Rate liberalisation to help diversify China’s banks, finds KPMG survey

Rate liberalisation to help diversify China’s banks

China’s banking sector is expected to see further diversification due to ongoing interest rate liberalisation, according to KPMG’s latest annual survey.


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China’s banking sector is expected to see further diversification due to ongoing interest rate liberalisation, according to KPMG’s latest annual survey.  

KPMG’s eighth annual Mainland China Banking Survey analyses current trends for 200 local and foreign banks in China and challenges facing the sector in the short term.

Simon Gleave, Regional Head, Financial Services, KPMG China, says: “Interest rate liberalisation will undoubtedly lead to a slowdown in the income growth of traditional deposit and loan business. The future development of the banking industry will no longer depend on the expansion of assets, and will instead turn towards specialisation and differentiation, with a focus on providing more diversified financial products.”

As rate liberalisation may reduce interest margins and further intensify competition in loans and deposits, the market will need to set higher standards for financial innovation, pricing capability and risk management skill sets. It will also require banks to undertake intermediary business in order to generate profits, the report notes.

To deal with the challenges, Chinese banks have enhanced financial innovation and cross-selling and increased fee-based income. According to the survey, some banks have expanded their RMB financial derivative business and entered into interest rate risk hedge arrangements. In addition, innovative services are being introduced to SMEs to stabilise the net interest margins for commercial banks.

Banks are facing additional deposit-related pressures too, such as a decline in the balance of customer deposits in large state-owned banks and joint stock banks. This is due to new rules that prohibit several methods of calculating deposits, such as attracting deposits along with loan offerings and deposits with payments on deferred terms, also converting financial products to deposits.

According to KPMG analysis, net profit margins of the 16 listed banks in China declined 2 basis points year on year to 2.5 percent in the first half, mainly due to the gradual implementation of interest rate liberalisation, the rise in the average cost for interest-bearing liabilities and the decline in the average yield for interest-bearing assets. 

Edwina Li, Partner-in-charge for Financial Services Assurance, KPMG China, says: “With so many challenges, one of the main priorities next year will be back to basics whereby credit quality will be top of mind for the banks and the regulators, given the deterioration of asset quality. This is seen spreading from the coastal provinces to inland regions.”

Separately, the survey highlights the impact of internet finance which has not only squeezed the profit margins for commercial banks, but also facilitated disintermediation. For example, the establishment of peer-to-peer lending platforms has transformed borrowing from banks and other financial institutions, to borrowing directly from investors. These are set to alter customers’ financial habits and pose a challenge to commercial banks in the financing market. 

Li concludes: “Traditional banks therefore need to improve market access and products in response to internet finance. Some banks have tapped into various e-commerce platforms and have launched different low-barrier, highly liquid wealth management products (WMPs) online to meet customers’ needs.”  


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