Forging Ahead to the Next Chapter

Deloitte China recently published the Forging Ahead to the Next Chapter: Review and Outlook on China Banking Industry 2019-2020. The report covers China's economic and financial overview, financial data analysis of listed banks, the industry hot topics of 2019, as well as outlooks on economic and banking development in 2020. By analyzing the 2019 financial performance of 6 large Chinese listed banks and compared with large global banks, sorting out and examining their business development, business models and regulatory environment changes, the report aims to look ahead to the future development of China's banking industry.

In 2019, the Chinese economy experienced a cyclical slowdown followed by a structural recession. The cumulative GDP growth slowed, and the year-on-year growth rate of total retail sales of consumer goods and investment in fixed assets decreased. Because of China-US trade disputes, the growth of domestic exports and imports was relatively slow. The fluctuation in market sentiment caused by trade disputes weakened the RMB against the U.S. dollar, which partially offset the tariff impact from the United States. To cope with the downturn the central bank cut the reserve requirement ratio (volume) and reduced the interest rate (price) in order to reduce financing costs. The lower price of funds affected the interest rate spreads of banks. In addition, the further opening up of the financial system, the introduction of FinTech strategy planning, and the launch of compliance management of financial holding companies will continue to weigh on the development of the industry.

In respect of operating performance, the asset scale of the six major domestic banks reached a higher level; the operating income increased steadily; the provision contributed positively to the profit; the non-performing indicators declined to different degrees; the overall profitability was healthy. In the face of economic downward pressure, the countercyclical adjustment was strengthened and the LPR reform was enhanced to reduce the financing costs of the real economy, which also built pressure on the banks' loan yield. The intensified deposit competition pressure will continuously impact the results of cost reduction. Six global systemically important banks in Europe, the United States, and Japan also maintained resilient profit growth, their asset and revenue structures differs from that of the six domestic banks, and their P/B ratio and ROE are also different. Domestic banks should determine differentiated development paths based on their own advantages, such as increasing FinTech investment to boost profitability and gain investors' recognition.

The domestic banking industry generally recognizes the necessity of digital transformation, taking digital transformation as the starting point for banks to serve customers, building comprehensive high-quality financial services by employing digital means, improving the capability of digital operation, and enhancing the ability to respond to emergencies and risks. Tightened regulation and advanced technology guide the future comprehensive risk management system. Banks should continually strengthen risk governance frameworks, optimize the overall portfolio analysis and asset allocation ability, deepen data management and application, expand and refine quantitative analysis tools, and reinforce the customer-centered risk management strategies as well as the compliance and security management. The agile transformation of retail banks poses a great challenge to the solidified organizational operation model. The key of agility lies in rapid iteration and constant trial and error. Deliberately applying the accumulated skills and strengths is essential to delivering the intended results. Finally, empowering the internal development of the banking businesses through intelligent operation is a natural choice to respond to the market competition under the rapid development of FinTech, reshaping the banks' overall value creation system and business model, which is a top-down complex project. Banks should promptly reach the reform consensus, thoroughly assess all difficulties in the course of transformation, and be prepared in advance.

Looking ahead to 2020, the COVID-19 outbreak has inevitably affected the economy. Financial institutions are faced with the hidden dangers of sudden increase of non-performing assets and concentrated outbreak of credit risks. The industrial restructuring triggered by the setback of the international supply chain system will also affect the future credit industrial structure of the banking system, but the impact will be generally controllable. In the new era, the unique integration of various driving factors is bound to unleash unprecedented forces for change in a broader social and economic environment, and the development goals and models of the global banking industry will change accordingly. The banks may focus more on the overall interests, and the management will re-examine the long-term development goals of their banks according to the current development situation, to fundamentally strengthen the core strength of the bank.

Hot topics included in this report:

• customer driven bank digital transformation
• strong regulation and strong technology to lead the future of banking industry comprehensive risk management system
• suggestions on business agility transformation in China's retail banking
• smart operation enables the "inclusive" development of banking business