Banking industry must respond to new challenges: report

Chinese banks’ profitability is facing challenges and the banks need to make a transition in response, a report released by consulting firm McKinsey said on Wednesday.

This is the second year the firm has released such a report, which looks at 40 banks in the Chinese mainland and analyzes public data and financial reports.

According to the report, the interest rate gap is getting bigger due to interest rate liberalization, nonperforming loans (NPLs) are increasing, and regulations for the sector are getting tighter, hindering the development of banks in China.

The net interest margin for commercial banks declined to 2.05 percent in the first half of this year, compared with 2.22 percent in 2016, and NPLs climbed to 1.74 percent in 2016, up from 1.67 percent in 2015, data from the report showed.

The report found the profits of the 40 banks it surveys was 333.5 billion yuan in 2016, a decline of 33 percent from the previous year.

The interest rate liberalization will narrow margins, and banks need to respond, said John Qu, senior partner at McKinsey. “It is urgent for banks to develop their professional asset-liability management to cope with a low interest rate period,” Qu said.

The report suggested that banks make improvements in aspects including operation mode, risk control and talent strategy. It also advised banks to shift to value development, supported by technology.