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UPDATED: April 16, 2014 NO. 16 APRIL 17, 2014
Where Are the Big Five Headed?
China's banking behemoths face unprecedented challenges
By Zhou Xiaoyan

PUSHING ONLINE BANKING: A clerk from Industrial and Commercial Bank of China demonstrates the user interface of the bank's mobile phone app (XING GUANGLI)

In China, there is a widely held stereotype concerning major state-owned commercial banks: They never have to sweat or bleed to make money. Instead, they just lie on their back and whistle as torrents of cash flow to them endlessly.

The good old days, however, may be gone. Although the five biggest state-owned banks posted profits as hefty as usual in 2013, they are now cornered by more challenges than ever, coming from a slowing economy, market-oriented reform on interest rates, an increase in bad loans, online investment products and fledging private banks, analysts said.

Slowing profit growth

The Big Five listed state-owned banks—namely the Industrial and Commercial Bank of China (ICBC), China Construction Bank (CBC), Agricultural Bank of China (ABC), Bank of China (BOC) and Bank of Communications (BOCOM)—posted exorbitant profits in 2013.

Together, they pocketed 870 billion yuan ($140 billion) in net profits, the equivalent of 2.4 billion yuan ($387 million) a day. Their net profits accounted for over 60 percent of the total of China's banking sector.

However, there has been a slowdown in profit growth in all but one of the Big Five. ICBC, the world's biggest bank in assets, registered 263 billion yuan ($42 billion) in net profits in 2013, up 10.2 percent from 2012. But this growth rate is much lower than the 14.5 percent in 2012. BOCOM saw the sharpest decline in profit growth, from 15.05 percent in 2012 to 6.73 percent in 2013.

A research report from Deloitte predicted that Chinese banks may have entered an era featuring single-digit profit increases.

Guo Tianyong, Director of the Center for Chinese Banking Studies of the Beijing-based Central University of Finance and Economics, said the decline is in line with China's economic slowdown.

China's economic growth rate declined to 7.7 percent in 2013 from 14.2 percent in 2007. This year, the Chinese Government set the growth target at 7.5 percent. Economic slowdown and rebalancing efforts have reined in the expansion of Chinese banks.

"As a result, the decline in growth rate is quite natural. The two-digital growth rate in previous years is abnormal. In 2014, the growth rate will further slide, even below 10 percent. Eventually, the growth rate will be on a par with GDP growth or a little bit higher than that," Guo said.

China retains a government-mandated cap on how much the nation's traditional banks are allowed to pay on savings deposits. A gap between that ceiling and lending interest rate is believed to be a major reason for Chinese banks' hefty profits. An imminent interest-rate marketization is expected to affect the profitability of the traditionally highly regulated banking sector. Net interest margins are expected to shrink as China moves to phase out the cap on bank deposit rates.

"The final liberalization of deposit rates is the last step of interest-rate marketization," central bank governor Zhou Xiaochuan said during the annual legislative session in March.

"We are formulating a plan. It's quite likely to be realized within one or two years."

Luo Yi, an analyst with China Merchants Securities Co. Ltd., said removing the cap on banks' deposit rates has a limited impact on their net interest margin.

"In one or two years, when China finalizes interest rate marketization, the overall net interest margin in banks won't significantly decline. However, the banking sector may see polarized business performances," Luo said.

Rising bad loans

A slowing economy and the debt overhang from the massive credit-fuelled stimulus that Chinese policymakers launched in response to the 2008 financial crisis are stoking concern about a rise in bad loans.

The overall non-performing loan (NPL) ratio of China's banking sector hit a two-year high of 1 percent at the end of 2013, according the China Banking Regulatory Commission.

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