Chinese banks need to seek quality, valuable growth: McKinsey

Facing tightened regulations and interest rate reforms, banks in China need to pursue more sustainable, high quality and valuable growth in the future instead of previous asset-driven expansions, McKinsey&Company said.

Tracking on the financial reports of the top 40 Chinese banks for the third year, the consulting firm made an in-depth analysis of the value creation ability of six large players — the top five state-owned banks plus the Postal Savings Bank of China — plus 12 national joint-stock commercial lenders, 17 major city commercial banks as well as five big rural commercial competitors.

Findings showed that in 2017, the top six participants saw their combined economic profits drop by 16.8 percent or 52.3 billion yuan (US$7.59 billion), while the 12 medium and 17 smaller-sized lenders also posted negative profit growth. Only the five investigated rural commercial banks recorded improved profits during the period.

The banking sector has suffered declining profits since 2015, and challenges facing industry players have become more severe during the past two years, as interest rate liberalization has led to a narrower interest spread — it is becoming more difficult for lenders to rely on interest income to boost their revenue growth, John Qu, senior managing partner at McKinsey&Company said.

Also, such reforms have taken their toll on the corporate banking sector in particular, the report indicated. Decreases in banks' net profit margins contributed to a total of 644.1 billion yuan in losses for 2017, led by loans to manufacturers and wholesale and retail enterprises.

In contrast, the retail banking business line made positive contributions to most of the reported lenders’ earnings.

Meanwhile, to fend off systemic risks, China’s financial watchdog has been strengthening supervisions over the whole industry and has lifted requirements for banks’ capital, which weighs a lot on those that count on heavy-asset modes of development, Qu added.

For example, regulations require that by the end of 2018, the capital adequacy ratio (CAR) of systemically important banks should not be less than 11.5 percent, and the number for other smaller competitors should not be lower than 10.5 percent.

To address these challenges, domestic banks must transform their business models from traditional asset-driven development to obtain more high quality and valuable growth, the report said.

Eric Kuo, associate partner at the US consultancy, said that banks should optimize their resources, put more emphasis on their retail banking business, seek high-quality expansion of the corporate banking sector and have better control of operational risks with the help of technology.

Kent Xu, expert associate partner at McKinsey&Company, added that domestic players should benchmark and learn from their foreign counterparts to find and build their respective strengths.