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Chinese Bankers’ Survey 2017

Executive summary

January 2018

January 2018 Chinese Bankers Survey 2017 PwC 2

Preface

firewalls to mitigate risks right from the We are pleased to present the Chinese Bankers’ beginning or to prevent them from spreading. Survey 2017 report, prepared jointly by the China The regulatory environment has also been Banking Association (CBA) and PwC. Now in its shifting towards tougher supervision, as well as ninth year, the report tracks developments in the stricter compliance and accountability. The sector from the perspective of Chinese bankers. China Banking Regulatory Commission (CBRC)

This year’s survey digs deep into the core issues has imposed a series of measures to tackle while maintaining a broad scope. Dr. Ba Shusong, irregularities in the sector by requiring banks to the Project Leader, together with the project team, strengthen self- inspections, conduct regulatory interviewed 14 senior bankers to get their insights examinations and introduce tougher penalties. into the sector. Seven of these bankers are at C-suite According to the survey, over 90% of level (Directors, Vice-presidents, or above). The respondents are strongly or very strongly aware interviews complement an online survey covering 31 of increasing pressure from the regulators. provinces in mainland China (excluding Hong Kong, Macau and Taiwan). With a total of 1,920 valid The Report of the 19th Party Congress argues responses collected over eight months, the survey that in order to build a modern economy, sampling process takes into account participants’ emphasis must be placed on developing the real geographical regions, grades, types of financial economy. In other words, effort should be made institution, and if their institution is listed on stock to deepen institutional reforms in the financial exchange(s) or privately held. In addition to an sector in order to better fuel growth. The survey increased sample size, the survey looks into hot reveals that, as a result of the government’s topics and challenges facing the sector through initiative to carry out national strategies with extensive studies. These efforts result in a broad new thinking and new technologies, small representation of China’s banking sector. businesses have become a higher priority for respondents among customer groups. Regarding 2017 was a critical year in which China continued to the opportunities brought by supply side push forward its reforms, the 19th National structural reforms, Chinese bankers are most Congress of the Chinese Communist Party was enthusiastic about the new markets created by held and the 13th Five-Year Plan entered its more advanced manufacturing and the new second year. The Report of the 19th Party demand driven by increased consumption. Congress highlighted the importance of Supply side structural reforms, carried out “improving the financial regulatory mainly through institutional and technological framework to forestall systemic financial innovation, are essential to create new demand risks”. Risk management and internal control and stimulate the economy, thus driving banks’ were two areas focused on in this survey. A growth. Another finding of the survey is that comparison of the survey findings from 2010 Chinese bankers are very supportive of green to 2017 reveals that “improving the capability industries and the ’Made in China 2025’ of risk management and control” has been put strategy. Nearly 80% of respondents believe the at the heart of the operations and strategies of main channel to contribute to the strategy is to Chinese banks over the past eight years. More provide comprehensive financial services, and to than 60% of respondents believe that credit adjust their products and services – as well as risk remains a major risk factor due to the their service standards, where necessary. As economic downturn in certain regions and many as 70% of respondents say they are willing industries, as well as slowing disposals of non- to extend credit and other support to the performing loans. At the same time, Chinese manufacturing sector to help it through bankers are putting more effort into diversified financial innovations in order to identifying and monitoring risks by facilitate the sector’s restructure and achieve strengthening pre-loan reviews, monitoring quality and efficiency gains. loans that have been granted, and establishing Chinese Bankers Survey 2017 3

The survey also highlights the rapid development of for a New Era”. They believe the sector will play an FinTech as an emerging business model. Powered ever-greater role in developments such as the Belt by technologies such as the Internet, data analytics, and Road Initiative and in Chinese companies’ cloud computing and artificial intelligence (AI), overseas expansion. FinTech is helping banks to engage in more targeted marketing activities and to optimise customer We would like to take this opportunity to thank all experience, as well as to improve risk management those who participated in the survey. They spared and compliance capabilities. More specifically, time to complete questionnaires and talked to us, Chinese bankers are keeping a close eye on the sharing their valuable insights. We hope this report integration between technology and finance, as helps you better understand the developments in demonstrated by their increasing commitment to IT and prospects for China’s banking sector. Please do investment. Investment preferences vary according not hesitate to give us your feedback, so that we can to the type of bank. At the same time, most Chinese continue to improve the report in the future. bankers well understand the risks that can arise from FinTech, especially technological risk and the For more information or enquiries, please contact risks arising from peer-to-peer (P2P) lending. the CBA, PwC or the Project Leader.

