Banking Newsletter - PwC · PDF fileWe are pleased to present our Banking Newsletter ... Macro environment 3. The “turning ... Japan’s growth fell back to

Banking Newsletter

Review and Outlook of China’s Banking Industry for the First Half of 2015

September 2015

www.pwccn.com

Editor-in-Chief：Jillson Jiang

Deputy Editor-in-Chief：Jeff Deng

Members of the editorial team：

Jody Chen, Colin Hong, Ingree Li, Joanne Song, Daniel Ying, Javy Zhu

(in alphabetical order of last names )

Editorial Team：

Advisory Board：

Raymond Yung, Jimmy Leung, Margarita Ho, Richard Zhu, Michael Hu, William Yung, Vincent Yao, Yan Hu

PwC

We are pleased to present our Banking Newsletter (the Newsletter), PwC’s analysis of China’s Listed Banks and the wider industry, which is now in its 24th edition.

The analysis covers 21 large listed banks (hereafter referred to as ‘Listed Banks’) are defined by the China Banking Regulatory Commission (CBRC) with the following four categories;

Large Commercial Banks (LCBs)

Industrial and Commercial Bank of China Limited (ICBC) China Construction Bank Corporation (CCB) Agricultural Bank of China Limited (ABC) Bank of China Limited (BOC) Bank of Communications Co. Ltd (BOCOM)

Joint-Stock Commercial Banks (JSCBs)

China Merchants Bank Co., Ltd (CMB) Industrial Bank (CIB) Shanghai Pudong Development Bank Co., Limited (SPDB) China CITIC Bank Corporation Limited (CITIC) China Minsheng Banking Corporation Limited (CMBC) China Everbright Bank Company Limited (CEB) Ping An Bank Co., Ltd (PAB) Hua Xia Bank Co., Limited (HXB)

City Commercial Banks (CCBs)

Bank of Beijing Co.,Ltd. (BOB) Bank of Nanjing Co., Ltd. (NJB) Bank of Ningbo Co, Ltd. (NBB) Shengjing Bank Co, Ltd (SJB) Huishang Bank Corporation Limited (HSB) Harbin Bank Co., Ltd. (HRB) Bank of Chongqing Co., Ltd. (BCQ)

Rural Commercial Banks (RCBs)

Chongqing Rural Commercial Bank Co., Ltd. (CQRCB)

The total assets of these banks as of 30 June 2015, accounted for 79.44% of the assets of China’s commercial banking sector. Unless otherwise stated, all the information in this newsletter comes from publicly available sources, such as the Listed Banks’ interim reports and statistics published by regulatory bodies, and are presented in RMB where applicable.

Preface

For more information, please talk to your PwC contacts or any of those listed in the Appendix as Banking and Capital Markets Contacts.

3

September 2015 Banking Newsletter

PwC

Table of Contents

1. Executive summary

2. Macro environment

3. The “turning points” for banks

4.Differentiated operating strategies

5. Features 6. Outlook

05 11

41 55

17

71

4


PwC

Executive Summary

• Macro environment at a glance

• Three “turning points” for banks

• Banks are adopting differentiated operating strategies

• PwC’s policy recommendations

• Highlights of Listed Banks’ performance

5


PwC

Macro environment at a glance

Slowing economic growth Falling interest rates

Ample liquidity Volatile stock & foreign exchange markets

• The global economy was recovering in 1H 2015, though with varied pace .

• Developed countries, especially the U.S. recorded resilient growth. While most countries in the Eurozone were growing against the backdrop of another Greek debt crisis, Japan’s growth fell back to negative territory in 2Q 2015.

• Most emerging market economies’ growth slowed, with China’s Gross Domestic Product (GDP) growth sliding to 7.00% in 1H 2015, from 7.40% in 2014.

• PBoC cut its benchmark interest rates three times in 1H 2015, in an attempt to bring down the cost of borrowing. Prior cuts in November 2014, and subsequently in August 2015, mean that the PBoC has reduced interest rates five times in less than a year.

