China's banks posted strong growth for 2011 and the first half of 2012, mainly driven by a growing deposit base, increased net interest margins and growth in non-interest income, according to KPMG's latest annual survey of the mainland banking sector.
The report notes that from an outbound perspective, Chinese banks have continued their overseas expansion, mainly by establishing new branches and subsidiaries. While there are market concerns around the quality of some credit portfolios, non-performing loans (NPLs) have continued to decline in absolute terms according to CBRC disclosures.
KPMG's sixth annual Mainland China Banking Survey covers a record 197 banks, representing 88 percent of all banking assets in China. This year's survey also includes the financial information for 33 of the 37 foreign banks that were locally incorporated prior to year-end 2011.
The report also highlights the strong performance of locally incorporated foreign banks in China, which have outperformed their domestic peers by most metrics. While still modest as a percentage of total banking assets in China, foreign bank assets now account for 1.95 percent of total banking assets, up from 1.87 percent in 2010. Notably, asset growth for foreign banks from 2010 to 2011 was 24 percent, outpacing the 18 percent average growth of the overall sector.
Simon Gleave, Regional Head, Financial Services, KPMG China, says: "While there is variance from bank to bank, in terms of the business model, what is clear is that most foreign banks did well last year and saw profits reach record levels. This was mainly being driven by net interest income both in terms of volume and margin, as well as increased activity in bond and foreign exchange trading. Foreign banks have also been actively providing products and services for local Chinese enterprises in relation to their increasing outbound investments and overseas expansion."
In other highlights, the variance in net interest margin (NIM) across banks is also greater in 2011 than in 2010, indicating divergence in terms of lending practices and borrower bases across banks. While only 24 banks released NIM figures for 2011, these banks represent nearly 70 percent of total banking sector assets.
Jason Bedford, Senior Manager, KPMG China, and Author of the report, says: "Access to financing has improved substantially in the past few years for SMEs, but securing capital still remains a challenge for many firms, as banks in China are still partial to lending to state-owned or larger entities. However, a number of factors are driving better access to capital, including a changing competitive environment, robust regulatory support for SME lending and the rapid growth of MCCs and credit guarantee companies, who help share the risk burden of SME lending with the banks."
"As a result, many banks, particularly smaller institutions such as rural commercial banks, are enjoying greater pricing power and employing more risk-based pricing mechanisms in their rapidly growing personal and SME loan departments, driving NIM growth."
The report finds that there was substantial variance in profit growth rates between different banks in China; the big five commercial banks (29.03 percent), joint stock banks (47.64 percent), and city commercial banks (40.41 percent).
For the 187 banks that supplied lending and deposit figures for both 2010 and 2011, the survey revealed loan growth of 15.7 percent and deposit growth of 13.1 percent. While total operating expenses across the sector are up 25 percent from 2010, there are indications of improving operating efficiency at the banks. The cost income ratio averaged out across all of the banks surveyed was 36 percent in 2011, down from 40 percent in 2010. Notably, of the 179 banks that released related figures, 135 saw a decrease in their cost income ratio.
Meanwhile continued growth of non-interest income is indicative of the maturing of the banking industry. In particular, payments have grown considerably, with a significant increase in the number of debit and credit cards issued in China.
Simon Gleave concludes: "We are pleased with the marked increase in transparency in China's banking sector. There are indications this sector is maturing, marked by an increased overseas presence, the roll out of new and innovative services and the rapid adoption of mobile banking applications and online payment systems. From our inaugural survey published in 2006, which included the financial information for 21 banks, it is testament to the increasing transparency within China's banking industry that 197 banks disclosed their financials for this year’s report."
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