September 2017

Banking Newsletter

Review and Outlook of ’s Banking Industry for the First Half of 2017

www.pwccn.com Editorial Team

Editor-in-Chief：Vivian Ma

Deputy Editor-in-Chief：Haiping Tang, Carly Guan

Members of the editorial team：

Cynthia Chen, Jeff Deng, Carly Guan, Tina Lu, Haiping Tang

(in alphabetical order of last names)

Advisory Board

Jimmy Leung, Margarita Ho, Richard Zhu, David Wu, Yuqing Guo, Jianping Wang, William Yung, Mary Wong, Michael Hu, James Tam, Raymond Poon About this newsletter

The Banking Newsletter, PwC’s analysis of China’s listed and the wider industry, is now in its 32nd edition. Over the past one year there have been several IPOs for small-and-medium-sized banks, increasing the universe of listed banks in China. This analysis covers 39 A-share and/or H-share listed banks that have released their 2017 first half results. Those banks are categorized into four groups as defined by the China Banking Regulatory Commission (CBRC):

Large Commercial Joint-Stock Commercial City Commercial Banks Rural Commercial Banks Banks (6) Banks (9) (16) (8)

Industrial and Commercial Chongqing Rural Commercial (ICBC) China (CIB) Bank of (Beijing) (CQRCB) (CMB) Bank of (Shanghai) (CCB) Guangzhou Rural Commercial Bank SPD Bank (SPDB) Bank of (Hangzhou) Agricultural Bank of China (GZRCB) (ABC) Corporation Bank of Jiangsu (Jiangsu) (CMBC) Jiutai Rural Commercial Bank Bank of China (BOC) Bank of (Nanjing) China CITIC Bank (CITIC) (JTRCB) (Shengjing) Changshu Rural Commercial Bank (BOCOM) (CEB) Bank of (Ningbo) (PAB) (CSRCB) Postal Savings Bank of China Huishang Bank (Huishang) (PSBC) (HXB) Rural Commercial Bank Bank of (Tianjin) (WXRCB) (CZB) Bank of (Jinzhou) Jiangyin Rural Commercial Bank Bank (Harbin) (JYRCB) Zhongyuan Bank (Zhongyuan) Zhangjiagang Rural Commercial Bank Bank of Zhengzhou (Zhengzhou) (ZJGRCB) Bank of Guiyang (Guiyang) Wujiang Rural Commercial Bank Bank of Chongqing (Chongqing) (WJRCB) (Qingdao)

The total assets of these banks, as of 30 June 2017, accounted for 85.16% of the total assets of China’s commercial banking sector. Unless otherwise stated, all the information in this newsletter comes from publicly available sources. For more information, please talk to your PwC contacts or any of those listed in the Appendix as Banking and Capital Markets Contacts.

Banking Newsletter September 2017 PwC 3 Table of Contents

1 Macro overview 05

2 Listed banks’ results analysis 11

3 Features 33

Banks and tech giants: stronger alliances for greater opportunities

Financial inclusion: a catalyst for banks’ business transformation

Compliance risk is of utmost importance as banks expand overseas

China’s financial reforms: a review from a new inflection point

4 Appendix 43

Banking Newsletter September 2017 PwC 4 Macro overview

• The global economy continued to recover, China’s economy stabilised and is rebalancing

• Money supply growth slowed, credit expanded rapidly

• More effective financial risk prevention requires closer regulatory coordination

• Overall ODI slumped, B&R investment rebounded

Banking Newsletter September 2017 PwC 5 Banking Newsletter September 2017 PwC 6 The global economy continued to recover, China’s economy stabilised and is rebalancing

The global economy presented a solid recovery in Price levels were stable in 1H 2017. The Consumer 1H 2017, as trade, investment and manufacturing Price Index (CPI) increased year on year by 1.50% activities gathered pace and commodities, such as and Producer Price Index (PPI) by 5.50% in June crude oil, rebounded in price. Deflationary 2017. pressures eased as consumer prices made a slight recovery. Corporate profits grew rapidly in 1H 2017, while growth of fixed asset investment slowed. The Major developed economies continued to recover supply-side structural reform deepened, with five with employment improving and priorities - cutting overcapacity, reducing excess normalising gradually. Emerging economies still inventory, deleveraging, lowering costs, and faced the pressure of restructuring and transition, strengthening areas of weakness. despite gradually stabilised growth. Many international institutions revised up their China's economy was steady and recorded higher forecast on China’s growth prospects in 2017, as than expected GDP growth of 6.90% in the first six they believe the country has taken solid measures to month of 2017. Growth was primarily driven by rebalance the economy. For example, the consumption (63.40%), followed by investment International Monetary Fund (IMF) raised China’s (32.70%) and net exports (3.90%). growth forecast in 2017 by 0.10 percentage point to 6.70% - the third revision this year.

Figure 1 China’s GDP growth Figure 2 Changes in CPI and PPI

13% 8% 7% 12% 6% 11% 5% 2017.06， 4% 5.50% 10% 3% 2017.06, 2% 1.50% 9% 1% 8% 2017 Q2 0% 6.90% -1% 7%

-2%

2015.09 2015.11 2015.01 2015.03 2015.05 2015.07 2016.01 2016.03 2016.05 2016.07 2016.09 2016.11 2017.01 2017.03 2017.05 2017.06 6% -3% -4% 5% -5% -6%

CPI PPI

Source: National Bureau of Statistics Source: National Bureau of Statistics Note: The growth rate in the graph shows the situation at the end of each quarter; for example, 2017 Q1 represents the growth rate for 2016 Q1.

Banking Newsletter September 2017 PwC 7 Money supply growth slowed, credit expanded rapidly

Money supply growth continued to slow in 1H 2017. While money supply growth slowed, credit The Broad Money (M2) grew 9.40% for the first six continued its growth momentum in 1H 2017, with months, 2.40 percentage points lower than that in RMB loan balances reaching RMB 114.57 trillion as the first six months of 2016. The Narrow Money of 30 June 2017, representing year-on-year growth (M1) growth was 15.00%, 9.60 percentage points of 12.90%. The new loan amount in the first six lower than the same period in 2016. The difference months was RMB 7.97 trillion, suggesting that in growth between M1 and M2 narrowed. monthly origination of new loans was over RMB 1 trillion, a record high. According to the interpretation by the People’s Bank of China (PBOC) in its Monetary Policy Looking at the loan mix by sectors, even though the Report 2017 Q2, the slower growth of M2 was due growth of mortgage loans slowed, overall household to lower demand for residential properties, the maintained its growth momentum and remained impact of measures taken to strengthen financial the main driver of credit expansion for the first six regulations, shorten financing chains, and the months in 2017. Demand for corporate loans (non- reduction of layers in the financing structure. The financial enterprises, government departments and PBOC also expects slower M2 growth to be the new organisations) remained stable. normal as the deleveraging proceeds and financial sector places a greater focus on serving the real From the perspective of all-system financing, the economy. other reason for rapid credit growth was the reduction in corporate debt and equity financing.

Figure 3 Growth comparison between M1 and M2 Table 1 RMB loan mix as of 30 June 2017

Year-on-year growth As of 30 2017 1H vs 2016 vs 30% Sector June 2017 2016 1H 2015 (in trillions) 25% Non-financial enterprises, 20% 15.00% government 76.27 +8.50% +9.30% departments 15% &organisations

Households 37.15 +23.90% +23.50% 10% -Mortgage loans 20.10 +30.80% +36.70% 9.40% 5% Non-banking financial 0.70 -19.70% +11.60% 0% institutions

Overseas 0.45 +28.50% +38.70%

Total RMB Loans 114.57 +12.90% +13.50% M1 M2 Source: PBOC Source: PBOC

Banking Newsletter September 2017 PwC 8 More effective financial risk prevention requires closer regulatory coordination

Financial regulators in China took further measures coordination was elevated to a higher level by to control systemic risks in 1H 2017. In March, the setting up the Financial Stability and Development CBRC began taking serious measures to tackle Committee (FSDC) under the State Council. The irregularities in the banking sector, namely the PBOC’s role in macro prudential regulation and “three types of violations" (Document No.45, on systemic risk mitigation was also strengthened. violation of laws, violation of supervisory rules and violation of internal compliance policies), "three Due to tougher regulations and financial types of arbitrage" (Document No.46 on regulatory institutions’ proactive adjustment of their assets arbitrage, idle funds arbitrage, and related entity and liabilities, interest rates in the money market arbitrage"), and "four types of improper conduct" edged up in 1H 2017. While trading activities (Document No.53, on improper innovation, decreased in interbank market, government bond improper transactions, improper incentives and and debt issuance yields rose. improper fees), particularly in interbank activities and wealth management business. According to the PBOC, the weighted average interest rate of loans to non-financial enterprises In July 2017, the National Financial Work and other sectors is 5.67% as of June 2017, up 0.40 Conference (NFWC), which is held every five years percentage points from December 2016. The rate by China’s leadership, highlighted four guiding for ordinary loans hits 5.71%, up 0.27 percentage principles for future financial work. one of the points from December 2016; and home mortgage principles was the enhancement of capabilities to loans 4.69%, up 0.11 percentage. mitigate risks. During this year’s NFWC, regulatory

Figure 4 Four guiding principles for future financial work Figure 5 Changes in SHIBOR

Back to basics, serving the real economy % 5.00

4.50 Optimise structure, improve financial 4.00 markets, institutions and products 3.50

3.00 Four guiding principles for 2.50 Strengthen regulations financial work and enhance capabilities 2.00 to mitigate risks

1.50

Market oriented, letting market forces play a decisive role in financial resource Overnight 3M 6M 12M allocation Source: Communique of the NFWC Source: China Foreign Exchange Trading System

Banking Newsletter September 2017 PwC 9 Overall ODI slumped, B&R investment rebounded

To mitigate financial risks and reduce volatility of actively participating in overseas M&A. The State cross-boarder capital flows, Chinese authorities Administration of Foreign Exchange (SAFE) further have implemented measures to contain the private strengthened reporting requirements for foreign sector’s "irrational" overseas investments. This has exchange violation cases to limit capital outflow. affected a large number of overseas M&A deals. As a result, according to the Ministry of Commerce, The State Council released Guiding Opinions on non-financial overseas direct investments (ODI) Further Guiding and Regulating the Direction of decreased year-on-year by 45.80% to USD 48.19 Overseas Investment”, to restrict overseas billion for the first six months in 2017. The ODI investment in areas such as real estate, hotels, increased by 58.70% in the same period of 2016. cinemas, entertainment, and football clubs, and encourage investments in construction and Non-financial ODI in territories along B&R, infrastructure projects under the “Belt and Road” however, remained robust in 1H 2017, as the (B&R) Initiative. The Ministry of Finance also amount reached USD 6.61 billion for the first six issued Measures on Financial Management of month, or 13.70% of total non-financial ODIs. In Q2 State-owned Enterprise's Oversea Investment to 2017, the amount increased by 11.93% year-on-year. impose a stricter audit system. The Ministry of The most popular destinations for investment Commerce strengthened the review on the capital were Singapore, Pakistan, Cambodia and authenticity and compliance of companies' overseas Russia. investment cases, to guide investment into the real economy. The CBRC has been looking into banks’ risk in granting credit to borrowers who have been

Figure 6 Changes in Non-financial ODIs Figure 7 Changes in Non-financial ODIs along B&R