Chinese bankers cite insufficient integration of internal data, limited external data and a shortage of PAN Guangwei talent as the main obstacles to applying technology Executive Vice President, such as data analytics and AI, although efforts have China Banking Association been made to integrate traditional risk control with FinTech. On the plus side, Chinese bankers remain positive about FinTech’s development prospects. David WU They accept that opportunities come with Partner, PwC China challenges, and believe that under the leadership of the Central Government and the CBRC, broader and deeper applications of FinTech will emerge. These Dr. BA Shusong will lead to new solutions for operations, data Project Leader integration and risk control.

Finally, all Chinese bankers surveyed are confident December 2017, Beijing about “socialism with Chinese characteristics” and its economic impact. This confidence is built not only on the recent success of China’s banking sector – a robust system without obvious deficiencies when compared to its western counterparts. It is also due to a vibrant financial eco-system with great potential and emerging business models, many of which are world-leading. Chinese bankers have high hopes for the sector’s future development under “Xi Jinping Thought on Socialism with Chinese Characteristics

Chinese Bankers Survey 2017 4 Participating Banks

A total of 163 Chinese banking institutions participated in the online survey and interviews. A full list of participants is shown below:

1. Policy banks (3) 4. Foreign (joint venture) banks (15)

China Development Bank Australia and New Zealand Banking Group (China)

The Export-Import Deutsche Bank (China)

Agricultural Development Bank of China First Commercial Bank Bank of East Asia (China) 2. Large commercial banks (6) Fubon Bank

Bank of China Taiwan Cooperative Bank

Agricultural Bank of China Hang Seng Bank (China)

Industrial and Commercial Bank of China OCBC Wing Hang Bank (China)

China Construction Bank Bank of Tokyo-Mitsubishi UFJ (China)

Bank of Communications Land Bank of Taiwan

Postal Savings Bank of China Allied Commercial Bank Bank SinoPac (China)

3. Joint-stock commercial banks (12) Chang Hwa Bank

China CITIC Bank Mega International Commercial Bank

China Everbright Bank CTBC Bank 5. City commercial banks (49)

China Merchants Bank Baoshang Bank

Industrial Bank

China Guangfa Bank

Ping An Bank Bank of Dongguan

Shanghai Pudong Development Bank Ordos Bank

Hengfeng Bank Bank of Fuxin

China Zheshang Bank FuDian Bank

China Bohai Bank Guangdong Nanyue Bank

Chinese Bankers Survey 2017 5

Guangxi Beibu Gulf Bank Taian Bank

Guilin Bank Bank of Tinajin

Harbin Bank Weihai City Commercial Bank

Bank of Handan Bank of Weifang

Hankou Bank Bank of Wuhai

Bank of Hangzhou Yantai Bank

Bank of Hebei Zaozhuang Bank

Huarong Xiangjiang Bank Chang’an Bank

Huishang Bank Zhejiang Tailong Commercial Bank

Bank of Jining Bank of Zhengzhou

Bank of Jiangsu Zhongyuan Bank

Jiangxi Bank Bank of Chongqing Bank of China Travel Service Jiaozuo Jinshang Bank 6. Rural financial institutions (109)