• The PBoC also lowered the deposit reserve requirement ratio (RRR) several times in 1H and August, to boost liquidity for the real economy.

• In addition to introducing easing measures, the PBoC also continued to push forward interest rate reform in 1H 2015.

• The daily average turnover of Shanghai and Shenzhen markets during 1H 2015, was RMB 1.2 tn, surging up by 542.40% compared to the same period in 2014. Market capitalisation increased by 132.40% year on year.

• In May and June, both Shanghai and Shenzhen markets experienced a period of turbulence, particularly toward the end of June.

• The foreign exchange market was another source of volatility and the PBoC launched another round of RMB exchange rate reform.

• Market liquidity remained stable in 1H 2015, as the PBoC continued to cut interest rates and RRR. By the end of June 2015, the balance of broad money supply (M2) reached RMB 133.30 tn, with year-on-year growth of 11.80%. The growth rate at the close of 1H was higher than it was at the end of March 2015.

• By the end of June 2015, the aggregate loan balance was RMB 94.40 tn, representing a growth of 12.50% year-on-year. Year-to-date new loans reached RMB 6.80 tn, the aggregate deposit balance was RMB 136 tn, reflecting growth of 10.60% year-on-year, while new deposits recorded RMB 11.5 tn.

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PwC

Three “turning points” for banks

1 2 3

The aggregate net profit of the 21 Chinese Listed Banks in this report reached RMB 722.80 bn in 1H 2015, up 2.78% year on year. The growth was 8.00 ppts lower than the same period in 2014.

Profit growth at the five Large Commercial Banks (LCBs) was 0.97%. Growth at the eight Joint-stock Commercial Banks (JSCBs)’s slowed by 8.24 ppts to 6.45%. The seven City Commercial Banks (CCBs)grew 15.24%.

Narrowing interest margin

Net interest margin (NIM) and net interest spread (NIS) narrowed at the five LCBs’.

Four out of eight JSCBs’ NIM and NIS expanded, three remained unchanged and one narrowed. Two out of seven CCBs’ NIM and NIS expanded, two remained unchanged and two narrowed. RCB’s NIM and NIS narrowed slightly.

The 21 Listed Banks’ non-performing loan (NPL) balance reached RMB 857.90 bn, 27.12% more than that in 2014. The aggregate NPL ratio was 1.44%, up .023 ppts from 2014.

LCBs and JSCBs’ NPL growth were higher than other Listed Banks. Most Listed Banks’ “special mention” loans and overdue loans increased at a faster pace than other types, suggesting that credit risk has not been fully exposed.

Deteriorating asset

quality

Slowing earnings growth

7


PwC

Banks are adopting differentiated operating strategies

Joint-stock Commercial

Banks

The rate cut by the PBoC impacted Joint-stock Commercial Banks (JSCBs). The proportion of investment in fixed income and beneficiary trust receipts and similar assets increased markedly, in an attempt to boost yield.

Additionally, JSCBs are also expanding their intermediary fee based business.

During the economic downturn, Large Commercial Banks (LCBs) increased the amount of write-offs and transfers of NPL.

They are also looking at a wide range of opportunities related to the government’s policy and strategy as a way to diversify their businesses. For example, the “One Belt One Road” initiative offers a new path for overseas expansion and RMB internationalisation.

Bank of China (BOC), for example, has 635 branches overseas as of June 2015. The Industrial and Commercial Bank of China (ICBC) added 64 more overseas branches in 1H 2015.

City Commercial

Banks

Large Commercial

Banks

City commercial banks (CCBs) are leveraging their relative flexibility in asset allocation to enhance pricing advantage in support of their net interest margins. The pricing advantage is more evident in corporate loans.

Some CCBs are looking at diversification. Bank of Beijing, for example, has built a comprehensive business platform ranging from insurance, funds, consumer finance, leasing and rural banking. Bank of Nanjing has also established a portfolio of asset management services, private equity funds, and a rural banking business.

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PwC

PwC’s policy recommendations

Explore viable NPL disposal alternatives

• Lowering the entry barrier to encourage private and

foreign investors.

• Encourage new disposal alternatives such as

securitisation.

