Im­proved as­set qual­ity may spin higher prof­its of around 700 bil­lion yuan in first half

China Daily (Hong Kong) - - BUSINESS - By WU YIYAO in Shang­hai wuyiyao@chi­nadaily.com.cn

Im­proved net profit mar­gin and as­set qual­ity will brighten prospects for China’s banks in the sec­ond half of this year, and smaller ur­ban com­mer­cial banks will likely grow the fastest, said an­a­lysts.

Av­er­age net profit of banks in the first half may see yearon-year growth, and it may grow fur­ther in the sec­ond half, they said.

China has 37 banks listed in Shang­hai, Shen­zhen and Hong Kong. They will start to re­lease fi­nan­cial re­sults for the first half from Fri­day.

Ac­cord­ing to Shen­wan Hongyuan Se­cu­ri­ties, av­er­age net profit of 27 A-share banks in the first half is ex­pected to grow 3.3 per­cent year-onyear, ver­sus 2.5 per­cent yearon-year growth in the same pe­riod last year. The over­all profit is ex­pected to reach 700 bil­lion yuan ($103 bil­lion).

China Mer­chants Bank, among the first ones to is­sue first-half fore­casts, said its net profit is ex­pected to reach 39.26 bil­lion yuan, up 11 per­cent year-on-year. Its non-per­form­ing loans or NPL rate at June-end is ex­pected to be 1.71 per­cent, down from 1.87 per­cent at the end of 2016.

Banks’ fun­da­men­tals are re­cov­er­ing. Lend­ing is up amid strong de­mand for in­fra­struc­ture de­vel­op­ment. Pol­i­cy­mak­ers are en­cour­ag­ing mass en­trepreneur­ship, said a re­search note from CITIC Se­cu­ri­ties.

Ef­forts to re­duce the lever­age ra­tio in the en­tire fi­nan­cial mar­ket to pre­vent bub­bles and ir­ra­tional lend-

Short-term lend­ing con­tin­ues to grow, which should ex­pand banks’ net profit mar­gin.”

ing have helped to re­cover as­set qual­ity and re­duce NPL risks, CITIC Se­cu­ri­ties said in its note.

Mean­while, rat­ings agency Moody’s has up­graded its out­look for China’s bank­ing sec­tor from “neg­a­tive“to “sta­ble”, sug­gest­ing it is pos­i­tive about Chi­nese banks’ NPLs.

Wan Ying, an an­a­lyst with Moody’s In­vestors Ser­vice, said pol­i­cy­mak­ers are tak­ing a con­sis­tent ap­proach to curb shadow bank­ing. This will help re­duce fi­nan­cial risks and re­store bal­ance to the lend­ing sys­tem.

Zhang Shuaishuai, an an­a­lyst with China In­ter­na­tional Cap­i­tal Cor­po­ra­tion, said net in­ter­est mar­gin is ex­pected to widen in the sec­ond half of this year, giv­ing more room for net profit growth.

“Short-term lend­ing con­tin­ues to grow, which should ex­pand banks’ net profit mar­gin. Short-term lend­ing was on the lower side some­time back. This will give banks more room for flex­i­ble pric­ing,” said Zhang.

As for re­tail bank­ing, pres­sure may re­main as in­di­vid­ual small in­vestors’ de­posit growth has slowed. Some banks have seen net out­flow of de­posits from in­di­vid­ual clients.

“For many banks, the re­tail bank­ing sec­tor is not prof­itable be­cause op­er­a­tional cost is high, and good as­sets are lim­ited. Clients’ loy­alty is hard to main­tain, and prod­ucts are not di­ver­si­fied enough to meet var­i­ous de­mands,” said Zhao Jiancheng, an an­a­lyst with Bank of Qing­dao.

A re­cent re­port by McKin­sey & Com­pany said the re­tail bank­ing sec­tor in China needs to im­prove ef­fi­ciency and man­age­ment of cus­tomer ex­pe­ri­ence.

Un­der the cur­rent model, one wealth man­ager on av­er­age looks af­ter more than 1,200 ac­counts. Con­se­quently, cus­tomer feed­back is not given a pri­or­ity. Cus­tomer pref­er­ences are very of­ten not acted upon by key departments.

Zhang Shuaishuai, an­a­lyst with China In­ter­na­tional Cap­i­tal Cor­po­ra­tion

ZHANG MAO / FOR CHINA DAILY

Cus­tomers fill out forms at a branch of China Mer­chants Bank in Haikou, Hainan prov­ince.

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