Bank of Jiujiang Lixin Rural Commercial Bank

Laishang Bank Ma’anshan Rural Commercial Bank

Bank of Lanzhou Qianshan Rural Commercial Bank

Bank of Liaoyang Shexian Rural Commercial Bank

Longjiang Bank Pingba Rural Credit Union

Bank of Luoyang Yaodu Bank

Bank of Inner Mongolia Cangwu shentong county Bank

Bank of Ningbo Cenxi Beibu Gulf County Bank

Bank of Panjin Chaling SPDB County Bank

Bank of Pingdingshan Cilihu Rural Commercial County Bank

Qilu Bank Danzai Rural Credit Union

Bank of Qinghai Daozhen Rural Credit Union

Bank of Rizhao Duangguan Rural Commercial Bank

Xiamen International Bank Fenggang Rural Credit Union

Bank of Shanghai

Chinese Bankers Survey 2017 6

Gansu Rural Credit Union Qingzhen Rural Commercial Bank

Ganzhou Rural Commercial Bank Qinglong Rural Commercial Bank

Dabu Rural Commercial Bank Renhuai Maotai Rural Commercial Bank

Gaoming Rural Commercial Bank Shiqian Rural Credit Union

Gaoyao Rural Commercial Bank Songtao Mengxi Rural Credit

Longmen Rural Commercial Bank Wangmo Rural Commercial Bank

Puning Rural Commercial Bank Changshun Malu Rural Commercial Bank

Shunde Rural Commercial Bank Sinan Rural Commercial Bank

Yangchun Rural Commercial Bank Tianzhu Rural Commercial Bank

Yangdong Rural Commercial Bank Tongzi Rural Commercial Bank

Yufeng Credit County Bank Wudang Rural Commercial Bank

Guangxi Rural Credit Union Xing Yi Rural Commercial Bank

Guangzhou Rural Commercial Bank Zunyi Rural Commercial Bank

Guiding Rural Credit Union Hefei Science & Technology Rural Commercial Bank

Guiyang Rural Commercial Bank Hezhang Rural Credit Union

Anlong Rural Commercial Bank Huarong Xinglong County Bank

Bijie Rural Commercial Bank Taojiang Jianxin County Bank

Congjiang Rural Commercial Bank Xiangtan Xianghuai County Bank

Dafang Rural Commercial Bank Jishui Rural Commercial Bank

Duyun Rural Commercial Bank Jiangmen Ronghe Rural Commercial Bank

Dushan Rural Commercial Bank Xinhui Rural Commercial Bank

Fuquan Rural Commercial Bank Nanfeng Rural Commercial Bank

Huangping Rural Commercial Bank Shangsu Rural Commercial Bank

Liping Rural Commercial Bank Jiangxi Rural Credit Union

Libo Rural Commercial Bank Jinping Rural Credit Union

Majiang Rural Commercial Bank Kaiyang Rural Credit Union

Meitan Rural Commercial Bank Kunming Rural Credit Union

Pu’an Rural Commercial Bank Liupanshui Rural Commercial Bank

Chinese Bankers Survey 2017 7

Liuzhi Rural Credit Union Xindu Guicheng Rural Bank

Luodian Rural Credit Union Xinjiang Rural Credit Cooperatives

Nanchang Rural Commercial Bank Xinmi Zhengyin Country Bank

Panxian Rural Credit Union Yingtan Rural Commercial Bank

Qianxi Rural Commercial Bank Changshun Rural Credit Union

Qujing Rural Credit Union Duanzhou Rural Commercial Banks

Xiamen Rural Commercial Bank Zhejiang Rural Credit Union

Xiamen Xiangan Minsheng County Bank Zhenyuan Rural Credit Union

Shandong Rural Credit Union Zhenan Rural Credit Union

Shanxi Rural Credit Union Zhongshan Rural Commercial Bank

Shanghai Rural Commercial Bank Zhuhai Rural Commercial Bank

Shangrao Rural Commercial Bank

Shenzhen Baoan Guilin County Bank

Shenzhen Longgang Everdynasty Rural Bank

Baosheng County Bank

Shenzhen Rural Commercial Bank

Shenyang Rural Commercial Bank

Shenmen SRCB Rural Bank

Shiqian Rural Credit Union

Shuicheng Rural Credit Union

Suiyang Rural Credit Union

Tongling Rural Commercial Bank

Tongren Rural Commercial Bank

Wuhu Yangzi Rural Commercial Bank

Wuhan Rural Commercial Bank

Wuchuan Rural Credit Union

Xifeng Rural Credit Union

Xiangxi Changhang Village Bank

Chinese Bankers Survey 2017 8

Executive Summary