• Strengthen product design, promote investor

suitability and ensure a robust legal framework. Short-term

01

Embrace government initiatives

• Domestically, strengthen structural reform to support

the ‘Made in China 2025’ vision.

• Internationally, take full advantage of the excellent

opportunity offered by the One Belt One Road

initiative by adding overseas presence. Mid-term

02

Secure a landscape for industry development

• Be open to new financial institutions such as

privately-owned banks.

• Put in place detailed guidelines that balance risk

control and innovation that will ensure robust and

balanced growth for the Internet finance industry.

Long-term

03

9


PwC

Highlights of Listed Banks’ performance

Listed Banks Highlights in 1H 2015

ICBC Largest asset size and net income

CCB Highest ROA, core tier-1 capital adequacy and capital adequacy

ABC Lowest liabilities cost

BOC Most international with largest number of shareholders base

BOCOM Highest yield on interest generating assets among LCBs

CMB Highest proportion in personal banking income, lowest cost on personal deposits

CIB Lowest proportion in deposits, highest proportion in interbank liabilities

SPDB Fastest growth in bank card income

CITIC Fastest fall in yield on deposits

CMBC Largest share of fee and commission income

CEB Fastest rise in share of personal banking income, highest growth in wealth management

service fee

PAB Fastest rise in the share of fee and commission income

HXB Fastest rise in special mention loans and loans that were past due but not impaired

BOB Lowest ratio for special mention loans, largest decrease in special mention loans, lowest

ratio for loans past due but not impaired

NJB Fastest growth in net interest income, fee and commission income, and total assets

NBB Fastest growth in deposits

SJB Fastest growth in net profit

HSB Lowest cost to income ratio

HRB Highest yield on interest generating assets, growth in loans

BCQ Highest ROE

CQRCB Highest NIM and NIS

10


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Macro environment

• Slowing economic growth

• Falling interest rates

• Ample liquidity

• Volatile stock & foreign exchange markets

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Slowing economic growth

The global economy was recovering in 1H 2015, though the pace of recovery varied by region. Developed countries, especially the U.S. recorded resilient growth, leading to a strong dollar appreciation and mounting expectation of an interest rate hike. Most countries in the Eurozone kept growing, albeit against the backdrop of the Greek debt crisis. However, Japan’s growth fell back to negative territory in 2Q 2015.

Most emerging market economies’ growth slowed, with China’s Gross Domestic Product (GDP) growth sliding to 7.00% in 1H 2015 from 7.40% in 2014. The growth in 2Q 2015 (7.40%) was the same compared to 1Q 2015.

China’s growth is on a downward trend, nevertheless, a 7.00% growth rate is still within

the central government’s target and substantially higher than most other global economies.

India’s growth was strong in 2Q 2015. But both Brazil and Russia recorded negative growth. South Africa’s GDP continued to grow year-on-year in 2Q 2015, though quarter-on-quarter growth was negative.

Figure 1 China GDP growth since 1992

Note: Growth covers the period from the beginning of the year to the end of the quarter.

The growth of 2013 Q2 covers the first two quarters in 2013.

2009 Q1,

6.60%

2015 Q2,

7.00%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Source：National Bureau of Statistics

Economy Growth in Q2 2015

US 3.70%

Japan -1.60%

Euro Area 1.50%

UK 2.60%

Germany 1.60%

France 1.00%

Spain 3.10%

Italy 0.70%

Greece 1.60%

Brazil -3.10%

Russia -4.60%

India 7.00%

South Africa 1.20%

Table 1 GDP growth, developed Vs. emerging

12


Source：Statistics authorities of the respective economies

PwC

Falling interest rates

Price levels in China were stable in 1H 2015, as a result of the economic downturn. The Consumer Price Index (CPI), a proxy that measures the inflation standing at 1.30% during the period, suggested a mild price hike. The Producers Price Index (PPI), a proxy that measures input prices, on the other hand, was -5.50%, suggesting the issue of excess capacity in the manufacturing sector remains.

