Listed banks in China see adjusting asset structure and slowing profit growth, finds KPMG report
Listed banks in China see adjusting asset structure...
Overall asset scale of listed banks in China increased in 2014 Q3, thanks to the expansion of the scale of credit assets and securities investment, shareholding commercial banks in particular experienced more active expansion.
Overall asset scale of listed banks in China increased in the third quarter of 2014, thanks to the expansion of the scale of credit assets and securities investment, shareholding commercial banks in particular experienced more active expansion, according to KPMG China’s publication - China’s banking sector: Performance of listed banks and hot topics - 2014 Q3. Also, it highlights net profit attributable to equity holders of parent company continues to see a year-on-year increase in the third quarter of 2014, but the growth rate has slow down.
The report presents the financial position and business performance of the listed banks for the third quarter of 2014, and covers hot topics such as Shanghai-Hong Kong Stock Connect, local debts, asset securitization, community banks in the United States and the development of internet finance. While total asset scale expanded in the third quarter of 2014, the report notes that the asset structure of listed banks changed compared with the end of last year. The ratio of loans and advances to customers dropped 0.3 percentage point, whilst the ratio of due from banks and other financial institutions dropped 0.6 percentage point, ratio of cash and balances with central bank rose 0.4 percentage point, securities investment increased 0.8 percentage point.
Edwina Li, Partner-in-charge for Financial Service Assurance, KPMG China, says: “The adjustment in banks’ asset structure is mainly due to the slowdown of the real economy and the increase of credit risk, the listed banks took the initiative in mitigating risks through measures such as raising the threshold, cutting lending and controlling credit scale for industries or areas with higher risk. At the same time, they tried to lower their risk exposures by adjusting capital lending direction and optimising their asset structure.”
Under the background of asset structure adjustment, the average ratio of non-performing loan (NPL) for listed banks was 1.05 percent in the third quarter, higher than the end of 2013. Even though the overall allowance for NPL was sufficient, the increase of the NPL balance lowered the allowance to NPL ratios of the listed banks.
In the first nine months of 2014, overall growth rate of net profit attributable to equity holders of parent company slow down to 9.69 percent, compared to 12.99 percent same time last year. This is the first time the year-on-year growth rate of net profit fell below double digit since 2010. Several banks experienced a decrease in their cost-to-income ratios, thanks to efficient cost control, refinement of operating expenses, and the comprehensive effect of asset structure optimization and rapid growth of intermediary business.
Li says: “Considering the increasingly rigorous external regulation, as well as the listed banks’ demand to remain competitive through continual innovation with respect to their products and services going forward, whether the low cost-to-income ratio can be sustained or not will be a key challenge facing the listed banks’ profitability.”
On 21 November, the Central Banking Regulatory Commission announced to lower the benchmark lending and saving rate. Li says the asymmetric cut in interest rates, particularly raising the ceiling of the floating range for deposit interest rate, can be seen as another advancement for rate liberalisation in China, it is expected that competition for deposit between banks will intensify. Due to decelerating loan growth, net profit margin may further narrow and hence affect the profitability of banks.
Separately, under the Shanghai Hong Kong Stock Connect programme, there is a 13 billion yuan of northbound daily trading quota and 10.5 billion yuan quota for southbound trading, of which all are settled in RMB. The huge demand for currency exchange will stimulate the demand for RMB in the offshore RMB market in Hong Kong thus enhance its position as an offshore RMB centre.
Li said: “The implementation of Shanghai Hong Kong Stock Connect is significance and impactful in various perspectives, for example, it will promote the internationalisation of RMB, promote the introduction of foreign investors into Shanghai market, enhance the investors structure in Shanghai market; provide greater ease for domestic investors to invest in foreign capital markets, which can enrich the asset allocation.”
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