A solid global economic recovery in 2017 created a balance sheet wealth management business. favorable environment for China's economic growth. Among the seven key performance indicators The US economy was stable, while Europe, Japan (KPIs) under the MPA, 62.8% consider capital and emerging markets all showed signs of and leverage requirements as the most improvement. In the first three quarters of 2017, challenging area to comply with. Most China's gross domestic product (GDP) grew by 6.9% respondents believe the MPA will lead to a less over the same period the previous year, level playing field, with City Commercial Banks demonstrating strong ongoing momentum. Supply expecting to be the worst affected (68.4%). side structural reforms progressed, but will need Respondents highlight incentives (40.1%) and further effort to ensure a sustainable growth the transparency of the assessment criteria trajectory. Over the past year, many factors have (36.2%) as two pressing areas to address in shaped the operations of the country’s banking order to improve the MPA framework. sector. Deleveraging, regulatory tightening and the disruption of FinTech have been the most Strategies that focus on differentiation significant. The Chinese Bankers’ Survey report, now in its ninth year, offers a comprehensive More than half of those surveyed believe the overview of the main issues from the perspective of top priority for their strategic transformation banking practitioners. is to enhance their risk management and control capabilities. Against a backdrop of Living with ‘L shaped’ growth slowing economic growth, accelerating financial disintermediation and tightening In 2017 China’s economy continued to expand regulations, 69.2% regard specialisation and under the “new normal” – where the focus of growth differentiation as the best path for future has shifted from speed to quality, and where the development. Turning to the effects of supply pace of financial deleveraging has accelerated. Over side structural reforms, respondents believe 80% of the bankers surveyed believe the country's that it is most evident that excess production GDP growth will remain between 6.0% and 7.0% capacity has been reduced and that mergers over the next three years, whereas over half argue and acquisitions have been encouraged to that China's growth will follow an L-shaped pattern. improve efficiency (75.6%). In the context of deleveraging, policies regarding financial regulation (78.4%) were bankers’ top As many as 69.8% of bankers recognise that concern among the external factors impacting their diversification of financial institutions’ daily operations. The prudent and neutral monetary business portfolios has brought challenges for policy adopted by the People's Bank of China regulators and requires a more integrated (PBoC), aiming at "deleveraging" and "risk supervisory approach to facilitate this prevention" (4.24 points), was still widely approved diversification. In light of the country’s vision by the bankers. As many as 90% regard President of building and optimising multi-layer capital Donald Trump as a threat to Sino-US trade activities. markets, the top three priorities are: to Nearly half predict that Brexit will increase volatility promote the development of asset in foreign exchange markets. securitisation, to advance ‘broad concept’ investment banking and to develop Macro-prudential Assessment (MPA): a transaction banking. more effective approach

Two-thirds (66.5%) of the bankers agree that the MPA is a more effective approach to preventing systemic financial risks. More than half predict that ‘credit’ – under the broader definition of the MPA framework – will grow by between 10% and 20%. Over 70% also believe that the MPA has affected their off-

