Greater professionalism and transparency contribute to long-term growth
||Income diversification and domestic consolidation remain steady |
Hong Kong, 9 December 2008
China's banking sector has been less affected by the global financial turmoil due to its relatively closed banking system, good liquidity position, and limited exposure to toxic U.S. financial products. The financial turbulence will lead to slower economic growth and thus a potential increase in non-performing loans, but Chinese banks should grow steadily in the long term, boosted by their increasing professionalism and transparency as well as their transformation into all-around financial conglomerates, according to KPMG's "Mainland China Banking Survey 2008".
KPMG's third "Mainland China Banking Survey" covers 83 banks this year, representing 86 percent of all banking assets in China. The report focuses on prevailing trends in China's banking sector, as well as the development of Chinese banks.
In 2007, China's banking sector achieved a year-on-year net profit growth of more than 50 percent on the back of higher net interest margins, as lending became more profitable. Income diversification into other financial service areas has been healthy. Non-interest income has grown by 48.1 percent on average from 2006 to 2007, for the 76 banks that disclosed information for both years.
"Income diversification has been driven by new government regulations, which have enabled banks to develop into financial conglomerates more in line with their international peers," said Mr. Simon Gleave, Partner in Charge, Financial Services, KPMG China.
"The uncertainty surrounding interest income has also been a key reason for banks' diversification of income sources. This is clearly reflected in the type of investments they are making," explained Mr. Gleave, noting that during late 2007 and the first half of 2008, market players focused on investments in the non-banking financial sector, such as insurance, fund management, leasing, and trust companies.
The report states that consolidation via the establishment of provincial or regional banks among 124 city commercial banks, which account for six percent of the country's total banking assets, was brisk throughout 2007. Indeed, a growing number of banks have also been granted trans-regional expansion licenses, allowing them to do business outside of their immediate regions. Despite a slower rate than in 2007, domestic consolidation has remained healthy this year.
Elsewhere, there has been steady progress to commercialise China's policy banks, including the China Development Bank (CBD), the Export-Import Bank of China (Eximbank), and the Agricultural Development Bank of China (ADBC). This type of transformation is often achieved through cooperation with external parties: CDB reached an agreement with Central Hujin Investment Corp in late 2007 for a USD 20 billion injection as part of its transformation. Eximbank and CDB have joined hands with Italian bank, Intesa Sanpaolo to establish a joint venture private equity fund called Mandarin Capital Partners. In August 2008, ADBC signed a memorandum of understanding with National Australia Bank to cooperate in rural banking expertise and staff training.
The report indicates that IPO activity among banks cooled significantly this year as many have shelved listing plans in light of the stock market downturn. However, there are expectations that activity will pick up in 2009 and a number of banks have indicated a desire to go public, including China Everbright Bank, Hangzhou Bank, Shengjing Bank, Bank of Shanghai, Bank of Tianjin, Bank of Wenzhou, and Bank of Dalian.
"Overall, we should not downplay the risks facing Chinese banks - especially in light of the current environment. Global market uncertainties and appreciation pressure on the Renminbi continue to increase market risk. However, the Chinese banking sector remains reasonably healthy and many banks have managed to cut their NPL ratios," commented Mr. Gleave.
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