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Banking Newsletter September 2017 Banking Newsletter Review and Outlook of China’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 banks 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 Bank Bank of China (ICBC) China Industrial Bank (CIB) Bank of Beijing (Beijing) (CQRCB) China Construction Bank China Merchants Bank (CMB) Bank of Shanghai (Shanghai) (CCB) Guangzhou Rural Commercial Bank SPD Bank (SPDB) Bank of Hangzhou (Hangzhou) Agricultural Bank of China (GZRCB) (ABC) China Minsheng Bank Corporation Bank of Jiangsu (Jiangsu) (CMBC) Jiutai Rural Commercial Bank Bank of China (BOC) Bank of Nanjing (Nanjing) China CITIC Bank (CITIC) (JTRCB) Bank of Communications Shengjing Bank (Shengjing) Changshu Rural Commercial Bank (BOCOM) China Everbright Bank (CEB) Bank of Ningbo (Ningbo) Ping An Bank (PAB) (CSRCB) Postal Savings Bank of China Huishang Bank (Huishang) (PSBC) Huaxia Bank (HXB) Wuxi Rural Commercial Bank Bank of Tianjin (Tianjin) (WXRCB) China Zheshang Bank (CZB) Bank of Jinzhou (Jinzhou) Jiangyin Rural Commercial Bank Harbin 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) Bank of Qingdao (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 monetary policy 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
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