Chinese banks' volatile results posit hazy future for 2020

City commercial lenders’ profits followed a “V” curve from 2017-2019.

Volatility remains a key theme in China’s banking space, with the lenders following different growth and loss trajectories over the past three years, according to EY’s Listed banks in China: 2019 review and outlook report.

China’s 36 listed banks collectively realised a net profit of US$246.08b (RMB1,748.36b) in 2019, up 7.32% compared to the previous year. This was mainly attributed to the accelerated growth in operating income and slower growth in loan loss provisions.

Large commercial banks and national joint stock commercial banks saw rising net profit growth, whilst city and rural commercial banks both followed a “V” curve.

In particular, the net profit of city commercial banks posted a bumpy ride over the three year-period of 2017-2019 at 12.8%, -3.12%, and 11.41%, respectively.

Banks’ fee and commission income also showcased the same volatility, expanding by 9.66% in 2019 after contracting 1.45% in 2018 and increasing marginally by 0.28% In 2017. This was due to lenders’ accelerated transformation of their wealth management businesses, increased volume of net asset value (NAV) wealth management products, and a rapid growth in their bank card businesses.

This unpredictable performance extends to uncertainty in Chinese listed banks’ future for 2020. Whilst their net profit grew 5.03% YoY and totalled $69.81b (RMB495.98b) in Q1, this growth was 2.35 percentage points (ppt) lower compared to the growth recorded in Q1. The recent pandemic outbreak will also likely affect future results.

“China still faces downward pressure on economic growth as the structural and cyclical factors constrain the prospects. In addition, the COVID-19 outbreak in 2020 inevitably has had an adverse impact on economic operations in China and the world,” noted Geoffrey Choi, APAC financial services assurance leader at EY.

“Meanwhile, to address the impact, larger-than-expected stimulus policies introduced across economies will likely change the international economic and trade landscape to a certain extent, posing considerable uncertainties to the global economy and exposing listed banks to new difficulties and challenges in business operation and development,” he added.

Banking on fintech
Listed banks’ investments into fintech and information technology totalled $14.19b (RMB100.8b) in 2019, according to data compiled from the lenders’ 2019 annual reports. China’s big four banks—ICBC, ABC, BOC, and CCB—all invested more than US$1.4b (RMB10b) into fintech and IT.

Meanwhile, the nine listed banks who disclosed growth in fintech and IT investments in 2019 recorded an average growth rate of 26%.

EY noted that the large investments of banks in fintech applications further strengthens the role of fintech in driving business transformation and growth and embracing accelerated innovation.

Social responsibility
The lenders were also observed to have actively responded and promoted the development of green finance and inclusive financial services in 2019. Large commercial banks increased their green credit and inclusive finance loans by 13.3% and 45%, respectively.

“For listed banks, both financial results and environment, social and governance (ESG) performance are important. On the one hand, to enjoy policy dividends, the listed banks must align their strategies and efforts with the national initiative to vigorously promote the construction of ecological civilization and develop inclusive finance,” said Kelvin Leung, Greater China financial services banking and capital markets leader at EY.

“On the other hand, only when the listed banks actively perform social responsibilities, demonstrate customer-centered commitment, attach importance to the protection of consumer rights and interests, and maintain a good reputation and image, can they gain trust and enhance customer loyalty,” he added.

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