of total assets at the end of June 2008. During the first half of 2008, total customer deposits declined by 2.8%, but on a year-on-year basis deposits have actually risen 7%. The loan-to-deposit ratio of retail banks rose from 45.5% in the fourth quarter of 2007 to 51.2% in the second quarter of 2008.
Overall loan asset quality remained healthy. The classified loan ratio fell to a 10-year low of 0.81% in the first quarter of 2008. However, this ratio rebounded slightly to 0.88% in the second quarter indicating early signs of deterioration. Credit card charge-offs rose slightly from 2.73% in the fourth quarter of 2007 to 2.78% in the second quarter of 2008, while the mortgage delinquency rate continues to drop, reaching 0.06% and 0.05% in June and July 2008. There was also a decline in mortgages in negative equity, which fell to 0.3% of the residential mortgage portfolio at the end of June 2008.

 

HONG KONG LISTED BANKS' PERFORMANCE

Balance sheet

 

The listed banks have continued to expand their balance sheets by 12.2%, loan books by 17.6% and customer deposits by 13.7%, year-on-year.
The growth in loan books for listed banks was generally broad-based. Based on available information, mortgages grew 7.6% as property prices rose; competition in this sector remained fierce. Commercial loans grew slightly by 2.2%. Loans for use outside Hong Kong also rose by 52.3%.
Trade finance lending experienced the strongest growth of 55.1% year-on-year.
Capital adequacy remained strong under BASEL II at 14.4% based on available information, compared 13.1% at the end of December 2007.
Liquidity remained strong although 12 out of 13 listed banks saw a decline in their average liquidity ratio for the period ended 30 June 2008, as compared with that for the year ended December 2007. The lowest average liquidity ratio for the first half of 2008 was 34.4% which was still well above the regulatory minimum of 25%.

 

Profitability

 

2008 first half results showed some growth in profits on the back of a general market slowdown but investment write-downs following the global credit crisis have set off some of these profits. Overall, net profit after tax dropped by 6.4%.
Based on disclosed information, total investment (including equity investment) write-downs in the first half of 2008 exceeded HKD 8.22 billion, greater than the HKD 7.67 billion charge to 2007 profit. These write-downs were significant in terms of the HKD 47.8 billion total interim net profit.
Net interest income remained the main component of income, rising by 15.4% on the back of loan growth, expansion of higher-yield lending and improved yields in treasury portfolio. Net interest margin remains under pressure as the contribution from net free funds fell due to the fall in market interest rates.
Net fee and commission income increased by 13% which was lower than recent history as IPO and stock brokerage activities slowed down but it still accounted for a significant portion of total operating income at 27.1%. Total operating income rose by 8.9%.
Operating expenses increased by 23.5% largely due to inflation in rents and staff costs and business expansion, particularly in the mainland.
Overall, operating profit before loan impairment allowances stayed the same as in the first half of 2007, but core profit excluding investment write-downs rose by 15.0%.
Contribution from associates and jointly controlled entities decreased by 33.9%. This was primarily attributable to a one-off gain of HKD 4.8 billion recorded on the dilution of investment in mainland banks in the first half of 2007 has not repeated this year.
Overall, after-tax profit dropped by 6.4%, or 5.8% excluding HSBC.

 

Asset quality

 

Listed banks' loan asset quality remained healthy in a benign credit environment. Over half of the listed banks reported a slight improvement in their impaired loan ratios, with the impaired loan ratio for the sector improving from 0.57% at the end of 2007 to 0.54% at the end of June 2008. Over half of the listed banks reported a drop in actual impaired loans, which fell overall by 2.7% or 1.2% excluding HSBC.
Impairment charges on loans went up by 28.4% or 19.5% if we exclude BOCHK which recorded write-backs of HKD 166 million in the first half of 2007. Overall, the net impairment charges for the sector accounted for 7.0% of profits before impairment charges for the listed banks in total, up from 5.4% in the first half of 2007.
At the end of June 2008, the allowance coverage of impaired loans was 29.0%, similar to 29.8% a year ago. 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 ABS, CDO and SIV investments held by some listed banks was affected by the global credit crisis. Based on disclosed information, listed banks had written down these investment portfolios (excluding equities) by HKD 6.4 billion in the first half of 2008. Based on disclosed information, the carrying value of these investments was HKD 18.1 billion at the end of June. Not all banks were affected. A few listed banks had small or nil exposure to these investments.

