www.pwccn.com Chinese Bankers Survey 2018

Executive summary

January 2019 Preface

We are pleased to present the Chinese Bankers Preventing and mitigating financial risks have been Survey 2018 report, prepared jointly by the on bankers’ radar. Risk management and internal Banking Association (CBA) and PwC. Now in its controls continue to be focused areas in the survey. tenth year, the report tracks developments in the A comparison of the survey findings over the past 10 sector from the perspective of Chinese bankers. years reveals that “improving the capability of risk management and risk control” has been put at the This year’s survey digs deep into the core issues heart of the operations and strategies of Chinese while maintaining a broad scope. The CBA was banks. More than 60% of respondents see the surge responsible for project management, while Dr. Ba of non-performing loans as the main risk, while over Shusong, together with the project team, 50% believe local government debt burden is a key interviewed bankers from typical financial risk area. The majority of respondents cite credit institutions to get their insights into the sector. The risk as their main concern and advocate stringent interviews complement an online survey covering 31 measures to strengthening pre-loan reviews, provinces in mainland China (excluding Hong Kong, monitoring loans that have been granted, and Macau and Taiwan), resulting in a broad establishing firewalls to prevent risks from representation of China’s banking sector as well as spreading. high quality and efficiency. The survey was conducted through online questionnaires, face to The Sino-US trade dispute intensified in 2018. More face interviews, telephone interviews and letters. than 60% of respondents believe trade dispute is a The survey tracks internal and external economic threat for financial markets, as it will lead to higher conditions, and looks into hot topics and challenges depreciation pressure on CNY exchange rates and facing the sector through extensive studies. With a heightened volatility on capital markets. This will in total of 2,380 valid responses collected over eight turn jeopardise the effectiveness of the central months, large amount of real, accurate and valuable bank’s neutral monetary policy or even bring data have been collected. downward pressure for the economy.

The year of 2018 was the first year following the According to the survey, Chinese bankers are 19th National Congress of the Chinese Communist particular upbeat in two areas. The first being the Party (the “19th Party Congress”), and the 40th rapid development of small and micro-sized anniversary of China’s Reform and Opening-up. It is enterprises (SMEs). Loans to those SMEs took also a critical year in implementing the 13th “Five- 75.2% of banks’ new lending in corporate banking, Year Plan”. The Central Economic Work Conference remaining top business for seven consecutive years. pointed out that upheavals remain despite a stable This clearly showcases the adaptability, agility and economy, given mixed external environment and innovation capability of those SMEs. The second downward pressure in economic growth. These area that bankers are confident with stems from the concerns were echoed in the survey, as Chinese opportunity brought by FinTech. It is widely bankers’ satisfaction to macroeconomic policies was believed that FinTech has empowered various lower in 2018 than it was in previous years, businesses in the form of lower costs, higher averaging 4.04 points (on a scale of 1 to 5 points). efficiency and better customer experience. Most This was 0.11 point lower than that in 2017. That bankers are committed to increase investment in said, most Chinese bankers are optimistic about the technologies such as data analytics, cloud country’s economic growth, with the majority computing and artificial intelligence. They are expecting a GDP growth of around 6.5%. confident about the deep integration of FinTech with operations, data and the organisation.

Chinese Bankers Survey 2018 2 We would like to take this opportunity to thank all those who participated in the survey. They spared time to complete questionnaires and talked to us, sharing their valuable insights. We hope this report helps you better understand the developments in and prospects for China’s banking sector. Please do not hesitate to share with us your feedback, so that we can continue to improve the report in the future.

For more information or enquiries, please contact the CBA, PwC or the Project Leader.