As the inflation was stable, the PBoC cut its benchmark interest rates three times in 1H 2015, in an attempt to bring down borrowing costs. This means that in addition to the rate cut in November 2014 and subsequently in August 2015, PBoC has cut the interest rates five times in less

than a year, with both the lending and deposit rates reaching a record low during the period.

The PBoC has also lowered the deposit reserve requirement ratio (RRR) several times in 1H, and again in August 2015, in an attempt to boost liquidity for the real economy.

In addition to the easing measures, the PBoC continued to forge ahead with the reform agenda in 1H 2015, lifting rate restrictions on the deposits with maturity over one year or longer, reflecting another step towards full liberlisation of interest rates.

Figure 2 CPI & PPI Figure 3 RMB benchmark interest rates

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

CPI PPI

Source：National Bureau of Statistics

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

1-year deposite rate 1-year (and below) lending rate

Source：The People's Bank of China

13


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Ample liquidity

Market liquidity remained stable in 1H 2015, as the PBoC continued to cut interest rates and RRR. By the end of June 2015, the balance of broad money supply (M2) reached RMB 133.30 tn, a year-on-year growth of 11.80%. The growth rate was higher than it was by the end of March 2015.

The M2 to GDP ratio stood at 1.46, slightly higher than it was by the end of March 2015.

According to the PBoC, as a result of the surge of loans and securities investments, M2 growth was slightly higher in 2Q than in 1Q. The increase of securities investments was primarily the result of a robust stock market.

By the end of June 2015, the aggregate loan balance was RMB 94.40 tn, representing a growth of 12.50% year-on-year. Year-to-date new loans reached RMB 6.80 tn, the aggregate deposit balance was RMB 136 tn, with growth of 10.60% year-on-year, and new deposits recorded RMB 11.5 tn.

Figure 4 M2 growth Vs. GDP growth

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Source：National Bureau of Statistics & the People’s Bank of China

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Volatile stock & foreign exchange markets

The Shanghai Stock Exchange Composite Index (SSECI) rose by 32.20% in the first six months of 2015, and the Shenzhen Stock Exchange Component Index (SZSECI) rose by 30.20%. The daily average turnover of Shanghai and Shenzhen markets during the first six months of 2015 was RMB 1.2 tn, up by 542.40% compared to the same period in 2014.

Market capitalisation of Shanghai and Shenzhen stock exchanges reached RMB 47.20 tn by the end of June 2015, an increase of 132.40% year on year.

In May and June, both Shanghai and Shenzhen markets experienced turbulence, especially during late June, which saw trading halted when stocks dropped by the daily limit of 10%.

To stabilise the market, the PBoC, CSRC, CBRC, CIRC, SASAC, Huijing and MoF jointly announced measures in early July to restore market confidence which included encouraging large shareholders to increase stakes, rather than selling. The PBoC also agreed to improve liquidity.

The foreign exchange market was another source of volatility, and PBoC launched another round of RMB exchange rate reform by depreciating the currency by over 2.00% in August 2015, leading to expectations of further depreciation.

6.05

6.10

6.15

6.20

6.25

6.30

6.35

6.40

6.45

Source：China foreign exchange trading system

Figure 6 RMB exchange rate

0

200

400

600

800

1,000

1,200

1,400

1,600

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

Value traded Close

SSE Composite Index Value traded (In billions)

Source：Shanghai Stock Exchange

Figure 5 SSE Composite Index change

15


PwC

PwC

The “turning points” for banks • Turing point 1：Slowing earnings growth

• Turing point 2：Narrowing interest margin

• Turing point 3：Deteriorating asset quality

17


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Turing point 1：Slowing earnings growth

The aggregate net profit of the 21 Listed Banks reached RMB 722.80 bn in 1H 2015, up 2.78% year on year. The growth was 8.00 ppts lower than the same period in 2014, due to the economic downturn, PBoC’s rate cuts and the further liberalisation of interest rates.

Profit growth for the five Large Commercial Banks (LCBs) was below 2.00%. For eight Joint-stock Commercial Banks (JSCBs), the profit growth rate slowed to a single-digit level. Seven City Commercial Banks (CCBs) recorded a relatively small slowdown of profit growth.