 

Part II - Mainland China
 

Mainland China listed banks3

 

The mainland China listed banks registered a very strong growth of 67.3% in net profit after tax. A reduction in domestic income tax rate from 33% to 25% together with loan growth, widened interest spread, fee income growth and improved loan quality contributed to growth in bottom line profits.
The net interest margin expanded after consecutive increases in benchmark loan and time deposit rates by the PBOC while the savings deposit rates are kept nearly the same.
Net interest income rose 15.4% due to loan growth, expansion of higher-yield lending and improved yields on treasury portfolios
Net fee and commission income surged by 56.4% and 155.2% with the launch of new fee earning products and services.
The global credit crisis has extended its impact into 2008 half-year results of the listed banks. Three mainland banks listed in Hong Kong made further impairment allowances of RMB17.7 billion for their US mortgage-related investment portfolio.
The non-performing loan (NPL) ratio continued to improve to 2.15% at the end of June 2008, from 2.50% and 2.87% at the end of December and June 2007 for all listed banks, on the back of strong growth in Chinese economy. Impairment charges on loans rose by 5.3%.
All listed banks were well capitalised with their capital adequacy ratios above the minimum ratio of 8%. Fund raising activities subsided in the first half, after an active year in 2007.

 

MAINLAND CHINA ECONOMIC ENVIRONMENT

 

Mainland China's real GDP growth was strong in the second quarter of 2008, and expanded by 10.4% over the same period last year, compared with 10.6% in the first quarter and 11.9% in 2007.
The consumer price index fell to 7.1% in June and then hit a ten-month low of 6.3% in July, thanks to an ease in food-price inflation, but this is still at a high level. The government announced increases in both fuel and electricity prices in June, and further rises are expected from September to bring retail prices for fuel and power closer in line with ever-increasing costs.
Retail sales expanded by 23.0% and 23.3% in June and July year-on-year respectively. Taking into account the retail price index, the real retail sales growth hit a decade record of 15.4% year-on-year in July. Urban disposable income growth has maintained an annual growth of 10% for the last three years, while rural residents' net income increased even faster.
The real estate market cooled down significantly and began to come off peak levels reached in 2007. The growth rate of real estate prices had slowed down for six consecutive months.
The mainland stock market has been experiencing a downturn since its peak in mid-October 2007. The index at the end of June 2008 had come down by over 50% compared with the peak level and the stock trading volume for the first half of 2008 also dropped 28% over the same period last year.
The Renminbi exchange rate appreciated 6.5% against the US dollar in the first half of 2008.

 

MAINLAND CHINA BANKING ENVIRONMENT

 

The Chinese government used monetary policies to strike a balance between economic growth and rising inflation. During these six months, the People's Bank of China (PBOC) raised the Renminbi deposit reserve ratio five times, taking it to 17.5% in June 2008. Recently, the PBOC announced a 1% cut in deposit reserve ratio, effective 25 September, except for the five state-owned banks and China Postal Bank. All financial institutions in the regions that were severely affected by the Sichuan earthquake will enjoy a 2% cut.
Compared with the first half of 2007, interest rates have gone up by more than 1%, except for savings deposits which remained largely the same. As half of the customer deposits were savings deposits, the overall deposit costs therefore did not increase as much as lending rates. Thus, net interest spread widened. On 16 September, the PBOC cut the benchmark lending rates, ranging from 9 basis points for five-year loans to 36 basis points for six-month loans. Benchmark deposit rates remained unchanged. As a result, net interest spread would narrow slightly.
Total deposits for all financial institutions rose 17.8% year-on-year at the end of June. The downturn in the stock market encouraged investors to keep their money in time deposits. Liquidity remained ample in the market, with the loan-to-deposit ratio slipping slightly to 67.8%. However, the higher deposit reserve ratio will put more pressure on banks' credit management.
Total loans in all financial institutions grew by 15.2% year-on-year at the end of June to RMB 30.5 trillion. Loan growth has been monitored closely by the PBOC. Personal loans grew 21% year-on-year or 9% for the first six months to RMB 5.52 trillion, mostly driven by mortgage books. Corporate loans on the other hand rose by 14% year-on-year or 10% for the first six months to RMB 24.98 trillion.
The NPL ratio of commercial banks continued to improve to 5.57% in the second quarter of 2008.

