EY report highlights bank profit slowdown

The net profit growth of China's 16 A-share-listed banks continued to slow in the first quarter of the year, while their nonperforming loan balance exceeded 1 trillion yuan ($153 billion; 134 billion euros) along with a continued increase in the NPL ratio, according to a new EY report on the Chinese banking industry.

A-share-listed banks posted net profit growth of 2.66 percent in the period, falling 59 basis points from the previous year, the report says.

The figures mean the net profit growth of listed banks has slowed for five consecutive years.

Steven Xu, partner of EY Financial Services in Greater China, says: "Narrower interest margin and increased provision resulted in further slowdown in net profit growth."

Last year, the average net interest margin narrowed to 2.54 percent, down 7 basis points from 2014, due to interest rate liberalization and five successive interest rate cuts by the People's Bank of China, the central bank.

In contrast, the NPL balance of A-share-listed banks rose 7 percent from the end of last year to 1.07 trillion yuan. The NPL ratio also climbed 5 basis points to 1.69 percent, the report says.

It also showed that, as asset quality declined, listed banks made increased provisions last year, and loan impairment losses rose by 55 percent from a year earlier.

To handle the challenges of slower profit growth and rising bad loans amid China's economic downturn, Xu says commercial banks must transform their business models, technology and institutional systems.

State-owned commercial lenders should also take the opportunity of mixed-ownership reform to show their vitality, he says.

"Currently, the income structure of commercial banks still relies heavily on net interest margin. As this kind of business model is unsustainable, they must make greater efforts to increase their non-interest income, especially income from asset management and investment banking, which can be little affected by the current economic cycle," he says.

During the quarter under review, the report says the proportion of listed banks' net fee and commission income climbed to 23.29 percent from 20.49 percent last year, whereas the net interest income fell from 73.87 percent to 64.33 percent.

Splitting off certain business departments and establishing subsidiaries to operate as separate companies will also vitalize their profit-making ability and promote efficiency, Xu says.

jiangxueqing@chinadaily.com.cn

(China Daily European Weekly 05/13/2016 page29)