China's trusts may overtake insurance as the second largest sector for financial services, due to rapid growth which is being driven by abundant liquidity and a corresponding shortage of investment options in China, according to a recent KPMG report.
KPMG's second annual Mainland China Trust Survey and its fourth report on the sector to date, contains the summary financials of 64 out of 66 registered trust companies in China.
Net profit growth for the sector was 47 percent, with the primary driver being the expansion in fee and commission income, which now accounts for 73 percent of total sector income (compared to 58 percent in 2010). Throughout 2011, the sector has demonstrated rising growth, with a 58.25 percent year on year increase in assets under management, an additional RMB 1.8 trillion (USD 282.4 billion) of assets injected into the industry.
Simon Gleave, Regional Head of Financial Services, KPMG Asia-Pacific, says: "2011 was a great year for the trust sector, marked by significant AUM and profit growth. However, the nature of risk in this sector is changing, which is one of the key areas our report focused on."
"Trust companies also face rising competition from the financial services industry, mainly being driven by securities companies with their increasing wealth management capabilities, and the launch of a junk bond market in 2012 on the Shanghai Stock Exchange with bonds offering rates competitive with that of trust debt products."
In terms of product innovation and the range of available products, the report notes a decline since 2011. Debt (or equity structured as debt) products have crowded out other product offerings of many trust companies, due to a perception among investors that they are lower risk.
Jason Bedford, Senior Manager and Author of the report, says: "We were pleasantly surprised with the high level of transparency in the sector. In many ways, trust companies are setting a benchmark in terms of transparency, in comparison to other financial institutions. In addition, we feel that they are becoming professional entities, investing more in risk management and client relationship management, although there is scope for further improvement."
This is particularly true for risk management, as Simon Gleave explains: "Risk in this sector should be viewed through a number of lenses. There is a level of strategic risk present that is not easily observed in other areas of the financial services sector. Unlike a bank, the role of a trust company in China's capital markets is not clearly defined and there is great deal of business model variance from one trust company to another. Without a strategic vision in place, companies run the risk of their existing business model being unable to respond to changes in the market.
Second, there are significant compliance and regulatory challenges that trust companies face, particularly in light of the rapid growth of the sector which has resulted in efforts to temper growth. Third, as competition in the sector heats up, trust companies are facing increasing operational challenges and cost pressures to ramp up their project monitoring and risk assessment. Credit risk is also beginning to emerge in the sector as certain trust companies take on a proportion of liability of some of their fixed income product offerings," he adds.
Increasing competition between the trust companies themselves and other players in the market are also changing some of the dynamics in this sector. Jason Bedford concludes:" While trust companies currently maintain a relatively unchallenged position in terms of providing investment alternatives to the market, this is gradually changing. Likewise, while many areas of the economy are currently struggling to secure finance, giving trust companies the benefit of being able to select from a wide range of attractive projects to finance, this opportunity would lessen in the face of increased credit, a challenge they need to prepare to respond to."
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