 

MAINLAND CHINA LISTED BANKS' PERFORMANCE

Balance sheet

 

Under tightened macro-adjustment measures, the mainland listed banks achieved balance sheets and loan growth of 17.2% and 14.6% year-on-year respectively at the end of June 2008. Discounted bills dipped by 33.1% as the banks continued to scale down the bill discounting business, which carried lower yields.
Growth in retail loans was led by growth in mortgage lending, which rose 26.0% year-on-year at the end of June 2008. Concentration in mortgage lending ranges widely among the listed banks, from 7.6% to 26.3% of the loan book.
Credit card lending surged by 116.1% year-on-year, as both the number of cards issued and the transaction volume continued to rise over the previous year. Overall, however the credit card portfolio only accounted for 0.65% of the total loans and advances to customers at the end of June 2008.
Deposits with central banks rose by 65.5% year-on-year or 15.0% in the last six months as the PBOC continued to raise the statutory RMB deposit reserve ratio.
Customer deposits rose 14.8% year-on-year. At the end of June 2008, savings deposits accounted for 48.4% of the total deposits. The loan to deposit ratio stood at 64.5%, same as at the 2007 year-end.
Some of the overseas acquisition deals agreed in 2007 were completed in 2008. A few merger and acquisitions happened in the first half of 2008.
The average capital adequacy ratio for all listed banks was 12.4% at the end of June 2008, which was generally close to the level at the previous year end. All banks were well capitalised as all of them are well above the minimum standard of 8% at the end of June 2008.

 

Profitability

 

The mainland China listed banks registered a very strong growth of 67.3% in net profit after tax. One reason for strong results was a reduction of the domestic income tax rate, from 33% to 25% effective this year. Profit before tax grew strongly at 43.3% due to loan growth, widened interest spread, fee income growth and improved loan quality.
Write-downs on investments in the first half of 2008 totalled approximately RMB 17.7 billion as a result of distress in the global credit market. This was not significant to the sector as a whole since the charge was only about 5.9% of the profit before tax, and only a few bigger listed banks were affected.
The net interest margin widened primarily due to the consecutive increases in benchmark loan and time deposit rates by the PBOC while the benchmark savings deposit rates remained largely the same.
Net fee and commission income surged by 56.4% overall and 155.2% for banks listed in China only. Smaller banks are catching up in launching new fee earning products and services which helped to boost the fee and commission income. The smaller banks were expanding their wealth management and bank card business so they were able to enjoy higher growth in these businesses than the more matured bigger banks. Bigger banks saw higher growth in credit facility related fee income as well as remittance and settlement fee income.
Operating expenses grew by 30.7% for all listed banks. The growth was slightly lower than the growth in total operating income, which resulted in a lower cost to income ratio of 37% for 2008 first half, down from 38% for the same period last year.

 

Asset quality

 

The NPL ratio continued to improve given the strong growth in Chinese economy, dropping to 2.15% at the end of June 2008, from 2.50% and 2.87% at the end of December and June 2007. Gross NPLs dropped by 14% year-on-year or 5.5% in the last six months.
The coverage of provisions for NPLs was 59.4%, similar to the 60.9% at the end of 2007. Loan impairment allowances were made after taking into account the value of collateral and other expected recoveries.
Based on disclosed information, the carrying value of the investment portfolio which was affected by the global credit crunch was approximately USD 12.4 billion.