While most banks recorded slower growth in net profit, BOB, NJB and SJB remained resilient, with double digit growth. In addition, PAB, NBB and BCQ all recorded profit growth over 10.00% .

The profit growth trends in 1H 2015, show that the smaller sized banks such as JSCBs and CCBs maintained a relatively high growth rate.

On the other hand, LCBs and larger JSCBs’ profit growth appear to have reached a turning point.

Figure 7 Listed Banks net profit growth, 1H 2015

Table 2 Listed Banks net profits, 1H 2015

1.69%

1.66%

0.97%

0.70%

0.48%

15.02%

8.93%

8.68%

7.16%

5.51%

4.53%

2.49%

2.43%

27.75%

24.54%

15.58%

13.62%

10.27%

8.81%

8.20%

6.91%

BOC

BOCOM

CCB

ICBC

ABC

PAB

CIB

CMB

HXB

SPDB

CMBC

CEB

CITIC

SJB

NJB

NBB

BOB

BCQ

CQRCB

HSB

HRB

Listed Bank Net profit（millions） YoY growth % change

ICBC 149,426 0.70% -6.45 CCB 132,244 0.97% -8.20 ABC 104,564 0.48% -12.17 BOC 94,986 1.69% -9.28

BOCOM 37,506 1.66% -4.01 Large Commercial Banks 518,726 0.97% -8.35

CMB 33,169 8.68% -7.51 CIB 27,984 8.93% -9.00

SPDB 24,126 5.51% -11.75 CITIC 22,969 2.43% -6.21 CMBC 27,272 4.53% -6.52 CEB 16,267 2.49% -3.76 PAB 11,585 15.02% -18.72 HXB 9,312 7.16% -11.92

Joint-stock Commercial Banks 172,684 6.45% -8.24 BOB 10,062 13.62% +0.15 NJB 3,601 24.54% +5.21 NBB 3,567 15.58% -2.77 SJB* 3,201 27.75% +11.86 HSB* 3,073 8.20% -7.64 HRB* 2,132 6.91% -18.91 BCQ* 1,838 10.28% -7.90

City Commercial Banks 27,474 15.24% -1.37 CQRCB 3,919 8.81% -3.05

All Listed Banks 722,803 2.76% -8.00

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Profitability on a downward trend

Profitability at most of the Listed Banks’ exhibited a downward trend in 1H 2015, as a result of slowing earnings growth: both return on assets (ROA) and return on equity (ROE) were lower year on year.

That said both BOB and NBB saw their ROA rise slightly over the period. NJB was the only bank to see its ROE rise. All three banks recorded a relatively higher net profit growth in 1H 2015.

CCB

ICBC

ABC

BOC

BOCOM

CMB

CMBC

CIB

CEB

SPDB

CITIC

HXB

PAB

BCQ

BOB

NBB

SJB

HSB

HRB

NJB

CQRCB

0.8%

0.9%

1.0%

1.1%

1.2%

1.3%

1.4%

1.5%

1.6%

1.7%

1.8%

2015 1H 2014 1H

Figure 8 Profitability – Return on assets, ROA

Figure 9 Profitability – Return on equity, ROE

CCB

ABC

ICBC

BOC

BOCOM

CIB CMBC

CMB

SPDB

HXB CEB

CITIC

PAB

BCQ

NJB

BOB

NBB

CQRCB

SJB

HSB

HRB

12%

14%

16%

18%

20%

22%

24%

26%

2015 1H 2014 1H

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Income grew more slowly than expense, with sluggish net interest income growth

Figure 10 Net interest income Vs. Net fee income growth, 1H 2015

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

Net interest income Net fee and comission income

20


Most Listed Banks’ income growth was slower than that of their expense in 1H 2015. JSCBs and CCBs saw a relatively higher growth rate, with NJB being the highest. LCBs saw a relatively lower growth rate of below 10.00%.

Listed Banks’ slower income growth was due to a lower growth in net interest income.