PAN Guangwei Executive Vice President, China Banking Association

Daniel Li Senior Partner, PwC Zhongtian LLP

Dr. BA Shusong Project Leader

December 2018,

Chinese Bankers Survey 2018 3 Executive Summary

The report of the 19th National Congress of the Risk control as the key to transformation Communist Party of China in October 2017 highlighted the importance of preventing systemic Nearly 70% of respondents believe that financial risks. The banking sector, which accounts strengthening risk controls is the most important for more than 80% of China’s financial assets, has part of banks’ transformation strategies. While become the central battlefield in this risk banks continue to favour small and micro-sized prevention. Banks’ risk management is under great enterprises, rural and small town-based customers pressure, as financial regulation tightens and the have been targetted for the first time. Nearly 85% of economy slows. The latest Chinese Bankers’ Survey, respondents are diversifying their operations in now in its tenth year, gives a comprehensive picture order to develop in a changing macro environment, of how bankers view industry developments. with shifting customer needs and tightening regulation on capital adequacy ratios. Most (65.3%) Bankers confident despite uncertainties bankers have turned to “FinTech” in their search for asset-light development. As China seeks tofurther It is widely believed that the Sino-US trade dispute develop its capital markets, most banks are will impact the macro economy. Despite such consolidating and strengthening their investment uncertainties over the course of 2018, bankers banking capabilities, as well as developing remain confident about China’s growth, with most transaction banking. More than 70% of respondents expecting a GDP increase of around 6.5%. The Belt agree that the Belt & Road Initiative and Asia- & Road Initiative has challenged banks’ capacity to Pacific Free Trade Area are important pillars for innovate. This is clearly on bankers’ radar, with as overseas expansion. Most bankers see opportunities many as 60% regarding technological innovation as for trade finance and offshore finance following the the hottest topic in finance and economics. establishment of Hainan Free Trade Zone and Free Trade Port. In terms of policy, Chinese bankers are positive about existing macroeconomic measures and expect Business portfolios are shifting more expansive fiscal policies in the future. Following the top leadership’s curbing of house Competition is intensifying as Chinese banks prices in 2018, bankers are more confident about innovate and develop new revenue streams. the real estate market in second-tier cities. Since Business portfolios are fairly balanced for large preventing and mitigating major risks is the top commercial banks, with traditional asset and priority of the “three critical battles”1 , almost 80% liability business remaining core for the next three of respondents believe that the establishment of the years. For joint-stock commercial banks, off-balance Financial Stability and Development Committee has sheet and intermediary business is expected to been helpful in cracking down on financial become more competitive, given their flexible violations. Chinese bankers also expect slower operations and greater ability to innovate. In terms growth in banks’ assets and liabilities, as risk of credit portfolios, business priorities are shifting prevention and deleveraging remain major themes. steadily.

1 In the Report of the 19th National Congress of the Communist Party of China that published on 27 October 2017, “three critical battles” were highlighted as priorities for Chinese government to address from 2018 to 2020. Apart from “preventing and mitigating major risks”, the other two are “poverty alleviation” and “environmental protection”.

Chinese Bankers Survey 2018 4 Urban infrastructure has been the most supported headcounts over the next three years. This compares sector for the last four years, with real estate the to just 12.4% in 2014. Most Chinese banks have put most restricted. In corporate banking segment, technical capability building at the heart of their loans to small and micro enterprises, supply chain strategies, leveraging these efforts as a means of finance and loans to large corporate clients are top broadening employees’ career paths. Only 14.9% business priorities. For the retail banking segment, have not yet started building such technical consumer lending comes top, with personal capabilities. While this is common practice among business loans gaining momentum and jumping to Chinese banks, challenges remain: over half of second place. Inter-bank lending has cooled and respondents (51.8%) believe that not enough effort “back to basics”, while financial leasing for is put into increasing the skills of their workforce. residential property is booming. Calling for more efficient capital Strengthening risk management and management internal controls Pressures on banks’ asset and liability management While China’s growth faces domestic and cited in the survey include the New Asset international pressure, the country continues to Management Rule (32.4%), Macro Prudential restructure its economy and implement “supply-side Assessment (20.4%), regulations on liquidity structural reforms”. As new regulations2 continue to management (19.7%), the capital adequacy ratio be released , the survey finds that Chinese banks are (15.4%) and violation crackdowns (11.4%). Against expected to strengthen their risk management and this backdrop, the proportion of loans to assets has internal controls, while streamlining organisational risen, so as the proportion of deposits. For most structures, so as to live up to changing government Chinese banks, pressure on capital comes from policies. expansion in size (68.3%), and from common equity tier 1 capital (77%). While retained earnings is one Over 60% of respondents cite credit risk as their way to replenish capital, the proportion of banks main concern. This has spread from industries with that can do this (52.8%) is diminishing as a result of excess capacity to small and micro-sized enterprises. slowing profit growth. Accordingly, most banks will Chinese bankers are also more concerned about ease capital replenishment pressures by compliance risk at a time of strict regulation, strengthening their capability of asset quality compliance and accountability. A rebound in non- management (69.7%), balancing the pace of asset performing loan (NPL) ratios and local growth and capital utilisation (61.4%), and governmental debt burdens are two other areas that migrating to asset-light business models (53.4%). concern survey respondents.

