Steady Progress Drives Substantial Achievements

Annual reports encapsulate the previous year's achievements and project the new year. We are in a time of significant changes. "An extraordinary year" has been repeatedly applied in our annual review and outlook report on China's banking sector. We still cannot find a more appropriate word than "extraordinary" to summarize 2023. In 2023, the main socio-economic development goals have been achieved, seeing substantive high-quality growth. However, with insufficient external and domestic demands and intertwined cyclical and structural problems, the foundation for a sustained economic recovery in China remained to be cemented. Finance and the real economy depend on and reinforce each other. The banking sector's high quality development relies on the robust growth of the real economy. Despite the complex international environment and arduous tasks of reform, development and stability at home, China's banking sector saw stable progress.

From the perspective of "stability", the Chinese government remained committed to the general principle of pursuing progress while ensuring stability, implementing flexible, appropriate, accurate and effective monetary policies. As the ballast stone of the economy and finance, China's banking sector continued to support the real economy, increase credit supply and optimize the credit structure. Large banks' assets expanded rapidly, driving the banking sector's assets to grow by 9.9%; their deposits also increased, showing a stable overall asset-liability structure. With expanded assets and liabilities, the banking sector generally maintained healthy operation. The nonperforming loan (NPL) ratio stood at 1.62%; the provision coverage dropped slightly to 205.1%; the liquidity was kept ample and stable, with the liquidity coverage rising 4.2 percentage points year-on-year to 151.6%. China's banking sector boasts robust fundamentals and strong risk resistance capacity, although it is confronted with challenges in capital replenishment, profitability, real estate loans, and mitigating risks of debts to local governments.

From the perspective of "progress", the objectives, priorities, and paths for building China into a world leader in finance are increasingly clear, revealing the strategic blueprint in the five major areas of Technology Finance, Green Finance, Inclusive Finance, Pension Finance, and Digital Finance. The financial regulation mechanism and efficiency have progressively improved after going through significant changes, creating a conducive institutional environment for the high-quality development of financial institutions. China's banking sector persistently allocated credit resources to the key areas and weak links of the real economy to foster new quality productive forces and accelerate the construction of modern industrial systems. In 2023, the Chinese banking sector's green and inclusive loan balances grew by 36.5% and 23.5% year-on-year. The growth rate of loans to high-tech manufacturing and sci-tech SMEs reached 34% and 21.9%, respectively. Large banks' elderly care lending also increased by more than 20%. The banking sector continued to increase Fintech investment. Digital technologies and data elements enhanced the quality and effectiveness of financial services. Advanced digital technologies empowered intelligent service, operation and risk control, enhancing the service quality, operational efficiency and risk management ability of China's banking sector.

While heralding 2023's results, the banking sector should be alert to the hidden troubles. Although assets maintained steady growth, the uncertain economic recovery prospects brought challenges to banks' credit supply and risk management. In 2023, interest margins continued to narrow; the scale of wealth management products shrank due to the volatile capital market; the slow recovery of the consumer market led to weaker-than-expected growth of traditional intermediate business income; consequently, the banking sector recorded negative revenue growth for the first time over the past three years, with key profitability indicators' growth rate down notably. The risk-weighted assets growth rate remained high. The capital adequacy indicator faced downward pressure. With insufficient endogenous capital supplement, expanding exogenous supplement channels was urgent. The nonperforming ratio of real estate loans rose continually. The growth of individual housing loans slowed. The impact of lowered interest rates of existing individual housing loan on banks' revenue and profits was not clear. Although deposit interest rates have been cut several times, fixed-term deposits increased steadily, posing significant challenges for banks to control capital costs and implement effective asset and liability management.

In 2024, China's banking sector will face unprecedented challenges and opportunities. With the implementation of the strategic plan for building a leading financial country, improvement of financial regulation systems and mechanisms, and an increasingly stable capital market, China's banking sector will embrace more favorable policies, market and regulatory environment for high-quality development. China is vigorously developing new quality productive forces, modern industrial systems, digital economy, advanced manufacturing, strategic emerging and future-oriented industries. Therefore, China's banking sector is expected to achieve business growth, structural improvement, and asset quality enhancement as it supports the real economy's high-quality development. With stable economic recovery, effective unleashing of consumer demand, gradual clearing of real estate investment risks and the mitigation of local government debt risks, China's banking sector is likely to resolve risks from the source, thoroughly rectify and improve the balance sheets, and achieve an optimal balance of benefits, liquidity and safety.

In this report, the Deloitte China FSI research team reviews economic and financial developments, analyzes the performance and business operation of Chinese listed banks in 2023, covers a host of hot topics, and provides an outlook of the macro economy and banking sector in 2024. Taking 10 representative commercial banks in China as a sample, the report also provides an overview of the Chinese banking sector's achievements in 2023 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 changes in the sector. To help China's financial institutions position themselves properly on the international stage and draw on the best practical experience of their international peers, the report also analyzes six foreign Global Systemically Important Banks (all ranking among The Banker's top 20 in 2023).

In addition, the report will take a deep dive into a host of industry hot topics, including the application of foundation model technology in banking businesses, intelligent compliance control, recognition of data assets in the balance sheet, application of fiscal policies for inclusive finance, quality and efficiency improvement in related party transaction management, human capital effectiveness in the digital era, money laundering risk management mechanism, unhealthy market analysis, AI model risk management, and "shadow IT" governance models. We believe this report will provide valuable reference for domestic commercial banks to contribute to in-depth institutional reforms, control and resolve risks, and enhance value creation and sustainable development capabilities, highlighting the new-era financial blueprint with Chinese characteristics drawn by the Central Financial Work Conference.