While those JSCBs and CCBs recorded high growth in fee and commission income, their operating income growth remained relatively low. This

was because the proportion of fee and commission income was low as a percentage of their operating income.

Both net interest income and fee and commission income growth was low for the five LCBs.

PwC

Loan provisions grew at a faster pace

The fact that expense growth was higher than income in 1H 2015 can be attributed to higher growth in allowance for impairment losses, as most banks increased their provisions in response to a deterioration of non performing loans caused by the economic downturn.

Figure 12 Allowance for impairment losses as % of profit-

before-provisions, 1H 2015

Figure 11 Growth on allowance for impairment losses, 1H 2015

Increased allowance for impairment losses led to a higher proportion of pre-provision profit eroded by credit asset quality concerns. This was most evident in JSCBs.

-10%

10%

30%

50%

70%

90%

110%

130%

150%

170%

190%

210%

230%

250%

270%

290%

0%

5%

10%

15%

20%

25%

30%

35%

21


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Cost to income ratio continued to fall

Listed Banks imposed tough measures on cost control in light of the economic downturn, which led to stable growth on cost items other than allowance for impairment losses in 1H 2015.

Most banks saw a fall in cost to income ratio in 1H 2015, except BOCOM and BOB.

Among the Listed Banks, JSCBs saw the highest growth in staff costs, while LCBs’ saw slow or even negative growth in staff costs.

Figure 13 Cost to income ratio

Figure 14 Components of business & administration expenses, 1H 2015

ABC

BOCOM BOC

ICBC CCB

HXB PAB

CMBC CEB

CITIC CMB

CIB

SPDB

CQRCB

NBB HRB

BCQ

NJB

BOB

SJB

HSB

15%

20%

25%

30%

35%

40%

2015 1H 2014 1H

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Staff costs Depreciation and amortisation General operating and administrative expenses

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Turing point 2：Narrowing interest margin

2.49% no change

2.63% -0.12ppts

Large Commercial Banks

2.49% -0.12ppts

Joint-stock Commercial Banks

City Commercial

Banks & Rural

Commercial Banks

Listed Banks’ net interest margin (NIM) and net interest spread (NIS) presented a narrowing trend in 1H 2015. While LCBs, CCBs and Rural Commercial Banks’ (RCBs) saw their NIM narrow, JSCBs’ NIM remained flat.

Listed Banks’ NIM, 1H 2015

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PwC

JSCBs’ NIM remained stable

All of the five LCBs’ NIS narrowed in 1H 2015. Among eight JSCBs, CMB, CIB, CEB and PAB narrowed, while SPDB and CITIC remained flat, CMBC also narrowed.

Among seven CCBs, BOB and NJB’s NIS expanded, NBB and HSB remained flat, SJB, HRB and BCQ narrowed. CQRCB’s NIS narrowed also.

Most banks’ NIM presented the same trend as that of NIS.

ABC

CCB

ICBC

BOCOM BOC

CMB

PAB HXB

CIB

SPDB

CMBC CITIC

CEB

CQRCB

NJB

HSB

HRB

NBB

BCQ

SJB

BOB

1.7%

1.9%

2.1%

2.3%

2.5%

2.7%

2.9%

3.1%

3.3%

2015 1H 2014 1H

Figure 15 Net Interest Spread

Figure 16 Net Interest Margin

ABC

CCB

ICBC

BOCOM

BOC

CMB

PAB

HXB

CIB

SPDB

CMBC

CITIC

CEB

CQRCB

HSB

HRB

NJB

BCQ

NBB

SJB

1.7%

1.9%

2.1%

2.3%

2.5%

2.7%

2.9%

3.1%

3.3%

3.5%

2015 1H 2014 1H

24


PwC

Yield on interest-generating assets fell

All Listed Banks’ saw lower yield on interest-generating assets in 1H 2015, compared to 1H 2014.

LCBs recorded a slight fall in yield, with the drop being more evident for JSCBs and CCBs’.

CMBC, CIB and NBB’s had the most evident decline over the period.

In terms of yield, CCBs and JSCBs were higher than that of LCBs.

