Chinese banks' profitability to improve in 2018

China’s banking industry will improve steadily next year as transformation goes through and banks shift to credit business again, according to a report released by the Bank of Communications.

Chinese commercial banks’ profitability and asset quality stabilized in 2017 thanks to better-than-expected economic growth together with prudent monetary policy, said Lian Ping, chief economist at the country’s fifth largest bank, at a press event.

The scenario is expected to improve further in 2018, Lian said, adding banks are close to “bottoming out” in their financial performance.

Net profit of Chinese commercial banks is expected to grow 6.5 percent year on year in 2018. Around a quarter of the growth will come from improved net interest margin, a key driver behind lenders’ profitability.

Non-interest income is projected to contribute to 1 percent of the growth, the report shows.

The non-performing loan (NPL) ratio in 2018 will be in the range between 1.7 percent and 1.75 percent, compared with an estimated ratio of 1.74 percent in 2017, the report said.

As the Chinese central government steps up efforts to fend off financial risks, compliance will be a top priority for banks, said Chiu Gaoching, deputy general manager of the financial research center of the Shanghai-based bank.

 “Credit business is our key banking service, which will remain so in the next year,” he added. “We will do what we are supposed to.”

Chinese banks will have a divergence in business performance in 2018 and beyond, as challenges from further market-oriented reforms in interest rates and financial technologies will weigh on smaller lenders and those that lack clear development strategies, Lian said.

“In 2017, some first movers, say, the big five state-owned banks, have made fast response to meet the ever-changing demands from consumers by teaming up with Internet and technology giants,” said Lian. “On the contrary, some market players who still don’t know what to do next strategically for the next three to five years will definitely fall behind.”