Forging ahead on a new journey

2022 has been an unusual year marked by a series of events that profoundly impacted the course of history. The Chinese banking sector has faced highly complex and uncertain domestic and international landscape. Globally, we have seen intensified geopolitical tensions, exacerbated energy and food crises, a rate hike cycle to combat intense inflationary pressure in the US and European economies, and the global capital markets remained volatile alongside with the slowed-down economic growth momentum worldwide. Economic recovery in China has been severely hindered by the COVID-19 resurgences, with a record low GDP growth of 3%, as well as the debt risk exposure in the real estate sector and the growing risks from local governments’ financing vehicles (LGFV). Despite of the unexpectedly overwhelming disruptions, China's economy remains highly resilient. We have seen a strong and steady recovery upon the shift in COVID-19 policies announced at the 20th National Congress of the Communist Party of China (NCCPC) at the end of 2022.

Furthermore, China’s banking sector’s overall performance is highly admirable in the midst of the highly challenging macroeconomic landscape. Banking institutions continue ramping up their credit support for the real economy and playing the unique role of the financial sector as the “growth accelerator” to the economy. At the end of 2022, China’s banking sector recorded total assets in Renminbi and foreign currency of nearly RMB 380 trillion, with year-over-year growth back up to 10%, surpassing the pre-COVID assets growth in 2018 and 2019. Optimization of the banking loan structure continued. The year-end balance of inclusive loans to SMEs reached RMB 23.8 trillion, up 23.8% year-on-year, with more businesses covered and lower financing costs. The year-end balance of green loans reached RMB 22.03 trillion, up 38.5% year-on-year. In 2022, commercial banks maintained the upward trend in profitability and achieved a cumulative net profit of RMB 2.3 trillion, up 5.4% year-on-year. While the credit business has increased significantly, commercial banks have realized steady improvement in assets quality, continuously reduced the NPL ratio, increased liquidity coverage and capital adequacy ratios, as well as improved their capabilities in risk control. China’s banking sector is committed to high quality growth in 2022, and the results are indeed impressive.

Having said that, we are fully aware of the concerning factors from the 2022 performance of China’s banking sector; i.e. the significant slowdown in revenue and profit growth among the commercial banks, as well as the dual pressures from a sluggish economy and the transformation of business model within the banks. Commercial banks' net interest margins have been narrowing since 2019; the 2022 net margin decreased 16 basis points to a record low of 1.91% for Q4 of the year. The significantly increased proportion of time deposits in the debt structure of commercial banks also reflects the competition in the deposit-taking business and financing costs are both rising. Following the end of the 3-year transition period of the new asset management regulations, in the midst of a bearish capital market, the asset management market size shrunk in 2022. Especially in the fourth quarter, the bond market turmoil triggered a wave of financial products redemption at banks resulting the decline of both the number and the volume of wealth management products by 4.41 percent and 4.66 percent respectively, and further eroded the source of profits for banks. The asset management business among commercial banks is facing many challenges in an unfavorable market environment. Also, banks’ revenue from intermediary business continues to shrink, asset-light business model transformation has become a long-term priority for commercial banks.

In 2023, despite the challenges, China’s banking sector is facing great opportunities. It marks the first year of 20th NCCPC policies and guidelines come into play, as well as the new leadership in the government. A strong and stable macroeconomy is the growth driver of banking sector and the real economy together. Green transformation, digital economy and tech innovation will provide new momentum to boost China’s economic growth, as well as new opportunities for the financial sector to benefit real economy and maintain sustainable development in banking. The unprecedented reform in financial regulation is coming, and we expect a more organized and effective regulatory landscape in the development of banking sector. Supporting the real economy, increase domestic demands and risks mitigation remain the key priorities for Chinese banks. Hence, banks need to be more precise in credit business management, and more focused on modern industries, green industries and the private sector. Inclusive finance will focus more on poverty alleviation and rural revitalization, while reviving consumption is the key for retail banking. Besides, more targeted risk control measures to help stable growth in real estate sector and mitigate the debt risks in local governments.

In this flagship report, the Deloitte China FSI research team reviews economic and financial developments, analyzes the performance and business operation of Chinese listed banks in 2022, covers a host of hot topics, and provides an outlook of the macroeconomics and banking sector in 2023. Taking 10 representative commercial banks in China as a sample, the report also provides an overview of the Chinese banking sector’s achievements in 2022 and identifies key development trends based on a systematic analysis of the profitability, assets, liabilities, and capital positions of listed banks. It also gives an overview of business development, operating models, and regulatory change in the sector. To draw on the best practical experiences of Chinese banks’ international peers, the report also analyzes six foreign Global Systemically Important Banks (G-SIBs).

In addition, the report will take you deep dive into a host of industry hot topics, including banking sector strategy for 2023, methodologies and best practices of carbon accounting for banks, smart monitoring of related party transactions, optimizing the annual reports presentation, future of finance transformation, building a high-quality data governance framework, banks’ operational resilience in response to the new business landscape, digital transformation in risks reporting, and key considerations in commercial banks’ M&A and restructuring. We believe this report provides valuable reference for Chinese commercial banks as they embark on a new journey in the 14th Five-year Plan development.