Almost all banks had lower loan yield in 1H 2015, than in 1H 2014, except for PAB. PAB restructured its loan book during 1H 2015, and improved its pricing ability, which led to a higher loan yield.

SJB recorded the highest yield in loans followed by PAB. It is worth noting that the banks with a higher yield in loans were CCBs and RCBs. This reflects the ability of the smaller sized banks to adapt their loan portfolio quickly during the economic downturn, and charging customers with higher yields.

Figure 17 Yield on interest-generating assets - overall

Figure 18 Yield on interest-generating assets - loans

BOCOM

ABC

CCB

ICBC

BOC

PAB

CIB

HXB

CMBC

CEB CITIC

CMB

HRB

BCQ

SJB

CQRCB

NJB

HSB

NBB

BOB

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

2015 1H 2014 1H

BOCOM

ABC CCB ICBC

BOC

PAB

HXB

CMBC

CMB

CIB CITIC

CEB

SJB

HRB

CQRCB

BCQ

HSB NBB

BOB

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

2015 1H 2014 1H

25


PwC

Excellent loan pricing for CCBs and RCBs

The pricing advantage of CCBs and RCBs was most evident in the corporate banking business. yield on corporate loans for NJB and HSB in 1H 2015, remained comparable to 1H 2014, even though PBoC had cut the benchmark interest rates on five occasions over past year.

Citic’s yield on corporate loans in 1H 2015 changed slightly.

In 1H 2015, Smaller sized banks in terms of assets, recorded a higher yield on corporate loans, while large banks saw a relatively lower yield on corporate loans.

With regard to personal loans, PAB’s yield was the highest (9.99%) among Listed Banks in 1H 2015, well above that of HRB’s.

There were no evident pricing advantages for CCBs and RCBs’ in personal loans. The yield of CCBs and RCBs were the same, and higher than the yield of LCBs’.

Figure 20 Yield on interest-generating assets – personal loans

Figure 19 Yield on interest-generating assets – corporate loans

BOCOM

ABC

BOC CCB

ICBC

PAB

CMB CMBC

CIB

SPDB

CITIC

CEB

HRB

NBB

NJB

CQRCB

HSB

SJB

HXB

4.5%

5.5%

6.5%

7.5%

8.5%

9.5%

10.5%

2015 1H 2014 1H

BOC

ABC CCB ICBC BOCOM

HXB

PAB

CITIC

CIB

SPDB

CMBC

CEB

CMB

SJB

HRB

HSB CQRCB

NJB

NBB

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

2015 1H 2014 1H

26


PwC

CCBs and RCBs recorded higher yield on investments

Most Listed Banks’ yield on investments remain unchanged in 1H 2015.

CCBs and RCBs’ yield on investments were higher than that of JSCBs and LCBs.

Most Listed Banks’ yield on interbank assets were lower in 1H 2015, as a result of the market liquidity stemming from PBoC’s growth-friendly monetary environment.

Figure 22 Yield on interest-generating assets – interbank activities

Figure 21 Yield on interest-generating assets – investments

BOCOM

ABC

CCB

ICBC

BOC

CIB

SPDB

HXB

CEB

CMBC

CMB

PAB

CITIC

BCQ

HRB

CQRCB

NJB

SJB

NBB

HSB

BOB

3.0%

4.0%

5.0%

6.0%

7.0%

2015 1H 2014 1H

BOCOM

ABC

BOC

ICBC

HXB

CIB

PAB

CEB CMB

HRB

BCQ

CQRCB

HSB

NBB

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2015 1H 2014 1H

27


PwC

Cost on interest-paying liabilities fell

Listed Banks’ cost on interest-paying liabilities presented different trends in 1H 2015.

Thanks to a large customer base, LCBs’ costs on interest-paying liabilities remained stable in 1H 2015.

However, costs for both JSCBs and CCBs in 1H 2015 were lower than 1H 2014, as the banks seized the opportunity to absorb funds from interbank markets rather than from retail customers.

The costs on deposits for Listed Banks rose in 1H 2015, as interest rate liberalisation deepened, and despite the fact that the PBoC cut the benchmark interest rates.