Chinese Bankers Survey 2017 9

Rebalancing business portfolios Debt-for-equity swaps

China’s banking sector has become fiercely Guided by government policy, Chinese banks have competitive as a result of business innovation and carried out several market-oriented debt-for-equity diversification, with Joint-stock Commercial Banks swaps. 33.6% of bankers hold a neutral view on gaining a competitive edge on the liabilities side such swaps, while 38.4% are cautious. Overall, (64.5%), in off-balance sheet activities (45.3%) and bankers are taking a prudent and incremental intermediary business (44.3%). This is largely due approach to the de-leveraging process. The most to these banks’ greater innovation and flexibility. important feature of this round of debt-for-equity Large Commercial Banks, owing to their broad swaps is that they are market-driven and follow customer base, have maintained solid business on clear legal procedures, leaving banks and the asset side (63.2%) and continued to dominate businesses with greater autonomy. 62.9% of the country’s financial system. Influenced by bankers recognise the importance of the scheme’s government policy, urban infrastructure (67.6%) commitment to market forces. Targets of the has been the most favoured industry in terms of scheme are mainly state-owned enterprises (47.6%), extending credit over the last three years; the industry leaders (43.0%), companies needing a high metallurgical industry (51.8%) has been the least level of support (41.7%), and those with the most favoured. SMEs (57%), conglomerates (45.4%) and potential for a return to profitability (41.2%). When supply chain finance (44.3%) have been the most it comes to exit routes, most respondents preferred valued corporate banking segments, with to sell their holdings to a third party (57.5%) when international settlement and trade finance growing the asset quality of the target company improves. the fastest. Consumer loans (70.3%) continued to be the top priority in personal banking, with wealth Managing risks and improving internal management (51.7%) rising rapidly into second controls place. Interbank business has returned to a reliance on deposits and placements (57%) and interbank Chinese bankers cited credit risk (64.8%), interest investments (35.2%). rate, foreign exchange rate and stock market volatility (41.9%), and liquidity risk caused by Xiong'an New Area: a strategic plan for the maturity mismatches (40.7%) as the top three risks millennium in 2017. Improving non-performing loan (NPL) collection, and speeding up the write-off and The strategic plan for Xiong'an New Area (located collateral disposal of NPLs (60.4%) remained the 100km south-west of Beijing) was announced on 1 primary measures to mitigate credit risk. With April 2017 by the central government. When asked increasing support from the authorities, 44.0% of about the project, 76.7% of bankers surveyed bankers are considering using NPL securitisation suggested that the authorities should introduce and debt-for-equity swaps in the near future. In innovative policy incentives to support the financial 2017, 69.9% of the bankers ranked lending as the sector in the New Area. 61.6% are committed to setting up second tier branches and cutting fees to main focus of risk analysis. 56.2% believed that support business in the New Area. Over 80% of the establishing a system of internal controls with clear bankers regard infrastructure development as the roles and responsibilities should be the main focus. top priority in the New Area.

Chinese Bankers Survey 2017 10

A shrinking workforce Bankers feel stricter regulation

32.3% of respondents expect their number of Chinese bankers' feedback on key regulatory employees will remain unchanged or decrease in indicators improved in 2017, suggesting that they the next three years. Most of the reduction is better understand the rationale for compliance with expected to come from Large Commercial Banks – these indicators. Most (74.4%) support the 30.9% of these respondents expect a drop in the establishment of the Financial Stability and number of employees over the next three years. Development Commission (FSDC), recognising that Bankers expect a significant increase in the number it will help coordinate financial regulatory and of professional staff (82.3%) and marketing and development priorities, and prevent and mitigate sales personnel (84.0%), no change in managerial risks. Over 90% say they have felt the effects of posts (66.3%), and a significant cut in operational tightening regulations. 69.4% believe increased positions (54.3 %). enforcement will help to improve banks’ compliance and internal controls. Higher corporate governance rating Unifying supervision of the asset Chinese bankers rated their corporate governance management sector higher than the previous year. The highest rating was for social responsibility (4.71 points), followed Asset management has been growing rapidly in by stakeholder protection (4.55 points). The China in recent years. But the sector faces many effectiveness of incentives and monitoring systems challenges due to inconsistent regulatory standards, scored the lowest (4.27 points). Over 80% of improper business practice, multi-layered products bankers believe that employee stock ownership and regulatory arbitrage and evasion. 47.3% of schemes have a positive impact on corporate bankers believe the most pressing issue for the asset governance. On related party transactions, 34.3% management business is the implicit guarantee of the bankers argued that the main deficiencies backing investment products – a perception that include: hiding or lack of due diligence to detect needs to be removed. 45.4% of bankers argue that such relations, miscalculated credit exposure with capital pooling, which is still being commonly used, improper risk mitigation factors, and reluctance in inevitably leads to liquidity risk. As a result, seeking approval on significant related party respondents cite increasing regulation (71.9%), transactions. strengthening regulatory coordination (55.9%) and improving financial data (54%) as the top three Bankers as a community priorities. In the Guiding Opinions on Regulating the Asset Management Business of Financial China’s economic growth was higher than expected Institutions (Draft for Comment) announced by the in 2017, with banks’ profitability and asset quality PBoC in late November 2017, most of these issues remaining stable. This has led to higher satisfaction have been met with clear regulatory requirements. with work and life among Chinese bankers. Thanks Regarding the impact of this unified regulation, to the sector’s ongoing market-oriented reforms, 52.4% predict their business will shrink, while 67.3% most bankers reported improvements in overall believe it will help the business to return to basics professionalism (56.0%), with management and reduce systemic risks. Overall, bankers believe capabilities better reflected in banks’ KPIs (45.4%). that the benefits will outweigh the disadvantages. Senior management turnover is stable, with 64.5% 73.0% of respondents are committed to of respondents committed to staying with their strengthening their asset management business – current institutions. mainly through wealth management (46.4%) and private banking (40.1%) products.

