Op­por­tu­ni­ties await na­tion’s banks, E&Y says

Fun­da­men­tal changes mean new po­ten­tial for profit and growth

China Daily (Canada) - - BUSINESS - By JIANG XUEQING jiangx­ue­qing@chi­nadaily.com.cn

China’s banks can em­brace op­por­tu­ni­ties thrown up by the coun­try’s eco­nomic fun­da­men­tals and prospects for long-term eco­nomic growth, Lon­don-head­quar­tered Ernst & Young LLP said in a re­port on Thurs­day.

“In­dus­tri­al­iza­tion, ur­ban­iza­tion and in­for­ma­tion tech­nol­ogy all en­joy broad de­vel­op­ment space and the growth po­ten­tial will be re­al­ized grad­u­ally” once the econ­omy re­struc­tures and in­dus­try up­grades, Ge­of­frey Choi, the as­sur­ance leader of EY Fi­nan­cial Ser­vices in Greater China, said. Commercial banks need to change strate­gi­cally and “build a long-term sus­tain­able growth en­gine.”

Share prices ofChina’s listed banks are ex­tremely low and will con­tinue to be un­der­val­ued if in­vestors don’t as­sess prop­erly how banks will be hit by ris­ing non-per­form­ing loans and weak­en­ing house prices, he said.

At end-March, the aver­age NPL ra­tio of 16 A-share listed banks was 1.01 per­cent com­pared with 0.98 per­cent at endDe­cem­ber. The banks have en­hanced pro­tec­tion against credit risk and been more ag­gres­sive in col­lect­ing and writ­ing off­bad­loans to im­prove as­set qual­ity. The write-offs in­creased to 83.47 bil­lion yuan ($13.55 bil­lion) in 2013 from 34.13 bil­lion yuan in 2012.

Ad­di­tion­ally, China’s in­ter­est rate lib­er­al­iza­tion is hav­ing an im­pact on the banks’ net in­ter­est mar­gin, Ernst & Young’s re­port said. To tackle that, banks at­tempted to ex­pand in­ter­me­di­ary busi­ness and ex­plored new busi­ness growth.

In 2013, the aver­age net in­ter­est mar­gin, a main in­dex of banks’ prof­itabil­ity, of the listed banks dropped 17 ba­sis points to 2.61 per­cent from


for 2.78 per­cent in 2012, com­pared with a 4 ba­sis-point de­cline in 2012 from 2011.

Their fee and com­mis­sion in­come grew 23 per­cent in 2013, to make up 20 per­cent of op­er­at­ing in­come com­pared with 18 per­cent for the pre­vi­ous year.

Commercial banks will em­brace op­por­tu­ni­ties in in­vest­ment bank­ing, thanks to an ex­pected in­crease in merg­ers and ac­qui­si­tions grow­ing out of eco­nomic re­struc­tur­ing and in­creased de­mand for un­der­writ­ing and is­su­ing of debt se­cu­ri­ties, Choi said.

Greater de­mand for wealth man­age­ment is ex­pected as house­hold in­comes in­crease, he said. That will sup­port de­vel­op­ment of as­set man­age­ment ser­vices, he said.

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