ODI amount (In USD billions) Year-on-year growth ODI amount (In USD billions) Year-on-year growth 60 80% 5 60% 48.77 4.26 45.36 4 3.59 3.66 40.09 60% 3.27 3.41 40 35.89 2.95 40% 27.65 3 40% 20.54 2 20 20% 20% 11.93% 1

0 0% 0 0%

-20% -1 -20 -20% -2 -40% -43.31% -3 -40 -40% -60% -4

-60 -80% -5 -60% ODI amount Growth ODI amount Growth

Source: Ministry of Commerce Source: Ministry of Commerce

Banking Newsletter September 2017 PwC 10 Listed banks’ results analysis

Profitability: • Net profit growth slowed • Net interest margin and net interest spread continued to narrow • Retail banking business on the rise

Assets and liabilities: • Assets: credit assets rose as a proportion; retail loans increased rapidly • Liabilities: interbank certificates of deposits growth slowed; customer deposits remained a lion’s share

Credit asset quality: • Both non-performing and special mention loan ratios fell, suggesting credit asset quality has entered a stable period • Overdue 90 days or above loan to NPL ratio presented divergent trends • Provision indicators remained stable

Capital adequacy: • Capital adequacy ratios were stable, but capital management efficiency to be improved

Banking Newsletter September 2017 PwC 11 September 2017 BankingPwC Newsletter 12 Profitability: —Net profit growth slowed

In 1H 2017, the aggregate net Table 2 Net profits & growth overview of listed banks in 1H 2017 profit of China's listed banks grew at a slightly slower pace as Growth compared to the same period of Net profits YoY compared with 2016. While City Commercial (in billions) growth 1H 2016 Banks experienced the most apparent slowdown in growth, Large Commercial Banks saw a 39 Listed Banks 849.72 4.50% -0.50 slight rise. Large Commercial Banks 577.73 3.53% +0.12 The profit growth for Large Commercial Banks, City Joint-stock Commercial Banks 197.64 5.84% -0.25 Commercial Banks and Rural Commercial Banks was mainly driven by net interest income. For City Commercial Banks 63.91 8.50% -8.09 Joint-stock Commercial Banks, the driver was fee and Rural Commercial Banks 10.43 10.25% -6.01 commission income. Note: As Zhongyuan Bank and Guangzhou Rural Commercial Bank did not disclose their interim results for 1H 2015, their net profits were not included in the above calculation on change in growth.

Figure 8 Share of profits for listed banks

1.23% 1.16% 7.52% 7.24% Rural Commercial Banks

23.26% 22.96% City Commercial Banks

Joinit-stock Commercial Banks

Large Commercial Banks 67.99% 68.63%

1H 2017 1H 2016

Banking Newsletter September 2017 PwC 13 Large commercial banks: stable profit Figure 9 Net profit growth of Large Commercial Banks growth driven by net interest income

2.01% In 1H 2017, most Large Commercial Banks ICBC experienced a slightly higher growth as 0.82% compared to the same period of prior year. 3.81% BOC gained a large investment income from CCB the sale of equity in its subsidiary, Nanyang 1.25% Commercial Bank in 1H 2016, driving its net 2017 1H 3.44% profits to double-digit growth. In 1H 2017, ABC 2016 1H although the bank recorded similar gains on its 0.47% disposal of another subsidiary, Chiyu Bank, the impact was very small. BOC’s net profit growth 3.02% BOC was 3.02% in the period, a level in line with 12.97% other Large Commercial Banks. 3.43% BOCOM Among Large Commercial Banks, only PSBC 1.11% achieved double-digit growth for both periods.

14.54% PSBC 10.80%

Four Large Commercial Banks recorded higher Net profit growth vs. pre-provision operating profit Figure 10 pre-provision operating profit growth than that growth, Large Commercial Banks of net profits.

2.01% Generally speaking, net interest income of ICBC 7.62% Large Commercial Banks increased at a relatively faster pace and was the main driver 3.81% CCB of stable profit growth. 7.56%

Net profit growth 3.44% ABC 5.85%

Pre-provision 3.02% operating profit growth BOC -6.51%

3.43% BOCOM -2.10%

14.54% PSBC 30.00%

Banking Newsletter September 2017 PwC 14 Joint-stock Commercial Banks: fee & Figure 11 Net profit growth of Joint-stock Commercial Banks commission income underpinned profit growth CIB 7.53% 5.81% In 1H 2017, Joint-stock Commercial Banks saw CMB 11.70% their aggregate net profit growth slow as compared 6.52% to the same period of the prior year. Only four of SPDB 5.48% nine banks’ growth exceeded their growth figures in 12.08% 1H 2016. CMBC 3.29% 1.58% In terms of net profit contribution, as most Joint- 2017 1H stock Commercial Banks experienced shrink in net CITIC 2.06% 3.08% 2016 1H interest income, their net profit growth was largely underpinned by fee and commission income. That CEB 3.06% 1.24% said, most banks saw their fee and commission income growth slowed to single digit. PAB 2.13% 6.10%

HXB 0.30% 6.07%

CZB 18.32% 42.34%

Most Joint-stock Commercial Banks’ net profit Pre-provision operating profit growth vs. net profit Figure 12 growth was higher than their pre-provision growth, Joint-stock Commercial Banks operating profit growth in 1H 2017. Some banks’

pre-provision operating profit growth slowed. CIB 7.53% -16.08%

CMB 11.70% 1.27%

SPDB 5.48% 2.27%

CMBC 3.29% -8.23% Net profit growth

CITIC 2.06% 0.73% Pre-provision operating profit growth CEB 3.06% 1.45%

PAB 2.13% 11.14%

HXB 0.30% 13.68%

CZB 18.32% 10.04%

Banking Newsletter September 2017 PwC 15 City Commercial Banks: net Figure 13 Net profit growth of City Commercial Banks profit growth slowed 4.51% Beijing 6.08% In 1H 2017, City Commercial 10.53% Jiangsu 14.34% Banks saw an obvious net profit Shanghai 6.43% growth slowdown as compared to 10.10% 16.92% Nanjing 22.56% the same period of the prior year. -3.24% Some banks even recorded Shengjing 13.16% 15.16% decreases. Ningbo 16.21% 2017 1H 13.25% Huishang 12.11% 2016 1H The main contributor of City 9.42% Hangzhou 4.89% Commercial Banks’ net profit 0.95% Tianjin 13.14% growth was net interest income. 163.78% 6.10% As net interest income growth Jinzhou 9.35% slowed, so did net profits. Harbin 15.35% Zhongyuan 16.45% 9.10% Zhengzhou 21.73% 22.72% Guiyang 3.20% Chongqing 11.31% 10.45% 1.37% Qingdao 17.46%

Note: Zhongyuan Bank did not disclose their interim results for 1H 2015, thus it is unable to calculate the change of its net profits in 1H 2016.

A total of 11 City Commercial Pre-provision operating profit growth vs net profit growth, City Figure 14 Banks’ net profit growth was Commercial Banks higher than their pre-provision Beijing 4.51% operating profit growth in 1H 10.92% Jiangsu 10.53% 2017. Five of these banks 11.05% 6.43% recorded decreases in pre- Shanghai -16.00% provision operating profits. Nanjing 16.92% -19.33% -3.24% Shengjing -17.26% Ningbo 15.16% 8.20% Huishang 13.25% 11.66% Net profit growth 9.42% Hangzhou -1.32% Tianjin 0.95% -15.09% Pre-provision 6.10% operating profit growth Jinzhou 6.92% 9.35% Harbin 17.08% 16.45% Zhongyuan 5.71% 9.10% Zhengzhou 3.56% 22.72% Guiyang 33.36% 11.31% Chongqing 5.54% 1.37% Qingdao 1.29%

Banking Newsletter September 2017 PwC 16 Rural Commercial Banks: Figure 15 Net profit growth of Rural Commercial Banks Net profit growth varied

Chongqing RCB 10.18% Rural Commercial Banks’ 7.32% aggregate net profit growth fell slightly in 1H 2017. Within the Guangzhou RCB 24.98% group, the performance varied -12.84% widely for individual banks, with 86.33% Jiutai RCB some banks’ profit growth sliding to negative territory from prior Changshu RCB 9.64% year’s positive growth, and others 10.45% experiencing continued profit 11.12% 2017 1H Wuxi RCB decrease in two consecutive years. 11.68% This variation in profit growth 2016 1H -5.75% reflects different geographic areas Jiangyin RCB and operating environments of -6.98% -0.56% Rural Commercial Banks. Zhangjiagang RCB -14.98% Jiutai RCB’s net profit growth Wujiang RCB 11.18% decreased by 12.84% in 1H 2017, 2.16% following an increase of 86.33% in 1H 2016, largely due to a sharp Note: Guangzhou RCB did not disclose their interim results for 1H 2015, thus it is unable to calculate increase in impairment charges. the change of its net profit in 1H 2016.

Most Rural Commercial Banks’ Pre-provision operating profit growth vs net profit growth, Rural Figure 16 pre-provision operating profit Commercial Banks growth was higher than their net Chongqing RCB 10.18% profit growth in 1H 2017. 13.13%

-11.84% Guangzhou RCB 24.98%

Jiutai RCB Net profit growth -12.84% 6.90%

Pre-provision operating Changshu RCB 9.64% 14.82% profit growth

Wuxi RCB 11.12% 22.79%

Jiangyin RCB -5.75% -2.72%

Zhangjiagang RCB 5.40% 8.37%

Wujiang RCB 11.18% 30.12%

Banking Newsletter September 2017 PwC 17 Profitability indicators fell Figure 17 Profitability indicator – return on average total assets（ROA）

In 1H 2017, profitability 1.4% indicators of all listed banks, i.e. 1.21% return on total assets (ROA) and 1.2% 1.13% return on equity (ROE) fell. 1.04% 1.04% 0.97% 1.0% 0.93% 0.95% Except for Large Commercial 0.93% Banks, other banks’ overall ROA 0.8% fell to a level of below 1.00%. City Commercial Banks saw the most 0.6% significant drop.

0.4%

0.2%

0.0% Large Commercial Joint-stock City Commercial Rural Commercial Banks Commercial Banks Banks Banks

2017 1H 2016 1H

The ROE for Rural Commercial Figure 18 Profitability indicator – return on weighted average equity（ROE） Banks was much lower than that of the other groups of banks, 18% 17.31% which stood at a level of over 16.53% 16.27% 15.88% 15.00%. 16% 15.41% 15.28%

14% 12.71% 12% 11.57%

10%

8%

6%

4%

2%

0% Large Commercial Joint-stock City Commercial Rural Commercial Banks Commercial Banks Banks Banks 2017 1H 2016 1H

Banking Newsletter September 2017 PwC 18 Profitability: —Net interest margin and net interest spread continued to narrow

The narrowing of net interest Table 3 Overview of NIM and NIS for listed banks in 1H 2007 margins (NIM) and net interest spreads (NIS) weighted down listed banks’ profitability. Net YoY Net YoY interest change interest change Due to continuous loan repricing margin (bps) spread (bps) following the PBOC interest rate cuts in 2015, and the effect on 39 Listed Banks 1.98% -21 1.86% -20 separation of price and tax as a result of the business tax to value- Large Commercial Banks 2.06% -11 1.95% -9 added tax reform (“VAT reform”), all listed banks’ NIM and NIS narrowed in 1H 2017 as compared Joint-stock Commercial Banks 1.82% -40 1.68% -40 to the same period of the prior year. City Commercial Banks and City Commercial Banks 1.85% -41 1.74% -36 Joint-stock Commercial Banks were the hardest hits. Rural Commercial Banks 2.18% -24 2.03% -31 Joint-stock Commercial Banks’ NIS and NIM were the lowest and Rural Commercial Banks were the highest.