Chinese Bankers Survey 2017 11

Outlook Responding to FinTech disruption

A steadily improving economy in 2017 has led FinTech has prompted new ways of thinking Chinese bankers to be upbeat about the sector’s among China’s bankers. Data analytics (76.3%) is growth over the next three years. The proportion of the technology of greatest interest to our bankers who expect revenue and after-tax profit respondents, particularly in terms of customer growth in the 5-10% range is higher than last year. identification (64.6%) and risk management Over 70% of bankers predict NPL ratios will fall (59.2%). Mobile technology has been widely steadily to less than 2.0% over the next three years, developed and applied (58.7%). Respondents indicating confidence in the country’s future growth believe the most practical uses for artificial prospects. Nearly 40% of bankers expect the intelligence (AI) include risk control (70.6%), provision coverage ratio of the sector will remain customer services (64.6%) and investment advisory above 150% by the end of 2017. More than 60% of (52.1%). Real uses for Blockchain, however, still bankers believe the capital adequacy ratio for the need to be identified (83.6%). For cloud sector will stand above 11.5% by the end of 2017. computing, Chinese bankers preferred to build private clouds (64.2%).

IFRS 9: in active preparation

The International Financial Reporting Standards No.9 (IFRS 9: Financial Instruments) will take effect on 1 January 2018. Chinese banks have been preparing for its implementation, but only a few banks had entered modelling (11.5%) and testing (11.2%) stages by the end of August 2017. Overall, listed banks’ preparedness was better than that of non-listed. Most bankers believe IFRS 9 will have a significant impact on risk asset rating (64.4%) and financial data disclosure (64.2%). The selection of valuation methods and consistency before and after implementation (59.0%) are seen as particular challenges.

Chinese Bankers Survey 2017 12

PwC Contacts

Financial Services

Matthew Phillips Jimmy Leung Florence Yip Hong Kong and mainland China Hong Kong and mainland China China Financial Services Leader Financial Services Leader Financial Services Tax Leader +852 2289 2303 +86 (21) 2323 3355 +852 2289 1833 [email protected] [email protected] [email protected]

Banking & Capital Markets

Margarita Ho Peter PT Li Richard Zhu China Banking & Capital Markets Hong Kong Banking & Capital North China Financial Services Leader Markets Leader Leader +86 (10) 6533 2368 +852 2289 2982 +86 (10) 6533 2236 [email protected] [email protected] [email protected]

Linda Yip James Chang Chris Chan China Financial Services China Financial Services Partner Transactions and Deals Partner Consulting Leader +86 (10) 6533 2300 +86 (10) 6533 2755 +852 2289 2824 [email protected] [email protected] [email protected]

William Gee Jianping Wang China Fintech Partner China Fintech Partner +86 (10) 6533 2269 +86 (21) 2323 5682 [email protected] [email protected]

Capital Markets and Accounting Advisory Services

Addison Everett Capital Markets and Accounting Advisory Services Leader +86 (10) 6533 7319 [email protected]

Chinese Bankers Survey 2017 13

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