 

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 the Hong Kong listed banks recorded a strong profit for the first half of 2008, though the investment write-downs following the global credit crisis have offset some of these profits. Net interest income remained the main income component and rose by 15.4% on the back of 17.6% loan growth, expansion of higher-yield lending and better yields on treasury portfolios.

Non-interest income remained at the same level as the first half of 2007 after investment write-downs. Insurance premiums continue to rise but investment returns on insurance investments were adversely affected by the downturn in global capital markets. Net fee and commission income grew slightly at 13% as IPO and stock brokerage activities slowed down. Contribution from associates and jointly controlled entities remained strong overall, though dropped by 33.9% as the one-off gain recorded in previous year on the dilution of investments in mainland banks was not repeated this year. A few banks however shared in losses from insurance associates."

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

"Disclosed information suggests that investment write-downs on equity portfolio and others affected by global credit crunch exceeded HKD 8.22 billion for Hong Kong listed banks, greater than the HKD 7.67 billion charge to 2007 profit. These write-downs were significant in terms of the HKD 47.8 billion total interim net profit. With the continued turmoil in the credit markets, we may see further write-downs in the second half of 2008.

Asset quality of listed banks remained healthy in a benign credit environment. Over half of the listed banks reported a slight improvement in their impaired loan ratios. Lenders should remain cautious of the negative economic impact of the global credit crisis, inflationary pressure and softened growth in the mainland economy, despite healthy delinquency statistics in Hong Kong. The weakened US economy together with mounting inflationary pressure and high property prices has begun to filter through all business and industry sectors. A closer look into the loan portfolio to identify loan customers with early signs of deterioration is important in order for banks to carry out timely measures to minimise risky exposures. As inflation begins to pick up, we may see pressure in operating costs. Cost control will become more important in the coming periods."

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

"We are delighted to see that the Mainland China listed banks registered a very strong growth of 67.3% in net profit after tax. Strong growth in profits was supported by a reduction in income tax rate, loan growth, widened interest spread, fee income growth and improved loan quality.

The People's Bank of China raised the statutory Renminbi deposit ratio five times in first half of 2008, bringing it to reach a record high of 17.5%. Credit available for refinancing will be limited. Improvements in the NPL ratio may slow down and even become challenging in view of the global slowdown paired with losses caused by natural disasters in the mainland. Small and- medium-sized borrowers and property developers that expanded aggressively in the past few years will require closer monitoring.

The global credit crisis which started in 2007 has extended its impact into the 2008 half year results of the listed banks. Three mainland banks listed in Hong Kong charged a further impairment allowance of RMB 17.7 billion for their US mortgage related investment portfolio. The carrying value of the US mortgage related investment portfolio with impairment provisions amounted to approximately USD 12.4 billion. With the continued turmoil in the global financial market, we may see further deterioration in the investment portfolio in the second half of 2008"

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

"Fund raising activities have slowed down in the first half of 2008, after an active year in 2007 for Mainland banks. Moving into the second half of 2008, a few listed banks have raised or announced plans to raise funds through the issuance of bonds or subordinated debt. Issuing Renminbi bonds in Hong Kong started gaining popularity in second half of 2008. Initial public offerings remain quiet because most of the large-sized banks have been listed while others are still preparing to go public. The poor sentiment in the stock market is also unfavourable to capital raising activities"


 



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.

 

- End -

About KPMG

KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 145 countries and have more than 123,000 professionals working in member firms around the world.

The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. KPMG International provides no client services.

In China, we have twelve offices (including KPMG Advisory (China) Limited) in Beijing, Shenyang, Qingdao, Shanghai, Nanjing, Chengdu, Hangzhou, Fuzhou, Guangzhou, Shenzhen, Hong Kong SAR and Macau SAR, with more than 8,500 professionals.

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

 

 

Get in touch with KPMG China

 


 

Subscribe to receive email alerts or e-Newsletters from KPMG China when new updates are available.