Figure 19 Change in NIM for listed banks Figure 20 Change in NIS for listed banks

2.42% 2.50% 2.50% 2.34% 2.26% 2.10% 2.18% 2.17% 2.22% 2.06% 2.03% 2.04% 2.08% 1.95% 2.00% 1.85% 2.00% 1.74% 1.82% 1.68%

1.50% 1.50%

1.00% 1.00%

0.50% 0.50%

0.00% 0.00% 2017 1H 2016 1H 2017 1H 2016 1H Large Commercial Banks Joint-stock Commercial Banks Large Commercial Banks Joint-stock Commercial Banks City Commercial Banks Rural Commercial Banks

Note: Jiangsu, Guiyang, Wujiang and Changshu Banks did not disclose their NIM and NIS for 2016, hence these figures are not included in the above analysis.

Banking Newsletter September 2017 PwC 19 Gross interest yield fell Figure 21 Change in gross interest yield of listed banks

Gross interest yield fell across all 5% groups of banks in 1H 2017, with 4.58% 4.49% 4.59% 4.28% 4.35% Joint-stock Commercial Banks 4.07% and City Commercial Banks 4% 3.75% recording the largest fall. 3.56% Downward gross interest yield was primarily due to the decline of 3% loan yields.

2%

1%

0% Large Commercial Joint-stock City Commercial Rural Commercial Banks Commercial Banks Banks Banks

2017 1H 2016 1H

Cost of funds varied Figure 22 Change in cost of funds of listed banks 3.00% In terms of cost of funds, banks performed differently in 1H 2017. 2.61% 2.48% Large Commercial Banks’ cost of 2.50% 2.39% 2.36% funds remained the lowest and 2.20% 2.25% continued to fall as compared to 2.00% the same period in the prior year. 1.71% 1.62%

The other groups of banks, 1.50% however, all experienced a rise in cost of funds, with City Commercial Banks bearing the 1.00% highest cost of funds.

0.50%

0.00% Large Commercial Joint-stock City Commercial Rural Commercial Banks Commercial Banks Banks Banks 2017 1H 2016 1H

Banking Newsletter September 2017 PwC 20 Differentiated patterns for Figure 23 Change in operating income mix of listed banks operating income mix 5.54% 4.60% 2.33% 2.10% 5.60% Total operating income of 39 11.10% 13.19% 10.69% listed banks decreased by 0.49% 17.20% 11.00% 18.07% year-on year in 1H 2017, with 18.67% 28.51% Large Commercial Banks and 19.49% 30.25% Rural Commercial Banks increasing by 0.56% and 2.32% respectively; Joint-stock Commercial Banks and City 70.23% 80.70% 89.50% Commercial Banks decreasing by 66.89% 3.11% and 0.72%. 67.32% 64.21% 79.61% 83.40%

Large Commercial Banks and Rural Commercial Banks saw their proportions of net interest income rise and fee and commission 2017 1H 2016 1H 2017 1H 2016 1H 2017 1H 2016 1H 2017 1H 2016 1H income fall in 1H 2017. Joint- Large Commercial Banks Joint-stock Commercial City Commercial Banks Rural stock Commercial Banks and City Banks Commercial Commercial Banks presented the Banks reverse. Net interest income Net fee & commission income Other non-interest income

It is also worth noting that fee and commission income accounted for Figure 24 Composition of fee & commission income in 1H 2017 over 30% of the operating income for Joint-stock Commercial Banks. 8.59% 5.15% 8.23% 8.04% Others In 1H 2017, most Large 5.82% 4.54% 4.77% 8.74% Commercial Banks and Joint- 12.80% 7.22% Settlement and clearing stock Commercial Banks’ fee and 12.71% 6.15% 9.60% commission income came from Credit commitment bank card business; while most of 30.04% 14.42% 16.09% 11.68% City Commercial Banks’ came Wealth management from agency service, and Rural 7.30% 11.42% Custodian and other Commercial Banks’ wealth 12.88% management business. fiduciary service 24.58% 34.84% Bank card 31.85% 23.26% Agency service 14.54% 12.99% Consultancy and 15.45% 16.88% advisory 11.62% 7.62%

Large Commercial Joint-stock City Commercial Rural Commercial Banks Commercial Banks Banks Banks

Banking Newsletter September 2017 PwC 21 Profitability: —Retail banking business on the rise

A comparison of banks’ operating Figure 25 Change in operating income mix by business segments of listed banks income by business segments suggested that corporate banking 2% 7% 8% 4% 5% Others was the largest source in 1H 2017, 8% 9% 25% but the proportion is falling. 13% 12% 28% 29% 23%

On the other hand, the proportion 39% 33% Treasury of retail banking (also known as 39% 38% 19% 16% 33% 34% personal banking) business for Large Commercial Banks, Joint- Retail stock Commercial Banks and City Commercial Banks were on the 54% 49% 53% 53% rise, indicating retail banking was 41% 42% 42% 41% Corporate an area that all listed banks were actively embracing.

Large Commercial Joint-stock City Commercial Rural Banks Commercial Banks Banks Commercial Banks Note: As CIB, SPDB, HXB, Wuxi RCB and Zhangjiagang RCB did not disclosed their business segments in 1H 2016, they were excluded from the above calculation of operating income.

Cost to income ratio (also referred Figure 26 Change in efficiency (cost to income) ratios of listed banks to as efficiency ratio) for most banks rose in 1H 2017, as their 35% 34.19% 32.87% operating income experienced slower or even negative growth 30% 26.56% due to increase in business and 26.15% 26.01% 23.95% 24.62% administration expenses. 25% 22.96%

While Large Commercial Banks’ 20% cost to income ratio remained stable, the ratios for Joint-stock 15% Commercial Banks and City Commercial Banks were relatively 10% lower and the ratio for Rural Commercial Banks was the 5% highest. 0% Large Commercial Joint-stock City Commercial Rural Commercial Banks Commercial Banks Banks Banks

2017 1H 2016 1H

Banking Newsletter September 2017 PwC 22 Total assets and liabilities —growth slowed

As of 30 June 2017, total assets of Table 4 Total assets and liabilities of listed banks, as of 30 June 2017 39 listed banks increased by 4.21% from the end of 2016 to Change Total Change Total assets RMB 161.98 trillion. Total from 31 liabilities from 31 (in trillions) liabilities increased by 4.23% to Dec 2016 (in trillions) Dec 2016 RMB 150.66 trillion. 39 Listed Banks 161.98 +4.21% 150.66 +4.23% For Large Commercial Banks and City Commercial Banks, total assets and total liabilities grew at Large Commercial Banks 104.68 +5.22% 97.11 +5.40% a rate above 5.00%, with total liabilities growing slightly faster Joint-stock Commercial Banks 40.92 +1.30% 38.22 +0.96% than total assets. City Commercial Banks 14.09 +5.48% 13.21 +5.50%

Rural Commercial Banks 2.29 +4.57% 2.12 +4.24%

Joint-stock Commercial Banks Figure 27 Total assets and liabilities growth of listed banks in 1H 2017 recorded the lowest growth among all groups of banks in total 6% 5.48% 5.40% 5.50% assets and total liabilities. The 5.22% growth rate was around 1.00%. 5% 4.57% 4.24%

4%

3%

2% 1.30% 0.96% 1%

0% Total assets growth Total liabilities growth

Large Commercial Banks Joint-stock Commercial Banks City Commercial Banks Rural Commercial Banks

Banking Newsletter September 2017 PwC 23 Assets and liabilities: —assets: credit assets rose as a proportion

Loans grew at a relatively faster Figure 28 Growth of different types of assets in 1H 2017 pace for all listed banks’ in 1H 2017; interbank assets saw 15% 12.90% negative or low growth, with 11.40% 8.91% 9.29% Joint-stock Commercial Bank and 10% Rural Commercial Banks 6.87% recording the most obvious fall. 5% 3.43% 2.97% 3.95%

0% Most banks’ investment portfolios, -6.25% -1.15% however, continued to grow at -5% modest rates, with Rural Commercial Banks growing most -10% rapidly from a low base. -15%

-20%

-25% -24.05% -30% -28.91% Large Commercial Joint-stock City Commercial Rural Commercial Banks Commercial Banks Banks Banks

Loans and advances Investments Interbank assets

All listed banks saw their loans Figure 29 Change in asset mix of listed banks rise as a proportion of total assets 2.64% 2.51% 2.26% 2.17% in 1H 2017, and investment 3.56% 3.68% 3.83% 3.52% 8.66% 9.13% 8.76% 9.15% 11.89% 12.11% portfolios and interbank assets 13.64% 13.73% fall accordingly. 5.41% 7.72% 8.11% 9.12% 11.01% 6.17% 6.30% 15.16% Loans still accounted for the 25.33% 34.59% largest portion of assets for Large 25.77% 35.44% 44.80% 34.38% Commercial Banks, Joint-stock 45.46% 31.85% Commercial Banks and Rural Commercials Banks, while the largest holdings for City 51.31% Commercial Banks were 38.71% 50.52% 47.51% investments. 33.76% 40.46% 44.18% 35.68%

2017 1H 2016 2017 1H 2016 2017 1H 2016 2017 1H 2016 Large Commercial Banks Joint-stock Commercial City Commercial Banks Rural Banks Commercial Banks Loans and advances Investments Interbank assets Cash & deposits with

Banking Newsletter September 2017 PwC 24 Loans continued to expand, Figure 30 Growth of different types of loans in 1H 2017 driven by retail segment 16.29% In 1H 2017, most banks saw their 14.86% 9.78% 12.83% 13.02% retail loans grow at a faster rate 9.57% than their corporate segments. 7.14% 7.08% The retail loans of Joint-stock Commercial Banks and City Commercial Banks recorded double digit growth, primarily driven by personal mortgage loans. -17.51% Corporate loans continued to grow -19.70% for all listed banks, with City -25.94% Commercial Banks and Rural Commercial Banks’ growth hitting double digit. -46.81% Large Commercial Joint-stock City Commercial Rural Commercial Banks Commercial Banks Banks Banks

Corporate loans Retail loans Discounted bills

Analysis of banks’ loan mix Figure 31 Change in loan mix of listed banks suggested that they all adjusted 2.48% 4.99% 2.53% 3.43% 4.09% 6.15% 5.00% their lending preferences in 1H 6.62% 2017 by reducing discounted bills 25.47% as part of assets and liabilities 24.39% 28.09% 36.10% 35.13% 38.14% 36.20% management. 28.67%

66.92% 69.46% 64.71% 61.41% 59.88% 59.34% 60.37% 70.44%

2017 1H 2016 2017 1H 2016 2017 1H 2016 2017 1H 2016 Large Commercial Banks Joint-stock Commercial City Commercial Banks Rural Banks Commercial Banks Corporate loans Retail loans Discounted bills

Banking Newsletter September 2017 PwC 25 Assets and liabilities: —liabilities: interbank certificates of deposits growth slowed

All listed banks strengthened their Figure 32 Growth of different types of liabilities in 1H 2017 funding bases primarily by issuing debts and attracting deposits in 43.29% 1H 2017.