More needs to be done to increase skills

Chinese bankers’ expectation on workforce growth continues to edge down, with 45.2% of respondents in 2018 foreseeing no change or reduction in

2 Such as Measures for the Supervision and Administration of the Wealth Management Business of Commercial Banks, released in September 2018.

Chinese Bankers Survey 2018 5 FinTech: partnering for success Supporting small and micro sized-enterprises and alleviating poverty continue to be the priority areas FinTech became more widely accepted in 2018. for corporate social responsibility. Yet greater FinTechs such as Ant Financial and JD Digits progress in these areas will require more innovative (formerly JD Finance) have emerged as a result of approaches. deep integration between financial services and technology. This has also driven financial Job satisfaction declines institutions, especially banks, to increase investment in research and development. Chinese In 2018, Chinese bankers were expected to address banks are exploring new paths and models to many challenges. These included the central develop technologies such as data analytics, cloud Government’s calls to support the real economy, computing and blockchain. Yet challenges remain, dealing with complex financial risks, and adapting including market competition, technological to a tougher regulatory environment. As a result, barriers and legal constraints. While FinTech brings Chinese bankers’ job satisfaction was lower than in opportunities in the form of lower costs, higher previous years. In terms of life satisfaction, the efficiency and better customer experience, it also results were mixed. The job satisfaction of bankers leads to more complex risk management and more in Central China was much lower in 2018 than in the intense competition. Nevertheless, most previous year. Most bankers believe that key respondents believe there are more opportunities performance indicators are not as effective in than challenges in FinTech. Chinese bankers are measuring management capabilities as they were. allocating more resources to FinTech and IT They also feel that the overall professionalism of development. Going forward, it is expected that the bankers is diminishing. When it comes to barriers to partnership between Chinese banks and FinTechs career development, there are growing concerns will be closer and more varied. about a lack of training and learning from peers. Inadequate performance review mechanisms, More innovation needed in corporate unattractive incentives and a lack of autonomy are governance and social responsibility other issues raised. While 59.5% of senior executives are not planning to resign, that still In terms of corporate governance, Chinese bankers means that there are more than a third who are believe that remarkable achievements have been willing to pursue careers in other banking made in data management and “party building”3. institutions should opportunities arise. That said, there is still more to be done in ownership management, employee incentives and restrictions, the function of independent directors, risk management and internal controls.

3 Since 2015, Chinese leadership has re-emphasised the importance of Communist Party’s role in corporate governance. This attempt to embed the Party’s presence in addition to the board of directors, the board of supervisors and the management is usually referred to as “party building” in China.

Chinese Bankers Survey 2018 6 Positive views of regulatory restructuring The Central Economic Work Conference in 2018 concluded that China is, and will continue to be, in a As part of the financial reform process, the period of strategic development opportunities. To restructuring of the financial regulatory framework seize these opportunities the country will need to was concluded in 2018. Most Chinese bankers build momentum and accelerate structural reforms recognise the effectiveness of these changes and and the upgrading of value chains. According to the believe the merger of the banking and insurance survey, China will also need to adhere to structural regulators will help prevent and mitigate systemic deleveraging to ensure quality growth and prevent financial risks. Under the “new normal” of tougher unnecessary turbulence and chain effects in regulation and stricter sanctions, more than half of financial markets. For banks, sustainable growth is respondents are positive. They welcome the expected to require stricter self-regulation and risk progress made by introducing tough measures on controls. Despite respondents’ optimism about the financial violations and deleveraging, although they next three years, including higher provision see growing pressure on compliance and capital coverage ratios, Chinese banks will have to improve adequacy ratios. Chinese bankers are also aware of their credit asset quality. the pressure on non-performing loan ratios. They are concerned that the deterioration of asset quality could present a potential risk for banks’ operations and might even trigger a systemic crisis. Respondents call for more measures to identify and intervene in high-risk institutions at an early stage.

Most bankers are positive about easing restrictions on market entry for foreign financial institutions, with nearly 60% believing that greater competition will incentivise local players. In terms of better regulating financial holding companies, more than 60% of respondents believe the key is entry control.

