China Banking Industry Semi-annual Analysis of 2020

Move forward with Fortitude

Deloitte has published the China Banking Industry Semi-annual Analysis of 2020—Move forward with Fortitude, covering China's economic and financial situations over the first half of 2020, as well as the interim results overview, financial data analysis, and business observations of Chinese listed banks. The report has conducted a comparative analysis on the business development, operation model, and response to regulatory changes of large state-owned commercial banks, 6 representative joint-stock banks, and 6 overseas global systemically important banks, and explored three focus points on risk prevention, control and mitigation of high-risk small and medium-sized banks, building banks' resilient competitiveness through digital transformation, and the emphasis of the "14th Five-Year Plan" for commercial banks, to provide extensive insight for China banking industry and look ahead to the future development trends of the industry.

Bank performance

According to the report, in the first half of 2020, domestic banks showed exceptional growth resilience. The operating revenue of large state-owned commercial banks totalled 1.7356 trillion yuan, with an average growth rate of 4.3%. The average growth rate of the six joint-stock banks exceeded 10% (a total of 598.9 billion yuan), while the revenue of the overseas banks fluctuated significantly due to the COVID-19 pandemic. The average growth rate of the domestic banks' pre-provision operating profit (PPOP) declined slightly but remained in positive zone, while the overseas banks delivered varied performance. The total net profit attributable to shareholders of the parent company of the large state-owned commercial banks and the six joint-stock banks were 566.3 billion yuan and 168.4 billion yuan, with an average drop of 11.2% and 7.6%, respectively. The overseas banks recorded only 152.7 billion yuan in total net profit attributable to shareholders of the parent company due to the provision for credit losses, an average decline of 65.75%. Many other foreign banks' net profit attributable to the shareholders of the parent company halved. The epidemic, global economic downturn, and overseas long-term low interest rates significantly impacted the foreign banks.

The large state-owned banks, actively responding to the call of the state, increased credit supply to the real economy, with the total book value of loans and advances reaching about 72 trillion yuan in the first half of the year; the six joint-stock banks issued loans and advances of a total book value of nearly 21 trillion yuan, while that (about 40 trillion yuan) of the overseas banks was far lower than the big four state-owned banks. In addition, according to the requirements of an executive meeting of the State Council, the financial system will make proper revenue concessions of 1.5 trillion yuan to the real economy throughout the year to reduce enterprises' financing costs. In the meantime, facing the resurgence pressure of non-performing assets, commercial banks have increased the provision for loan losses and strengthened the capacity for risk mitigation. All these factors have collectively led to the substantial net profit decline of Chinese listed banks during the first half of the year.

Generally, the domestic banks have maintained certain growth resilience in the first half of 2020. Centering around the tasks of stabilizing the six fronts (employment, finance, foreign trade, foreign investment, domestic investment and market expectations) and guaranteeing the six priorities (jobs, people's livelihoods, development of market entities, food and energy security, stable operation of industrial and supply chains, and smooth functioning at the community level), implementing the countercyclical adjustment policies, and adhering to the major missions of China's economic development, the financial system should intensively support the real economy, and timely increase the provision for impairment losses to shield against future risks. The follow-on work will focus on establishing high-quality development strategies under the new development pattern of "dual circulation" (which takes the domestic market as the mainstay while letting domestic and foreign markets boost each other), and continue to overcome difficulties to support the development of the real economy.

However, over the first half of 2020, the total profit of domestic banks' overseas establishment (including overseas branches and subsidiaries) fell significantly year-on-year, recording an average decline of 17%. The overall performance of the overseas branches and subsidiaries slipped due to the impact of the COVID-19 pandemic and geopolitical factors. Deloitte holds that the risk of capital outflows will be relatively low due to national foreign exchange regulations, and the regulators will keep abreast of and comply with the latest requirements of international regulatory laws and regulations. We suggest that domestic banks continue to enhance the operation management of overseas establishment, strengthen corporate governance and risk control, lay emphasis on self-assessment and inspection, further study and guard against the overseas operation risks, and optimize the allocation of compliance resources to maximize efficiency.

Accelerating digital transformation amid the epidemic outbreak

During the epidemic, the six state-owned commercial banks and six joint-stock commercial banks upgraded the front desk businesses, strengthened the mid-office risk control, and safeguarded the back-office operation to optimize their business model. They adopted financial technologies to accelerate digital transformation and ensure steady business operations. The commercial banks have gradually built digital risk control capabilities. The credit business was directly hit by the COVID-19 outbreak, and asset quality faces great challenge. In addition, the banks are actively issuing various loans to fuel the recovery of the real economy. Therefore, the banks are steadily enhancing the digital mid-office risk control capabilities, utilizing the risk control models to promote the implementation of efficient access and post-lending risk warning strategies.

With the transformation and upgrading of industrial structure, technology-enabled financial business results are highlighted. Large domestic commercial banks attaches greater importance to cross-industry fund investment and Fintech talent, and has set specific direction and implementation plans for the development and application of financial technology. Big data, artificial intelligence, and other advanced technologies have been applied to the banks' smart marketing, smart operation, and smart risk control. During the outbreak of the pandemic, many Chinese commercial banks focused more on investment and improvement of information technology, providing higher-quality services for customers through better strategy implementation, architecture transformation and technical support. How to deeply integrate the application of Fintech with the banks' development strategy and deliver customer-oriented services will be what the listed banks continue to explore in the future.

Against the backdrop of the epidemic, the listed banks have integrated social responsibilities into their development strategies and management, and implemented a new development philosophy. They have actively utilized the financial means and strength to fight against the epidemic, reduce charges, make interest concessions, assist with poverty alleviation, and promote green finance. In particular, the commercial banks, following the national policy orientation and economic transformation trends, continue to promote green finance, refine green credit policies, and expand green credit from a strategic height to support the sustainable development strategy of the country.

Moving forward with fortitude

We think that the growth resilience of commercial banks will be crucial to cope with the current economic downturn and the increasing uncertainties, and an inevitable trend will be transforming from inorganic growth to organic growth. However, due to varied internal and external environment, different banks will achieve increasingly different levels of operation. Resilience will be the core quality of outstanding banks in the future. Comprehensive digital transformation will help build banks' resilient competitiveness. Data analysis, intelligent drivers, flexible architecture, reducing cost and enhancing efficiency will help the banks to identify external risks in advance, form rapid judgment, make agile changes, and strengthen operation endurance to prepare for various uncertainties in the future.

The report also probes into the following focus points

  • Prevent risks and deepen reform: risk concerns and mitigation measures of small and medium-sized banks 
  • Make a digital difference beyond the life cycle: building banks' resilient competitiveness through comprehensive digital transformation 
  • Seek new opportunities amid uncertainties, set goals, and pursue resilient development: key macro topics in the 14th Five-Year Plan for commercial banks

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