Inter-bank certificates of deposits 28.62% and certificates of deposits, booked as debt securities issued, 17.89% 16.61% 17.79% 14.78% grew rapidly in 1H 2017. Larger 12.83% banks tended to issue certificates 6.34% 7.63% 6.32% 3.56% of deposits, while their smaller peers preferred inter-bank certificates of deposits. The CBRC conduced special inspections in 1H -7.28% -11.72% 2017 to examine banks’ interbank -13.28%

business with a focus on arbitrage. -19.72% As a result, the growth in inter- bank certificates of deposits -31.09% slowed down. Large Commercial Joint-stock City Commercial Rural Commercial Banks Commercial Banks Banks Banks Deposits from customers Interbank liabilities Debt securities issued Borrowings from central bank

All listed banks were seeking other Figure 33 Change in liability mix of listed banks means to increase their liabilities, 2.75% 2.76% 2.74% 2.47% 2.56% 2.64% including issuing green bonds, tier 4.57% 4.51% 2.94% 2 capital bonds and convertible 3.29% 13.00% 9.46% 10.82% 9.27% 16.11% 13.21% bonds. 9.87% 11.22% 9.82% 14.86%

Yet from the perspective of 21.45% 24.98% 18.66% 22.30% liability mix, customer deposits maintained a lion’s share as of 30 June 2017, and increased slightly. 79.82% 71.59% 79.12% 73.02% 59.00% 60.58% 60.20% 59.05%

2017 1H 2016 2017 1H 2016 2017 1H 2016 2017 1H 2016 Large Commercial Banks Joint-stock Commercial City Commercial Banks Rural Banks Commercial Deposits from customers Interbank liabilities Banks Debt securities issued Borrowings from central bank

Banking Newsletter September 2017 PwC 26 Time deposits rose in Figure 34 Change in deposit mix of listed banks proportion 1.52% 1.63% With respect to deposit mix, all 6.87% 7.15% 6.74% 8.26% 6.46% 6.10% listed banks’ time deposits - a stable source of funding – rose in proportion. 47.54% 47.19% 45.04% 44.86% 48.98% 48.19% 54.32% 52.80%

50.95% 51.18% 48.08% 47.99% 44.28% 43.55% 39.22% 41.10%

2017 1H 2016 2017 1H 2016 2017 1H 2016 2017 1H 2016 Large Commercial Banks Joint-stock Commercial City Commercial Banks Rural Banks Commercial Banks Demand deposits Time deposits Other deposits

Banking Newsletter September 2017 PwC 27 Credit asset quality: —both non-performing loans & special mention loans ratios fell, suggesting credit asset quality has entered a stable period

Aa of 30 June 2017, the non- Table 5 NPL balance and ratios of listed banks, as of 30 June 2017 performing loans (NPLs) balances of 39 listed banks increased by NPL balance NPL ratio 4.24% as compared to 31 December 2016, to over RMB 1.30 30 Jun Change Change 30 Jun trillion. 2017 from 31 from 31 2017 (billions) Dec 2016 Dec 2016 Both NPL ratios and special- mention loans ratios fell as 39 Listed Banks 1,300.70 +4.24% 1.60% -0.05 compared to 31 December 2016, suggesting listed banks’ credit Large Commercial Banks 874.61 +2.17% 1.59% -0.07 asset quality has entered a stable period. Joint-stock Commercial Banks 345.72 +8.52% 1.72% -0.01

City Commercial Banks’ NPL City Commercial Banks 66.42 +10.18% 1.28% -0.01 ratios and special-mention loans ratios were the lowest among all Rural Commercial Banks 13.95 +7.96% 1.46% -0.01 groups of banks.

Figure 35 Change in NPL ratios of listed banks Figure 36 Change in special-mention loan ratios of listed banks

1.8% 1.72% 3.94% 1.66% 1.73% 4.0% 1.59% 1.6% 3.40% 3.36% 1.46% 3.5% 1.47% 3.18% 3.11% 3.06% 1.4% 1.28% 1.29% 3.0% 2.62% 1.2% 2.44% 2.5% 1.0% 2.0% 0.8% 1.5% 0.6% 1.0% 0.4%

0.2% 0.5%

0.0% 0.0% Large Joint-stock City Commercial Rural Large Joint-stock City Commercial Rural Commercial Commercial Banks Commercial Commercial Commercial Banks Commercial Banks Banks Banks Banks Banks Banks 2017 1H 2016 2017 1H 2016

Banking Newsletter September 2017 PwC 28 Credit asset quality: —overdue 90 days or above loans to NPL ratios presented divergent trends

Aa of 30 June 2017, almost all Figure 37 Change in overdue loan ratios of listed banks groups of banks saw their overdue loan ratios fall as compared to 31 3.00% 3.00% 2.93% December 2016, except for Rural 2.64% Commercial Banks. 2.48% 2.44% 2.50% 2.39% 2.23% 2.02% 2.00%

1.50%

1.00%

0.50%

0.00% Large Commercial Joint-stock City Commercial Rural Commercial Banks Commercial Banks Banks Banks

2017 1H 2016

As of 30 June 2017, loans overdue Figure 38 Change in overdue 90 days or above loans to NPL ratio of listed banks 90 days or above increased as 1.4 compared to 31 December 2016 1.21 1.21 1.21 for all listed banks. 1.2 1.16 1.10 1.06 Almost all groups of banks’ ratio of loans overdue 90 days or above 1.0 0.87 to NPLs were on the rise, except 0.85 for Joint-stock Commercial Banks. 0.8

Another fact worth mentioning is 0.6 that the ratios of loans overdue 90

days or above to NPLs were well 0.4 over 1.00 for Joint-stock Commercial Banks, City 0.2 Commercial Banks and Rural Commercial Banks, suggesting 0.0 credit risk remains. Large Commercial Joint-stock CommercialCity Commercial Banks Rural Commercial Banks Banks Banks 2017 1H 2016

Banking Newsletter September 2017 PwC 29 Credit asset quality: —provision indicators remained stable

As of 30 June 2017, most listed Figure 39 Chang in allowance to NPLs (provision coverage) ratios of listed banks banks’ allowance to NPLs ratio (also known as provision coverage 250% 242.66% 244.69% 241.35% ratio) were stable as compared to 237.70% the end of 2016. 200% The provision coverage ratio of 176.10% 170.24% City Commercial Banks, which 164.29% 159.05% was relatively higher, fell slightly 150% in 1H 2017, while that of all other types of banks rose. 100% The provision coverage ratios were lower for Large Commercial Banks and Joint-stock 50% Commercial Banks; and were higher for City Commercial Banks and Rural Commercial Banks. 0% Large Commercial Joint-stock City Commercial Rural Commercial Banks Commercial Banks Banks Banks

2017 1H 2016

The allowance to total loans Figure 40 Change in allowance to total loans ratio of listed banks ratio (also known as provision ratio) was relatively stable for all 4.0% 3.56% groups of banks, with Joint- 3.56% 3.5% stock Commercial Banks rising 3.14% 3.04% and other groups of banks 3.04% 2.95% 3.0% dropping. 2.64% 2.61% 2.5%

2.0%

1.5%

1.0%

0.5%

0.0% Large Commercial Joint-stock City Commercial Rural Commercial Banks Commercial Banks Banks Banks

2017 1H 2016

Banking Newsletter September 2017 PwC 30 Capital adequacy： —capital adequacy ratios (CAR) were stable

As of 30 June 2017, apart from Joint-stock Figure 41 Change in total CAR of listed banks Commercial Banks, the CAR for most listed banks fell. 13.67% 14% 13.51% 13.29% Joint-stock Commercial Banks and City 13% 12.23% 12.12% 12.30% 12.51% 11.80% Commercial Banks’ CAR were relatively lower 12% 11% among all listed banks, indicating higher capital 10% pressures. 9% 8% Most listed banks’ capital management revolve 7% around a central approach. On the other hand, 6% they are actively exploring alternative financing 5% channels to improve their capital management 4% 3% capabilities and promote the efficient use of 2% capital. 1% 0% Large Joint-stock City Commercial Rural Commercial Commercial Banks Commercial Banks Banks Banks 2017 1H 2016

Figure 42 Change in Common Equity Tier 1 CAR of listed banks Figure 43 Change in Tier 1 CAR of listed banks

12% 11.03% 11.21% 11.21% 11.78% 12% 11.59% 11% 10.62% 11.24% 10.66% 8.94% 9.56% 11% 10% 9.29% 9.82% 9.87% 8.98% 10% 9.62% 9.57% 9% 9% 8% 8% 7% 7% 6% 6% 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% 0% Large Joint-stock City Rural Large Joint-stock City Commercial Rural Commercial Commercial Commercial Commercial Commercial Commercial Banks Commercial Banks Banks Banks Banks Banks Banks Banks

2017 1H 2016 2017 1H 2016

Banking Newsletter September 2017 PwC 31 Banking Newsletter September 2017 PwC 32 Features

• Banks and tech giants: stronger alliances for greater opportunities

• Financial inclusion: a catalyst for banks’ business transformation

• Compliance risk is of utmost importance as banks expand overseas

• China’s financial reforms: a review from a new inflection point

Banking Newsletter September 2017 PwC 33 Banking Newsletter September 2017 PwC 34 Banks and tech giants: stronger alliances for greater opportunities

With BOCOM signing a strategic cooperation agreement with e-retailer Suning, all five Large Commercial Banks are in partnership with large tech companies in China. These efforts indicate an era of “extensive cooperation” between financial institutions and tech giants is approaching as a result of the FinTech boom, in which the ways consumers access financial products and services are changing. This also suggests that stronger alliances are needed to seize new opportunities.

Moving beyond previous internet-based cooperation with Ant Financial (of Alibaba Group), efforts followed by ICBC with JingDong, ABC with Baidu and BOC with . In late August, BOCOM also In recent years, most banks in China promoted followed the trend by partnering with Suning. All “internet finance” through direct-sales banking, e- five Large Commercial Banks are in alliance with commerce platforms and open financial services large tech companies. platforms. Yet this round of exploration did not meet expectations due to large tech companies The importance of new technologies in banks’ controlled access to data and banks were constrains FinTech development is widely acknowledged. by their own organisational structures and FinTech has been playing increasingly crucial roles management systems. in risk pricing, resource allocation, cyber security and risk management. This is the primary reason Cooperation with large tech companies offers an for more and more banks to integrate financial alternative for banks to embrace Fintech. In 1H expertise with technological capabilities by seeking 2017, CCB took the lead by signing a strategical cooperation with tech giants.

Table 6 Alliances between five Large Commercial Banks and tech companies

Parties Date of agreement Cooperating areas

To jointly promote on-boarding of CCB’s credit card business online and CCB + Ant Financial 29 March 2017 cooperation of channels & e-payment offline, information sharing between credit systems of both parties.

To jointly explore extensive collaborations in FinTech, retail banking, consumer ICBC + JingDong 16 June 2017 finance, corporate credit, campus eco-system, asset management and personal joint accounts.

To jointly build a financial intelligence bank and consumer profiles by exploring the application of customer intelligence, precise marketing, consumer credit ABC + Baidu 20 June 2017 rating, risk supervision, robo-advisors, chatbots, particularly in financial products and services, and distribution channels.

