Liu Minxia

    mllmx@msn.com

    AGAINST the backdrop of a slowing economy and the liberalization of interest rates, the profitability of major banks appears to have peaked while asset quality risk is increasing, the latest report by PwC showed.

    Net profit growth at China’s five largest commercial banks slowed to 0.69 percent last year from 6.52 percent a year ago. Growth at the six major joint-stock commercial banks also slowed significantly, to 4.21 percent last year from 9.74 percent in 2014. The net profit of 18 listed banks, which had reported their annual results by Monday, grew by an average of 1.91 percent last year from 7.39 percent a year ago.

    “Due to the economic slowdown, listed banks have increased provisions, which has restricted the growth in their net profit,” said Jimmy Leung, PwC China’s banking and capital markets leader. “The liberalization of interest rates — with the impact of rate cuts — has led to slower growth in interest income, which also curbed profit growth.”

    The 18 listed banks’ nonperforming loans (NPLs) rose by 48.6 percent last year from a year ago to 948 billion yuan (US$146.52 billion). Commercial banks can no longer rely on the traditional ways to dispose of nonperforming assets (liquidation, write-offs and transfers), PwC suggested. Securitization of nonperforming assets is one possible way for them to improve their asset quality in an efficient and cost-effective way. However, securitization still faces a few obstacles, such as valuation, pricing and investment demand for the products, as well as policy and legal considerations.

    The proposed “Debt For Equity Conversions” that have been recently reported are also assessed in the report. The PwC report argues that such measures have to be based on a strong, market-driven rationale and that the equity holdings have to make strategic sense for the banks concerned.

    “The pressure on profitability in the banking sector is going to increase. Profits have peaked and may even start to shrink,” said Leung. “Strengthening asset quality will be a long-term challenge. But elsewhere, developments such as Fintech offer some promise to the sector. The winners will not simply utilize the features of this new technology — they will focus on optimizing service efficiency.”