Listed Chinese Banks Interim Results Analysis for 2018

Deloitte China published the latest analysis of the 2018 interim financial results of Chinese banks, which outlines China's economic and financial developments and the performance of Chinese A-share or H-share listed banks. Financial deleveraging has gained its effect which is a positive signal to the financial stability. The use of financial technologies might help bring the industry to the next level in coming years.

Below are the key findings from the report:

  • The Chinese economy saw a medium to low pace of growth in the first half of 2018 with rebound in manufacturing. The targeted regulation by the Central Bank facilitated structural deleveraging, and bond defaults increased as repayment was no longer guaranteed at all times. Marketization and legalization of debt-to-equity swap gained remarkable popularity. Commercial banks were busy competing in micro and small enterprise financing as the differentiative service.
  • The Central Bank injected liquidity for the mid to longer term through the three targeted reductions of the required reserve ratio. The sufficient capital in the banking system and the reduced cost of capital have alleviated the negative impact of the tightened financial policy. The equity ownership requirements have been made the same among domestic and foreign institutions and the Chinese financial sector has been further opened. Foreign financial institutions are sophisticated in running and operating investment management and retail businesses, and the opening will spur an uplift of competitiveness of the domestic counterparts.
  • New rules by the China Banking and Insurance Regulatory Commission will facilitate local government bond issuance and encourage infrastructure investment. Local bond issuance might be made easier as the risk weighting of banks' local government bond holdings is expected to reduce to zero, and the demand for bank allocation will rise considerably. The overall bond market looks good from a longer term perspective, in view of the facts that the China economic growth faces the pressure to ease down; there may be marginal adjustments in the fiscal policy; and the aggregate demand may not be sufficient.
  • The online lending sector has commenced their self-regulative actions and peer-to-peer industry may be adjusted. With appropriate guidance and self-discipline, the online lending will be a key component of digital financial inclusion, acting as an effective auxiliary to the indirect financing provided by commercial banks.
  • The net interest spread and net interest margin dipped in the first half of 2018; fees and commission incomes performance varied but the averaged growth rates slowed down. The total asset growth continued to slow down and structural adjustment was acute; the bank loan amount increased while the size of inter-bank transactions and financial investments reduced. The size of non-performing loans ratio slightly dropped, the provision coverage ratio rose up again, and there were more overdue loans. The financial investments grew slower, among which the proportion of bonds investments was stable; the proportion of wealth management products and trust products reduced; the total liability grew slower while the customer deposits increased and the dependency on inter-bank financing eased. Changes of off-balance sheet businesses varied, with a slowdown in off-sheet wealth management products, custody, and loan commitment businesses.
  • The implementation of new financial instruments standards did not lead to noticeable impact to the listed bank financial assets. Financial instruments now have three possible classification categories and the opening reclassification adjustment varied; the adoption of expected credit loss model resulted in an increase in expected credit loss; the net interest income reduced while the investment income increased. The overall impact on the operating performance of listed banks was mild.
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