To collaborate extensively on cloud computing, big data analytics, blockchain BOC + Tencent 22 June 2017 and artificial intelligence, and build eco-systems of inclusive financing, cloud financing, smart financing and TechFin.

To collaborate extensively in smart financing, full financing, cash management, BOCOM + Sunning 22 August 2017 international expansion, business diversification

Banking Newsletter September 2017 PwC 35 Partnerships are not always smooth sailing resource and finance constraints, as well as other operational challenges. While partnerships between financial institutions and tech companies are an inevitable trend, they are It is important to enhance the independence and not all smooth sailing. PwC’s Global FinTech the professionalism of FinTech business unit as it Survey China Summary 2017 launched earlier this helps to ensure banks’ resilience in market year reveals that financial institutions believed competition, while securing their position as an “compatibility of IT system” as a key challenge, and innovator. An independent FinTech business unit “differences in business models” is the key concern also cushions banks’ management and operations shared by FinTech companies. arising from the impact of platform transformation. Banks need to upgrade capabilities in four ways Build a cross-disciplinary talent pool

To ensure a successful cooperation with tech Cross-disciplinary talent is essential to sustainable companies, banks are advised to upgrade their business and technological development of both capabilities in four areas: financial institutions and tech companies. The latter have gained a competitive edge in building such Pursuit internal transformation talent pools and banks need to catch up quickly.

At present, most banks only have basic and Partnering with tech companies to build cross- scattered service capabilities, which do not unleash disciplinary FinTech talent pool and set up the full value of the new technology. There are no innovative teams will be key steps for banks to significant changes before and after banks apply develop FinTech capabilities and enhance core new technologies to the relevant business processes, competitiveness in the future. as many banks regard them as aids. As a result, improvements in process efficiency and resource allocation are not obvious. Develop a corporate culture fit for FinTech era

Tech companies are more flexible in operations and In the cooperation between finance and technology, offer more attractive incentives, which contributes banks should fully embrace FinTech and make to their innovation and growth. During their efforts to optimise and transform their customer cooperation with tech companies, banks will not services, business procedures and risk management only obtain technological outputs, but also learn in order to transform from product-centric to from their FinTech corporate culture. This can customer-centric, from automatic to digitalised, and ignite their employees’ sense of mission and passion from experience-oriented to data-oriented. for innovation.

Improve institutional flexibility

In the early days of internet finance, banks placed high hopes for direct-sale banking. However, this model was side-lined by the market due to human

Banking Newsletter September 2017 PwC 36 Financial inclusion: a catalyst for banks’ business transformation

Regarded as part of national development strategy in China, financial inclusion (also referred to as inclusive financing) will be a catalyst for the business transformation of banks rather than just a response to government initiatives. The scope of inclusive financing will also expand from payments and lending to social welfare, insurance and particularly to rural and SME financing. That said, financial literacy, consumer coverage, social credit system and risk control remain top challenges. Banks and FinTechs as important drivers Bottlenecks to be addressed

Banks and FinTech (or Internet Finance) companies While inclusive financing is fuelling the country’s are major drivers of financial inclusion in China. In economic development, several challenges remain: 1H 2017, five Large Commercial Banks, namely ICBC, BBC, ABC, BOC and BOCOM, have all set up 1. The residents’ financial literacy needs to their inclusive financing divisions. So have the other be enhanced. Otherwise they are likely to be banks. Thanks to the features of far-reaching victims of irregular transactions and fraud. coverage, low costs and vast availability, FinTech Financial education should be developed and companies have managed to expand their customer planned at the national level, primarily targeting the base to those who would otherwise have no access disadvantaged, such as senior citizens, children and to financial services, thus becoming one of the best teenagers. Consumer protection is an integral part channels for realising financial inclusion. of financial inclusion.

Table 7 Development of inclusive financing business in five Large Commercial Banks

Establish date Work plans • Dedication in six areas: 1) credit management; 2) capital management; 3) accounting system; 4) ICBC 19 April 2017 provisioning and write-off policies; 5) funding management; 6) incentives and performance assessment system. • Identifying and meeting customer needs by deeply understanding the markets and improving management approaches, business models, product & service offerings and technology capabilities. CCB 11 April 2017 • Leveraging existing branch network and IT capabilities to lower transaction costs, expand service scope and depth for SMEs and rural sector. Bridging the financing gap and creating synergy between inclusive financing and other businesses. • Deepening institutional reform and replicating the successful experiences of rural financing in other ABC 28 April 2017 sectors of inclusive financing. • Enhancing top-down planning by organisational restructuring and capacity building. • Overall planning with dedication in five areas: 1) comprehensive service mechanism; 2) statistical support；3) risk management; 4) resource allocation; 5) performance assessment system. BOC 20 June 2017 • Focusing on target groups, such as SMEs, rural sector and mass entrepreneurism, to explore unique inclusive financing models by firstly formulating standardised, transferable models and then replicating those models in selective branches. • Improving institutional design from the top and planning organisational structure, statistical support, BOCOM 30 June 2017 performance assessment, risk management, resource allocation needed to support inclusive financing business.

Banking Newsletter September 2017 PwC 37 2. The coverage of inclusive financing needs A catalyst for business transformation to be expanded. While the emergence of FinTech has significantly enlarged the coverage of inclusive For banks, inclusive financing will be a catalyst for financing, it is evident that most FinTech customers transformation to a platform-oriented, smart and are primarily merchants and consumers, leaving innovative business model, rather than just to rural and middle-aged citizens and retirees respond to government initiative. Apart from underserved. This is far from the goal of financial establishing dedicated business units to run inclusion which is to provide financial services to all financial inclusion businesses, banks should elevate levels and groups of society. it to a strategic level and build capabilities through organisational restructuring, technological and 3. The inclusiveness of the credit rating business innovation and resource sharing within system needs to be improved. Financial the ecosystem. inclusion envisages a deeper penetration of financial services to grassroots communities, which Service scope to be expanded requires stronger risk management capabilities. As a result, a wider coverage of financial services rests The service scope of inclusive financing involves upon a greater inclusiveness of the credit rating account opening, deposits, electronic payments, system. China’s existing credit rating system covers social welfare, lending, insurance, price only a small group of people and lacks information information transparency, and integrated services. sharing. This has resulted in a large information While electronic payment and lending are making gap. impressive progress so far, other sectors, such as social welfare, insurance and price information 4. Systematic risks exposed by inclusive transparency, will soon catch up. This will further financing need to be addressed. As the improve access to financial services and efficiency barriers to entering the inclusive financing business of resource allocation. continue to lower, this has led to an explosive growth in the number of operators with varying capabilities, irregular information disclosure and Rural and SME financing is key the gradual exposure to higher credit risk during the economic downturn. Inclusive financing in The financing difficulties faced by “agriculture, China is still undergoing the full business cycle. farming and rural areas”, and small- and medium- Therefore, regulators should enhance supervision sized enterprises (SMEs) remain the bottleneck for and identify blind spots to mitigate financial risks, those underserved by traditional financial while striking a balance between financial institutions. As the credit assessment of these innovation and risk control. groups improves, and the application of data analytics in risk control over supply chains matures, A bumpy road ahead they will be the new focus of financial inclusion.

Even though the road to implementing financial PwC was a knowledge partner of the B20 in 2016 to inclusion will not be smooth, there are still ample assist its Financing Growth Taskforce by drafting policy opportunities. We foresee these three trends in the recommendations to the G20 leaders on promoting coming years: financial inclusion by technology. Do feel free to contact our experts for more insights.

Banking Newsletter September 2017 PwC 38 Compliance risk is of utmost importance as banks expand overseas

Chinese banks has accelerated their international expansion in recent years, with many medium-sized banks (i.e. joint-stock commercial banks and large city commercial banks) following in the steps of large commercial banks by setting up their first overseas branches in as a springboard for global expansion. Aggressive expansion comes with rising compliance risk. Chinese banks are advised to respect differences in culture and governance, and to strengthen anti-money laundering (AML) management.

Maintaining a sound corporate culture operations, regulations and compliance rules, conflicts could arise in management teams and As of 30 June, 18 out 39 Chinese listed banks have weakening the governance framework. This could overseas branches across 60 territories (including also lead to regulator's impression that the senior Hong Kong, Macau and Taiwan), seven of which management assigned is not promoting prudent have branches only in Hong Kong. As newcomers risk management behaviour or striking the balance with limited experience in overseas operation, how between business growth and sound risk should these banks effectively manage compliance management. In practice, a dedicated board-level risks? committee should be established and chaired by an independent non-executive director. It remit should Taking Hong Kong as an example. Hong Kong be to advise and assist the board in the build-up of a Monetary Authority ("HKMA") revealed that, while risk management framework. banks have generally made efforts to promote a proper culture, they still need to monitor the 2) Incentive systems potential implications of management and staff behaviour. As most senior executives of Chinese banks’ overseas branches are sent from headquarters, The HKMA issued a circular on Bank Culture there could be frequent change of leadership, the Reform (HKMA, Bank Culture Reform, 2 March organisational structure may also be rapidly 2017) to guide financial institutions to develop and expanding as the business grows. The Board of promote a sound corporate culture that supports head office should pay special attention to the prudent risk management and contributes towards organisational structures and personnel movement incentivising proper staff behaviour with the aim of in overseas entities and ensure timely review and achieving positive customer outcomes and high appropriate incentive schemes in line with the ethical standards for the industry. bank’s culture.

While there is no one-size-fits-all approach, the 3) Assessment and feedback mechanisms HKMA’s circular is a good reference for Chinese banks to promote sound bank culture in three areas: Banks should establish appropriate assessment and feedback mechanisms as part of business units and 1) Governance staff compliance risk monitoring. An effective and confidential whistle blowing channel should be put It is commonly observed that Chinese banks tend to in place to allow timely reporting of any illegal, send senior management from domestic market to unethical or questionable practices. manage oversea operations. If a senior executive does not demonstrate a sound understanding of

Banking Newsletter September 2017 PwC 39 Anti-money laundering (AML) and counter- Three lines of defence with clear roles terrorist financing (CTF) as global issues Roles and responsibilities need to be properly In additional to culture behaviour, anti-money assigned to each line of defence. In the first line, laundering (AML) and counter-terrorist financing business heads and relationship officers are (CTF) are also sources of compliance risk. These responsible for daily compliance of AML and CTF. issues are global in nature, and cannot be In the second line, risk management and underestimated by Chinese banks planning for compliance departments are responsible for overseas expansion.. reviewing policies and procedures on AML and CTF standards so that management and staff can be In recent years, regulators around the world have compliant. For the third line, the internal audit taken tougher measures with increasing sanctions. department shall independently test the internal Both the US (New York State Department of control over AML and CTF compliance so that the Financial Services) and European (Financial Board can be assured that effective AML/CTF Conduct Authority of the UK) regulators have controls are in place. Last but not least, the Board inspected Chinese banks on AML/CTF compliance. should timely address and resolve any reported As the number of collegial orders signed with Asian compliance issues concerning AML and CTF. banks continues to increase, it is expected that there could be more enforcement activities and sanctions Understand local business practices imposed on Asian banks.