Upbeat about the future

Chinese bankers were more upbeat in 2018 about their business over the next three years. A higher proportion predicted revenue growth at over 10% and increased after-tax profits. More than 70% expect their NPL ratios to be lower than 2.0% and to continue falling in the coming three years. Over 50% of respondents expected their provision coverage ratios to be higher than 150% by the end of 2018. More than 60% forecast their capital adequacy ratio to be higher than 10.5% by the end of 2018.

Chinese Bankers Survey 2018 7 Participating Banks

A total of 127 Chinese banking institutions participated in the online survey and interviews. A full list of participants is shown below:

1. Policy banks (3) 4. Foreign banks (21)

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

The Export-Import Chong Hing Bank

Agricultural Development Bank of China United Overseas Bank (China)

Deutsche Bank (China)

2. Large commercial banks (6) Bank of East Asia (China)

Bank of China BNP Paribas (China)

Agricultural Bank of China Fubon Bank (China)

Industrial and Commercial Bank of China Korea Development Bank

China Construction Bank Hana Bank (China)

Bank of Communications Hang Seng Bank (China)

Postal Savings Bank of China Citibank (China)

OCBC Wing Hang Bank (China)

3. Joint-stock commercial banks (12) HSBC Bank (China)

China CITIC Bank Scotiabank

China Everbright Bank Nanyang Commercial Bank (China)

Huaxia Bank Bank of Tokyo-Mitsubishi UFJ (China)

China Minsheng Bank DBS Bank (China)

China Merchants Bank Bank SinoPac (China)

Industrial Bank Woori Bank (China)

China Guangfa Bank E.SUN Bank

Ping An Bank Standard Chartered China

Shanghai Pudong Development Bank

Hengfeng Bank 5. City commercial and private banks (65)

China Zheshang Bank Baoshang Bank

China Bohai Bank

Chinese Bankers Survey 2018 8 Bank of Bank of Jiujiang

Bank of Chaoyang Bank of Kunlun

Bank of Chongqing Bank of Lanzhou

Bank of Changsha Bank of

Bank of Dazhou Longjiang Bank

Bank of Luzhou City Commercial Bank

Bank of Mianyang City Commercial Bank

Ordos Bank Bank of Nanjing

Bank of Bank of Inner Mongolia

Bank of

Guangxi Beibu Gulf Bank Panzhihua City Commercial Bank

Bank of Guangzhou Bank of

Bank of Guizhou Bank of Pingdingshan

Guilin Bank Qilu Bank

Harbin Bank Qishang Bank

Bank of Hainan Bank of

Bank of Handan Bank of Shangrao

Hankou Bank Bank of Shaoxing

Bank of Hangzhou WeBank

Bank of Hebei

Huishang Bank Suining Bank

Yillion Bank Bank of Taizhou

Bank of Jilin Bank of

Bank of Jiangsu Bank of Tieling

Jiangxi Bank Bank of Wenzhou

Bank of China Travel Service Jiaozuo Bank of Wuhai

Bank of Bank of Urumqi

Jincheng Bank XW Bank

Jinshang Bank Bank of

Chinese Bankers Survey 2018 9 Zhejiang Chouzhou Commercial Bank

Zhejiang Mintai Commercial Bank

Zhejiang Tailong Commercial Bank

Bank of Zhengzhou

China Resources Bank of Zhuhai

6. Rural financial institutions (20)

Guangdong Rural Credit Union

Guizhou Rural Credit Union

Gansu Rural Credit Union

Henan Rural Credit Union

Hubei Rural Credit Union

Hunan Rural Credit Union

Hainan Rural Credit Union

Jiangsu Rural Credit Union

Jiangxi Rural Credit Union

Liaoning Rural Credit Union

Sichuan Rural Credit Union

Shanxi Rural Credit Union

Shannxi Rural Credit Union

Yunnan Rural Credit Union

Zhejiang Rural Credit Union

Inner Mongolia Rural Credit Cooperative

Guangxi Rural Credit Union

Beijing Rural Commercial Bank

Shenzhen Rural Commercial Bank

Tianjin Rural Commercial Bank

Chinese Bankers Survey 2018 10 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 Michael Hu Vincent Yao China Financial Services Partner China Financial Services Partner China Financial Services Partner +86 (10) 6533 2300 +86 (21) 2323 2718 +86 (755) 8261 8293 [email protected] [email protected] [email protected]

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

Chinese Bankers Survey 2018 11 www.pwccn.com

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