China Banking Industry Semi-annual Analysis Of 2019

Review and Outlook

This report explores China's economic and financial conditions and analyzes the performance of A-share and H-share listed Chinese banks in 1H2019.

In the first half of 2019, China's economy has demonstrated resilience and the country's GDP achieved a YoY growth of 6.3%. Consumption is still the most dynamic area, and investment has rebounded. The foreign trade sector was greatly affected by the trade tensions, and China’s imports and exports to the United States declined to varying degrees. The exchange rate of the Renminbi against the US dollar has dropped below 7, while many central banks around the world have started to cut interest rates. The Chinese government can release liquidity through the depreciation of the Renminbi in the absence of interest rate cuts.

The interest rate cut cannot solve the fundamental problem of “Financing difficulties of private enterprises and small and medium-sized enterprises”, and may also lead to re-emergence of speculation in the real estate market. The Fed’s dovish stance has allowed most emerging markets, including China, to continue its growth. Given the resilience of the Chinese economy, the central bank is expected to maintain a neutral monetary policy.

The structural reform of the financial supply-side has gradually landed. Small and medium-sized banks risk accelerated exposure and clearing, financial holding company regulatory measures were released; wealth management subsidiaries were established successively, asset management business transformation accelerated; loan interest rate pricing mechanism is further optimized to lower enterprises' financing cost; industry and market opening-up further support direct financing development.

The new quotation mechanism of LPR and lowering reserve ratio efforts to cut financing costs for the real economy. The new pricing mechanism uses the interbank market interest rate MLF as the LPR pricing anchor interest rate, which is conducive to improving the marketization degree of LPR, dredging the channel of monetary policy interest rate transmission to the real economy, reducing the financing cost of the real economy, and indirectly reducing the interest rate. It is expected that the loan pricing level will decline slightly, and the market costs such as inter-bank liabilities and structured deposits will also decrease which will result in the reduction of banks' spread.

The real estate sector is under strict supervision by the regulator, and the penalties for non-compliance property-related loans were significantly strengthened in the first half of 2019. Since property-related loans comprise a large scale on the bank's balance sheet and also serves as government tool for adjusting and control, it can be foreseen that the market environment and the tightness of supervision will not change. Banks that rely heavily on property-related loans should start self-assessment, promote internal review as soon as possible to clearing out risks, which will increase the cost of internal and external risk compliance.

In the first half of 2019, the profitability of listed banks has increased steadily, and the net interest margin of joint-stock banks have widened; the scale of retail loans has increased, the co-debt risk has risen; the adoption of more strict risk classification of loans leads to the improvement of assets quality; the proportion of time deposits has increased, and state-owned banks have increased their ability of obtaining customer deposits; the capital adequacy ratio is still under pressure and needs to be supplemented by multi-channel.

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