While regulations and laws differ around the world, The extent to which management given overseas Chinese banks should consider AML/CTF as part of assignments can familiarise themselves with local wider compliance risk management. In particular, business practices and the expectations of they should focus on the following three key areas: regulators will help mitigate the compliance risk arising from overseas operation. It is key to appreciate and address the principles behind the Effective system monitoring on AML/CTF rules of regulation set by the regulators so that required regulations and compliance obligations AML and CTF risk assessment (on each product can be fulfilled. inventory list) should be incorporated into the transaction monitoring system, which clearly List of key considerations for compliance risk management defines the risks required to be detected. When • Can corporate policies catch up with changing laws and regulations? running IT applications, it is important to ensure • Have you well understood the requirements of domestic and model design (i.e. scenario design) is processed, overseas regulatory bodies and known how to respond accordingly ? tested and recorded by experienced data analysts. It • Have the board and senior management set a right tone from the should also have a proper structure to support the top to ensure a sound risk management practice is adhered to especially on the build up and promotion of proper bank culture in system with capability to detect and update related managing overseas operation and risk taking behaviour scenarios and parameters. In the operation of • Is enterprise risk assessment regularly performed? transaction monitoring system, periodic checks • Is the risk assessment on AML / CTF incorporated and carried out should be conducted to assess the completeness of on new products and services? system list and database, as well as to ensure a • How well do you understand your high risk customers? dedicated model design and governance framework • Have we continuously monitored customer business relations & in place to detect and approve related scenario transitions so that suspicious activities can be timely identified changes. Compliance, operation and IT • Is the system checked regularly testing on its effectiveness & departments need to be given clear roles and efficiency so that constant improvement can be made on AML / CTF responsibilities. transactions monitoring • Are senior management and staff trained appropriately? • Is the risk management framework periodically reviewed to ensure compliance? Feel free to contact PwC’s Advisory team to discuss further.

Banking Newsletter September 2017 PwC 40 China’s financial reforms: a review from a new inflection point

The National Financial Work Conference (NFWC) convened every five years was held again in July 2017. One of its highlights was to elevate regulatory coordination by setting up the Financial Stability and Development Committee (FSDC) under the State Council. History suggests that major reform decisions made at the conference will have significant impact on financial industry in subsequent years. At this historical juncture where information technology is disrupting businesses in every possible way, China’s financial reforms call for a new way of thinking and fresh perspectives.

This year’s conference was the fifth since the NFWC true in an information technology revolution era was first convened in 1997. Historically, while where the Internet is disrupting traditional finance domestic and global macroeconomic environments in every possible way. This requires closer vary, and different risks and issues arising from regulatory coordination and new approaches, each stage of development, the agenda of the functional and thorough supervision. conference usually revolved around the financial sector’s support of the real economy, reforms in At this new inflection point, and as China's financial financial institutions, rural financial reform, reforms entered a new phase, we look forward to improving capital markets, preventing financial new ideas and innovation so that China's financial risks, and opening up the financial sector. sector can address challenges appropriately and maintain sustainable development. China's financial sector has developed steadily in the past five years. However, new challenges have arisen as the industry evolved. This is particularly

Figure 44 Timeline and key milestones of previous National Financial Work Conference

2001 2007 China opened its financial sector to foreign investment after the China became a member of WTO, 2017 July 1997 and promised to open up its transitional period for a new WTO member expired. Asian financial crisis Financial Stability and Development financial sector gradually. 2008 Committee under the State Council was 2003-2007 Global financial crisis ICBC,CCB, BOC and set up BOCOM completed 2010 transformation and listings. ABC was publicly listed, the last among

large state-owned bank to do so.

0

2003 2008 2012 1997 1998 1999 2000 2001 2002 2004 2005 2006 2007 2009 2010 2011 2013 2014 2015 2016 2017 2018 2019 202 2021

November 1997 February 2002 January 2007 January 2012 July 2017 1st NFWC: 2nd NFWC: 3rd NFWC: 4th NFWC: 5th NFWC: • Reinforcing PBOC’s financial • Strengthen financial • Deepen reforms in state- • Greater efforts by financial sector • Financial sector’s reversion to regulatory functions regulations owned banks to improve service functions serve the real economy • Accelerate commercialisation of • Facilitate the comprehensive • Accelerate rural finance • Deepen reforms in financial • Pro-active prevention and institutions state-owned commercial banks reform of state-owned reforms and development mitigation of systematic • Improve the multi-level and multi- commercial banks • Construct a multi-level • Strengthen and improve financial financial risk type system of financial institutions • Advance the reform of rural financial market system regulation • A firmly commitment to credit cooperatives • Prevent and mitigate local • Standardise and maintain financial • Exert financial services and deepening financial reform order • Standardise the development regulatory functions governments’ debt risks • Accelerate a fundamental shift in the of securities market • Facilitate the opening-up of • Intensify the construction of • Expand the opening-up of the economic system and method of • Enhance the establishment of the financial sector capital and insurance markets financial sector economic growth to create a better a social credit system • Improve financial regulatory • Improve the financial macro- environment for a good financial • Increase financial support for capabilities control system cycle adjusting economic structure • Expand the opening-up of the • Enable the financial system to better and economic development. financial sector serve economic reform and • Improve the overall quality of • Strengthen the financial sector’s development the financial talent pool infrastructure

Banking Newsletter September 2017 PwC 41 BankingPwC Newsletter September 2017 42 Appendix

• Financial highlights of listed banks

• Banking and capital markets contacts

Banking Newsletter September 2017 PwC 43

Financial highlights of listed banks (I) -Large Commercial Banks

2017 1H（In RMB million） ICBC CCB ABC BOC BOCOM PSBC Operating performance (January-June) Operating income 362,151 320,388 276,953 248,236 103,688 105,973 Net interest income 250,922 217,854 211,323 165,042 62,708 87,514 Net fee & commission income 76,670 68,080 42,465 49,187 21,261 7,033 Other non-interest income 34,559 34,454 23,165 34,007 19,719 11,426 Operating expenses (166,789) (149,682) (144,902) (108,272) (56,491) (75,910) Tax and surcharges (3,908) (2,907) (2,411) (2,456) (1,198) (797) Business & administration expenses (76,091) (67,184) (78,407) (63,019) (27,020) (64,747) Allowance for impairment losses (61,343) (60,510) (44,697) (26,960) (14,942) (10,366) Other business expenses (25,447) (19,081) (19,387) (15,837) (13,331) 0 Operating profit 195,362 170,706 132,051 139,964 47,197 30,063 Profit before tax1 196,498 172,093 133,210 140,378 47,355 30,063 Income tax expense (42,811) (33,084) (24,540) (29,829) (8,133) (3,471) Net profit 153,687 139,009 108,670 110,549 39,222 26,592 Non-controlling interests 692 670 77 6,859 247 (8) Profit attributable to shareholders 152,995 138,339 108,593 103,690 38,975 26,600 Financial Position (as of 30 June) Total assets 25,514,046 21,692,067 20,573,586 19,425,980 8,930,838 8,543,826 Loans and advances, net 13,549,396 12,204,730 9,996,639 10,426,548 4,270,542 3,261,436 Loans and advances 13,865,909 12,507,021 10,411,918 10,650,703 4,370,147 3,340,454 Less: Allowance for impairment losses (316,513) (302,291) (415,279) (224,155) (99,605) (79,018) Investments2 5,569,993 5,045,126 5,888,748 4,350,945 2,451,158 3,207,682 Interbank assets3 1,797,897 830,526 1,182,940 1,196,043 854,775 596,521 Cash & deposits with central bank 3,542,773 2,941,465 2,882,030 2,595,717 963,575 1,348,535 Others assets 1,053,987 670,220 623,229 856,727 390,788 129,652 Total liabilities 23,483,412 20,047,465 19,215,145 17,898,108 8,282,430 8,179,044 Deposits from customers 19,021,171 16,274,393 16,104,949 13,368,203 4,938,694 7,806,235 Interbank liabilities4 2,496,970 1,736,840 1,349,042 2,010,757 1,841,062 146,013 Debt securities issued5 641,113 535,093 439,986 799,289 704,071 74,925 Due to central bank 511 520,110 435,749 916,062 508,304 0 Other liabilities 1,323,647 981,029 885,419 803,797 290,299 151,871 Total owners’ equity 2,030,634 1,644,602 1,358,441 1,527,872 648,408 364,782 Non-controlling interests 12,339 16,157 3,241 76,494 5,158 350 Total equity attributable to shareholders 2,018,295 1,628,445 1,355,200 1,451,378 643,250 364,432 Major financial indicators Profitability (January-June) Return on average total assets (ROA) 1.24% 1.30% 1.08% 1.18% 0.91% 0.64% Return on weighted average equity (ROE) 15.69% 17.09% 16.74% 15.20% 12.80% 14.91%* Net Interest Spread (NIS) 2.03% 2.03% 2.11% 1.70% 1.44% 2.38% Net Interest Margin (NIM) 2.16% 2.14% 2.24% 1.84% 1.57% 2.31% Cost to income ratio 21.01% 22.30% 28.31% 25.39% 26.96% 61.10% Asset quality (as of 30 June) Non-performing loan ratio 1.57% 1.51% 2.19% 1.38% 1.51% 0.82% Overdue loan ratio 2.23% 1.49% 2.61% 1.97% 2.27% 0.99% Allowance to total loans ratio 145.81% 160.15% 181.80% 152.46% 151.02% 288.65% Provision coverage ratio 2.28% 2.42% 3.99% 2.10% 2.28% 2.37% Capital adequacy (as of 30 June) Common Equity Tier 1 capital adequacy ratio 12.67% 12.68% 10.58% 10.93% 10.62% 8.72% Tier 1 capital adequacy ratio 13.19% 12.84% 11.25% 11.80% 11.71% 8.72% Capital adequacy ratio 14.46% 14.50% 13.16% 13.41% 13.86% 11.67% Leverage ratio 7.29% 6.95% 6.07% 6.77% 6.65% 4.09%

Note： 1.Profit before tax equals operating profit minus other operating (net) income; 2.Investment include: financial assets at fair value through profit or loss, available-for-sale financial assets, held-to-maturity investments and receivables; 3.Interbank assets include: deposits with banks and other financial institutions, demolition of funds and buy back financial assets; 4.Interbank liabilities include: deposits with banks and other financial institutions, capitalization of borrowed funds and repurchase of financial assets; 5.Issued debt securities include: subordinated debt, two capital debt, convertible corporate bonds, green bonds, financial bonds, mixed capital debt, deposit certificates and interbank deposits * PSBC is listed in H share market, where the calculation of ROE is based on simple average rather than weighted average used in A share market.

Banking Newsletter September 2017 PwC 45 Financial highlights of listed banks (II) -Joint-Stock Commercial Banks

2017 1H（In RMB million） CIB CMB SPDB CMBC CITIC CEB PAB HXB CZB Operating performance (January-June) Operating income 68,107 112,666 83,354 70,535 76,580 46,334 54,073 33,348 17,949 Net interest income 44,003 70,896 51,803 41,115 49,494 30,383 37,361 24,003 12,385 Net fee & commission income 18,310 34,750 24,154 24,477 22,761 15,992 15,748 9,020 5,090 Other non-interest income 5,794 7,020 7,397 4,943 4,325 (41) 964 325 474 Operating expenses (31,366) (63,090) (47,374) (36,333) (45,536) (24,331) (37,605) (20,197) (10,638) Tax and surcharges (624) (1,073) (741) (753) (828) (543) (503) (395) (112) Business & administration expenses (16,229) (29,249) (19,236) (17,561) (20,294) (13,593) (13,386) (11,551) (5,319) Allowance for impairment losses (14,253) (32,648) (27,170) (17,139) (24,414) (10,030) (23,716) (8,218) (5,207) Other business expenses (260) (120) (227) (880) 0 (165) 0 (33) 0 Operating profit 36,741 49,576 35,980 34,202 31,044 22,003 16,468 13,151 7,310 Profit before tax1 37,080 49,942 36,751 34,451 31,116 22,004 16,432 13,181 7,310 Income tax expense (5,241) (10,476) (8,229) (5,837) (6,952) (5,032) (3,878) (3,274) (1,708) Net profit 31,839 39,466 28,522 28,614 24,164 16,972 12,554 9,907 5,602 Non-controlling interests 238 207 357 526 153 33 0 71 (11) Profit attributable to shareholders 31,601 39,259 28,165 28,088 24,011 16,939 12,554 9,836 5,613 Financial Position (as of 30 June) Total assets 6,384,658 6,199,690 5,915,395 5,767,209 5,651,216 4,033,546 3,092,142 2,423,098 1,453,290 Loans and advances, net 2,203,179 3,404,094 2,929,721 2,636,361 3,012,896 1,917,181 1,549,052 1,274,795 512,472 Loans and advances 2,284,665 3,539,938 3,027,486 2,706,294 3,091,095 1,964,448 1,594,281 1,309,553 530,807 Less: Allowance for impairment losses (81,486) (135,844) (97,765) (69,933) (78,199) (47,267) (45,229) (34,758) (18,335) Investments2 3,315,266 1,555,602 2,081,471 2,061,332 1,691,248 1,244,582 826,650 680,276 697,216 Interbank assets3 146,085 445,343 221,552 307,419 265,020 359,248 238,339 163,447 69,287 Cash & deposits with central bank 460,813 606,623 501,390 424,669 519,590 345,530 289,977 264,035 130,018 Others assets 259,315 188,028 181,261 337,428 162,462 167,005 188,124 40,545 44,297 Total liabilities 5,986,106 5,777,866 5,523,221 5,392,687 5,258,518 3,767,371 2,880,688 2,263,485 1,367,476 Deposits from customers 3,008,219 4,142,254 3,172,519 3,010,734 3,453,476 2,271,303 1,912,333 1,376,875 803,068 Interbank liabilities4 1,887,872 770,716 1,380,367 1,263,272 1,011,998 655,226 461,995 408,651 359,025 Debt securities issued5 728,855 346,902 672,491 542,144 472,227 531,006 350,650 321,843 168,146 Due to central bank 231,500 351,542 172,215 324,468 193,600 217,500 84,684 105,000 0 Other liabilities 129,660 166,452 125,629 252,069 127,217 92,336 71,026 51,116 37,238 Total owners’ equity 398,552 421,824 392,174 374,522 392,698 266,175 211,454 159,613 85,814 Non-controlling interests 5,553 2,447 5,195 10,327 5,273 643 0 860 1,459 Total equity attributable to shareholders 392,999 419,377 386,979 364,195 387,425 265,532 211,454 158,753 84,355 Major financial indicators Profitability (January-June) Return on average total assets (ROA) 1.02% 1.29% 0.96% 0.98% 0.84% 0.84% 0.83% 0.82% 0.80% Return on weighted average equity (ROE) 17.22% 19.11% 15.70% 16.23% 13.76% 13.76% 12.56% 12.68% 16.54%* Net Interest Spread (NIS) 1.48% 2.31% 1.69% 1.27% 1.62% 1.32% 2.29% 1.96% 1.57% Net Interest Margin (NIM) 1.75% 2.43% 1.82% 1.40% 1.77% 1.52% 2.45% 2.10% 1.75% Cost to income ratio 24.21% 25.96% 23.08% 24.90% 26.50% 29.34% 24.76% 34.64% 29.64% Asset quality (as of 30 June) Non-performing loan ratio 1.60% 1.71% 2.09% 1.69% 1.65% 1.58% 1.76% 1.68% 1.39% Overdue loan ratio 2.08% 2.02% 2.91% 3.44% 3.13% 2.53% 4.33% 4.82% 1.43% Allowance to total loans ratio 222.50% 224.69% 154.21% 153.33% 152.97% 152.17% 161.32% 157.63% 249.17% Provision coverage ratio 3.57% 3.84% 3.23% 2.58% 2.53% 2.41% 2.84% 2.65% 3.45% Capital adequacy (as of 30 June) Common Equity Tier 1 capital adequacy ratio 8.65% 12.42% 8.90% 9.18% 8.61% 8.35% 8.13% 8.29% 8.27% Tier 1 capital adequacy ratio 9.26% 12.42% 9.67% 9.46% 9.60% 9.42% 9.05% 9.48% 10.05% Capital adequacy ratio 11.87% 14.59% 11.84% 11.91% 11.76% 11.86% 11.23% 12.63% 12.38% Leverage ratio 5.62% 5.83% 5.74% 5.69% 5.92% 5.69% 5.62% No data 4.95%

Note： 1.Profit before tax equals operating profit minus other operating (net) income; 2.Investment include: financial assets at fair value through profit or loss, available-for-sale financial assets, held-to-maturity investments and receivables; 3.Interbank assets include: deposits with banks and other financial institutions, demolition of funds and buy back financial assets; 4.Interbank liabilities include: deposits with banks and other financial institutions, capitalization of borrowed funds and repurchase of financial assets; 5.Issued debt securities include: subordinated debt, two capital debt, convertible corporate bonds, green bonds, financial bonds, mixed capital debt, deposit certificates and interbank deposits * CZB is listed in H share market, where the calculation of ROE is based on simple average rather than weighted average used in A share market.

Banking Newsletter September 2017 PwC 46 Financial highlights of listed banks (III) -City Commercial Banks

2017 1H（In RMB million） BOB JSB BOS BNJ SJB BNB HSB BHZ BTJ BJZ HRB ZYB BZZ BGY BCQ BQD Operating performance (January-June) Operating income 26,498 17,020 15,394 12,425 6,469 12,316 10,815 6,583 5,291 8,532 7,472 5,876 4,860 5,681 5,076 2,835 Net interest income 19,049 13,833 9,205 10,150 5,470 8,603 9,575 5,911 4,299 8,387 6,324 5,614 4,060 5,053 4,033 2,345 Net fee & comm. Income 7,218 3,192 3,190 1,615 1,068 3,332 1,470 741 1,051 401 1,213 276 909 627 848 518 Other non-interest income 231 (4) 2,999 660 (68) 381 (230) (69) (59) (255) (65) (14) (109) 2 195 (28) Operating expenses (12,556) (9,986) (7,343) (6,080) (2,250) (6,769) (6,025) (3,648) (1,967) (3,189) (3,831) (3,638) (1,871) (3,485) (2,291) (1,193) Tax and surcharges (323) (145) (175) (157) (93) (85) (73) (68) (49) (68) (64) (50) (35) (45) (40) (29) Business & admin expenses (5,569) (4,423) (3,715) (3,324) (1,553) (3,924) (2,470) (1,998) (1,349) (1,506) (1,795) (2,309) (1,099) (1,507) (1,087) (764) Allowance for impairment (6,653) (5,417) (3,443) (2,548) (604) (2,742) (3,482) (1,580) (569) (1,615) (1,972) (1,279) (737) (1,930) (1,164) (400) Other business expenses (11) (1) (9) (51) 0 (17) 0 (3) 0 0 0 0 0 (3) 0 0 Operating profit 13,942 7,034 8,051 6,345 4,220 5,547 4,790 2,934 3,324 5,343 3,641 2,238 2,989 2,196 2,785 1,642 Profit before tax1 13,939 7,088 8,127 6,366 4,220 5,539 4,865 2,946 3,312 5,343 3,641 2,238 3,008 2,190 2,830 1,642 Income tax expense (2,784) (867) (321) (1,206) (715) (765) (963) (415) (690) (1,313) (952) (491) (683) (282) (570) (364) Net profit 11,155 6,221 7,806 5,160 3,504 4,774 3,901 2,531 2,622 4,030 2,689 1,748 2,325 1,908 2,259 1,279 Non-controlling interests 76 45 10 56 (3) 9 121 0 6 39 30 29 54 5 10 3 Profit attr. to shareholders 11,079 6,177 7,796 5,105 3,507 4,765 3,780 2,531 2,616 3,991 2,660 1,719 2,271 1,902 2,249 1,276 Financial Position (as of 30 June) Total assets 2,239,167 1,727,172 1,711,416 1,132,849 938,711 938,529 812,678 754,085 659,884 644,013 546,927 458,010 417,535 414,191 408,429 281,976 Loans and advances, net 998,335 682,825 582,819 354,176 270,709 313,920 287,327 264,975 211,985 184,292 219,638 176,973 118,445 105,646 159,806 92,079 Loans and advances 1,029,550 701,062 600,908 368,522 277,777 325,698 295,915 273,112 218,467 190,333 225,906 184,236 121,953 109,675 164,209 94,509 Less: Allowance (31,215) (18,237) (18,089) (14,346) (7,068) (11,778) (8,588) (8,137) (6,483) (6,041) (6,268) (7,263) (3,508) (4,029) (4,403) (2,430) Investments2 796,172 665,254 832,203 549,090 493,628 474,703 381,222 337,284 329,627 379,231 206,481 205,659 183,825 219,972 137,169 120,885 Interbank assets3 223,738 196,824 131,599 100,509 83,847 33,212 22,139 80,712 48,834 14,992 30,657 7,212 52,627 23,406 60,049 31,651 Cash & deposits with CB 179,457 131,057 135,548 104,926 76,310 87,859 85,483 61,894 56,753 46,825 55,132 52,449 45,669 45,276 42,040 28,215 Others assets 41,465 51,212 29,246 24,148 14,218 28,834 36,507 9,221 12,686 18,673 35,020 15,718 16,968 19,891 9,364 9,147 Total liabilities 2,089,446 1,639,827 1,590,175 1,068,140 890,284 885,147 756,587 713,918 616,872 598,396 506,872 420,925 394,462 391,058 382,144 263,788 Deposits from customers 1,267,905 984,311 880,752 720,289 443,457 555,112 511,080 381,954 354,571 312,060 344,901 279,554 245,401 273,256 238,705 157,297 Interbank liabilities4 364,891 349,828 392,068 62,995 216,533 123,722 124,551 151,602 155,749 168,911 60,866 75,345 80,245 43,696 49,757 44,074 Debt securities issued5 352,245 221,525 208,119 223,947 134,287 162,159 98,092 153,478 87,270 79,075 78,372 57,528 60,145 68,437 87,041 56,138 Due to central bank 48,011 52,060 80,111 32,550 70,500 11,500 0 0 1,500 178 511 2,486 1,092 330 0 1,468 Other liabilities 56,394 32,103 29,126 28,359 25,506 32,653 22,864 26,885 17,783 38,172 22,222 6,012 7,579 5,339 6,641 4,811 Total owners’ equity 149,721 87,345 121,240 64,708 48,427 53,382 56,092 40,167 43,012 45,616 40,055 37,085 23,073 23,133 26,284 18,188 Non-controlling interests 1,766 1,586 458 557 578 104 1,433 0 50 3,860 1,083 807 681 868 1,480 493 Attributable to shareholders 147,955 85,758 120,782 64,151 47,850 53,278 54,659 40,167 42,961 41,756 38,972 36,278 22,392 22,265 24,804 17,696 Major financial indicators Profitability (January-June) Return on total assets (ROA) 1.02% 0.91% 0.90% 0.93% 0.76% 1.05% 1.00% 0.68% 0.80% 1.36% 0.99% 0.78% 1.19% 0.98% 1.17% 0.91% Return on equity (ROE) 16.42% 14.62% 13.02% 19.02% 14.79%* 20.30% 16.04%* 12.78% 12.38%* 19.76%* 14.09%* 9.63%* 20.80%* 17.38% 18.66%* 14.44%* Net Interest Spread (NIS) 1.61% 1.46% 1.32% 1.74% 1.42% 1.98% 2.18% 1.55% 0.90% 2.51% 2.23% 2.63% 2.05% 2.53% 1.93% 1.62% Net Interest Margin (NIM) 1.78% 1.60% 1.20% 1.87% 1.53% 1.96% 2.32% 1.63% 1.31% 2.80% 2.42% 2.80% 2.20% 2.64% 2.15% 1.79% Cost to income ratio 21.02% 25.99% 24.14% 26.75% 24.00% 31.86% 23.51% 30.35% 25.50% 15.83% 24.02% 39.29% 22.60% 26.53% 21.41% 26.94% Asset quality (as of 30 June) Non-performing loan ratio 1.18% 1.43% 1.16% 0.86% 1.53% 0.91% 1.06% 1.61% 1.46% 1.06% 1.65% 1.85% 1.38% 1.46% 1.25% 1.69% Overdue loan ratio 1.73% 1.94% 1.25% 1.35% 1.91% 0.97% 1.85% 2.66% No data 3.17% 5.11% 5.29% 4.79% 3.77% 5.10% 4.81% Allowance to total loans ratio 237.03% 181.33% 259.06% 450.19% 166.73% 398.52% 273.21% 184.89% 200.25% 300.33% 168.49% 213.52% 208.84% 251.51% 213.89% 152.17% Provision coverage ratio 2.79% 2.60% 3.01% 3.89% 2.54% 3.62% 2.90% 2.98% 2.92% 3.17% 2.77% 3.94% 2.88% 3.67% 2.68% 2.57% Capital adequacy (as of 30 June) Common Equity Tier 1 CAR 7.74% 8.64% 11.40% 8.06% 9.21% 8.68% 8.62% 9.67% 9.29% 9.18% 9.46% 10.67% 8.59% 10.04% 9.21% 10.16% Tier 1 CAR 8.79% 8.64% 11.40% 9.48% 9.21% 9.55% 9.69% 9.67% 9.29% 9.19% 9.48% 10.68% 8.61% 10.05% 9.22% 10.17% CAR 11.13% 10.97% 13.40% 13.13% 12.10% 12.20% 12.42% 11.54% 11.64% 10.97% 12.02% 11.82% 12.08% 12.03% 12.88% 13.67% Leverage ratio 5.77% 4.55% 6.49% No data 4.40% 4.97% No data 4.97% 6.05% No data No data 7.42% 4.82% No data No data 5.82%

Note： 1.Profit before tax equals operating profit minus other operating (net) income; 2.Investment include: financial assets at fair value through profit or loss, available-for-sale financial assets, held-to-maturity investments and receivables; 3.Interbank assets include: deposits with banks and other financial institutions, demolition of funds and buy back financial assets; 4.Interbank liabilities include: deposits with banks and other financial institutions, capitalization of borrowed funds and repurchase of financial assets; 5.Issued debt securities include: subordinated debt, two capital debt, convertible corporate bonds, green bonds, financial bonds, mixed capital debt, deposit certificates and interbank deposits * SJB, HSB, BTJ, BHZ, HRB, ZYB, BZZ, BCQ, BQD are listed in H share market, where the calculation of ROE is based on simple average rather than weighted average used in A share market.

Banking Newsletter September 2017 PwC 47 Financial highlights of listed banks (IV) -Rural Commercial Banks

2017 1H（In RMB million） CQRCB GZRCB JTRCB CSRCB WXRCB JYRCB ZJGRCB WJRCB Operating performance (January-June) Operating income 11,445 6,242 2,868 2,362 1,386 1,175 1,206 1,364 Net interest income 10,271 6,051 2,188 2,095 1,242 994 1,027 1,232 Net fee & commission income 1,155 1,065 334 185 119 30 69 41 Other non-interest income 19 (874) 346 82 24 150 111 91 Operating expenses (5,300) (2,827) (1,762) (1,628) (735) (851) (863) (846) Tax and surcharges (72) (80) (31) (19) (13) (12) (8) (12) Business & administration expenses (3,615) (2,260) (1,174) (871) (402) (431) (429) (408) Allowance for impairment losses (1,613) (488) (557) (739) (320) (406) (426) (426) Other business expenses 0 0 0 0 (1) (3) 0 0 Operating profit 6,145 3,415 1,107 734 651 324 343 518 Profit before tax1 6,145 3,415 1,119 750 644 322 342 518 Income tax expense (1,511) (775) (219) (145) (123) 19 10 (77) Net profit 4,634 2,639 900 605 521 341 352 441 Non-controlling interests 40 17 207 34 (1) (12) 1 3 Profit attributable to shareholders 4,594 2,622 693 571 522 352 352 438 Financial Position (as of 30 June) Total assets 855,426 680,049 195,661 140,487 125,917 104,713 97,989 84,664 Loans and advances, net 310,396 267,601 72,020 69,277 61,891 51,778 45,761 46,072 Loans and advances 323,730 276,333 74,281 71,747 63,670 54,116 47,498 47,566 Less: Allowance for impairment losses (13,334) (8,731) (2,261) (2,470) (1,779) (2,338) (1,737) (1,494) Investments2 289,221 247,969 64,105 46,747 44,397 38,206 35,340 19,088 Interbank assets3 139,803 67,996 25,652 6,551 1,629 2,131 3,635 4,307 Cash & deposits with central bank 101,027 84,074 26,315 14,327 14,980 9,643 9,755 11,554 Others assets 14,980 12,409 7,569 3,585 3,020 2,955 3,498 3,643 Total liabilities 798,283 635,700 179,797 130,003 116,936 95,785 89,894 76,437 Deposits from customers 569,677 440,875 130,503 96,496 100,007 75,991 67,988 68,470 Interbank liabilities4 88,752 46,534 18,762 10,497 8,513 13,809 16,756 4,916 Debt securities issued5 96,520 126,733 27,627 18,999 3,302 1,694 1,057 0 Due to central bank 30,420 1,304 242 766 100 299 350 525 Other liabilities 12,915 20,254 2,663 3,244 5,014 3,992 3,743 2,526 Total owners’ equity 57,144 44,349 15,864 10,484 8,981 8,928 8,095 8,226 Non-controlling interests 1,587 1,970 3,821 603 100 247 121 102 Total equity attributable to shareholders 55,557 42,379 12,043 9,882 8,881 8,681 7,974 8,125 Major financial indicators Profitability (January-June) Return on average total assets (ROA) 1.12% 0.79% 0.93% 0.89% 0.84% 0.62% 0.75% No data Return on weighted average equity (ROE) 16.31%* 12.84%* 12.17%* 11.42% 11.76% 8.08% 9.02% 10.96% Net Interest Spread (NIS) 2.42% 1.68% 2.03% 2.73% 1.81% 1.97% 2.04% 2.84% Net Interest Margin (NIM) 2.59% 1.73% 2.21% 2.93% 2.07% 2.07% 2.24% 2.95% Cost to income ratio 31.58% 36.20% 40.93% 36.88% 29.08% 36.65% 35.65% 29.93% Asset quality (as of 30 June) Non-performing loan ratio 0.97% 1.73% 1.59% 1.29% 1.31% 2.45% 1.97% 1.71% Overdue loan ratio 2.92% 2.62% 3.17% 1.31% 1.51% 3.03% 2.10% 3.53% Allowance to total loans ratio 425.14% 182.18% 190.84% 266.36% 212.63% 176.11% 185.67% 183.52% Provision coverage ratio 4.12% 3.16% 3.04% 3.44% 2.79% 4.32% 3.66% 3.14% Capital adequacy (as of 30 June) Common Equity Tier 1 capital adequacy ratio 9.66% 10.22% 9.52% 9.68% 9.70% 11.94% 11.92% 12.36% Tier 1 capital adequacy ratio 9.68% 10.25% 9.71% 9.71% 9.71% 11.95% 11.92% 12.36% Capital adequacy ratio 12.41% 11.77% 12.43% 11.88% 11.96% 13.13% 13.08% 13.45% Leverage ratio 6.31% 6.02% No data 6.03% 6.69% 7.70% 7.19% 8.19% Note： 1.Profit before tax equals operating profit minus other operating (net) income; 2.Investment include: financial assets at fair value through profit or loss, available-for-sale financial assets, held-to-maturity investments and receivables; 3.Interbank assets include: deposits with banks and other financial institutions, demolition of funds and buy back financial assets; 4.Interbank liabilities include: deposits with banks and other financial institutions, capitalization of borrowed funds and repurchase of financial assets; 5.Issued debt securities include: subordinated debt, two capital debt, convertible corporate bonds, green bonds, financial bonds, mixed capital debt, deposit certificates and interbank deposits * CQRCB、GZRCB、JTRCB are listed in H share market, where the calculation of ROE is based on simple average rather than weighted average used in A share market.

Banking Newsletter September 2017 PwC 48 Banking and capital markets contacts

Assurance Advisory Tax

Jimmy Leung – Shanghai James Chang – Beijing Oliver Kang – Beijing +86 (21) 2323 3355 +86 (10) 6533 2755 +86 (10) 6533 3012 [email protected] [email protected] [email protected]

Margarita Ho – Beijing Yuqing Guo – Shanghai Matthew Wong – Shanghai +86 (10) 6533 2368 +86 (21) 2323 2655 +86 (21) 2323 3052 [email protected] [email protected] [email protected]

Richard Zhu – Beijing Jianping Wang – Shanghai Florence Yip – Hong Kong +86 (10) 6533 2236 +86 (21) 2323 5682 +852 2289 1833 [email protected] [email protected] [email protected]

Linda Yip – Beijing William Yung – +86 (10) 6533 2300 +86 (755) 8261 8388 [email protected] [email protected]

Michael Hu – Shanghai Matthew Phillips – Hong Kong Assurance – Risk & Quality +86 (21) 2323 2718 +852 2289 2303 [email protected] [email protected] Tracy Chen – Shanghai +86 (21) 2323 3070 Shirley Yeung – Guangzhou Mary Wong – Hong Kong [email protected] +86 (20) 3819 2218 +852 2289 2587 [email protected] [email protected] Nigel Dealy – Hong Kong +852 2289 1221 Vincent Yao – Shenzhen Chris Chan – Hong Kong [email protected] +86 (755) 8261 8293 +852 2289 2303 [email protected] [email protected]

Peter Li – Hong Kong +852 2289 2982 [email protected]

Banking Newsletter September 2017 PwC 49 www.pwccn.com

This content is only for general information purposes only, and should not be as a substitute for consultation with professional advisors.

© 2017 PricewaterhouseCoopers Zhong Tian LLP. All rights reserved. PwC refers to the China member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.