The cost on deposits rose for Most LCBs, except ICBC.

CMB, Citic, CEB, BOB and HSB all saw their costs on deposits fall in 1H 2015, compared to 1H 2014.

Figure 24 Cost on interest-paying liabilities – deposits

Figure 23 Cost on interest-paying liabilities – overall

BCQ

BOCOM

BOC ICBC

CCB ABC

PAB CEB

CIB

HXB

CMBC

CITIC

CMB

SJB

南京

HRB BOB

NBB

HSB

CQRCB

1.5%

2.0%

2.5%

3.0%

3.5%

2015 1H 2014 1H

BOCOM

BOC

CCB

ICBC

ABC

CIB

PAB

CEB

CMBC

CITIC

HXB

CMB

SJB

BCQ HRB

NJB BOB

NBB HSB

CQRCB

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2015 1H 2014 1H

28


PwC

Cost on interest paying liabilities - corporate and personal loans

Listed Banks’ cost on corporate deposits remained broadly stable in 1H 2015, with ABC, CIB, PAB, SJB, HRB and CQRCB rising slightly, and the rest either remaining unchanged or falling.

Citic and HSB’s cost on deposit recorded a relatively faster fall.

In terms of personal deposits, most Listed Banks saw an upward trend in costs during 1H 2015, most notably for CCBs and RCBs.

It is worth noting that CMB was not only among the few banks to see cost on deposits fall, but also had among the lowest cost on deposits of all Listed Banks.

In addition, both Citic and CEB saw lower cost on deposit in 1H 2015, than in 1H 2014.

Figure 26 Cost on interest-paying liabilities – personal deposits

Figure 25 Cost on interest-paying liabilities – corporate deposits

BOCOM

ICBC

CCB

ABC

PAB CEB

CIB

CMBC

CITIC

CMB

SJB

BCQ HRB

HSB

NBB

CQRCB

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2015 1H 2014 1H

NBB

BOCOM

CCB

ICBC

ABC

CEB

PAB CMBC

CITIC

CIB

CMB

SJB

BCQ

HRB

CQRCB

HSB

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2015 1H 2014 1H

29


PwC

Turing point 3：Deteriorating asset quality

The Listed Banks continued to experience deteriorating credit asset quality in 1H 2015, with the 21 banks’ non-performing loan (NPL) balance reaching RMB 857.90 bn, 27.12% more than in 2014.

The JSCBs recorded the highest growth rate in NPL balance, which was 28.80%, rising to RMB 196 bn in 1H 2015. The LCBs’ NPL balance grew 26.96% to RMB 642.60 bn. The CCBs’ NPL balance grew 22.15% to RMB 17.03 bn.

In millions As of 30 June 2015 As of 31 December 2014 Growth

ICBC 163,495 124,497 31.32%

CCB 144,359 113,171 27.56%

ABC 159,543 124,970 27.67%

BOC 125,053 100,494 24.44%

BOCOM 50,153 43,017 16.59%

Large Commercial Banks 642,603 506,149 26.96%

CMB 39,615 27,917 41.90%

CIB 22,203 17,544 26.56%

SPDB 27,742 21,585 28.52%

CITIC 30,476 28,454 7.11%

CMBC 26,423 21,134 25.03%

CEB 20,141 15,525 29.73%

PAB 15,729 10,501 49.79%

HXB 13,668 10,245 33.41%

Joint-stock Commercial Banks 195,997 152,905 28.18%

BOB 6,787 5,783 17.36%

NJB 1,942 1,639 18.50%

NBB 2,052 1,863 10.17%

SJB* 777 696 11.58%

HSB* 2,350 1,826 28.70%

HRB* 2,079 1,400 48.50%

BCQ* 1,039 732 41.99%

City Commercial Banks 17,027 13,939 22.15%

CQRCB 2,258 1,887 19.65%

All Listed Banks 857,885 674,880 27.12%

Table 3 Non-performing loan balance & growth

1.36% +0.22ppts

0.91% +0.07ppts

Large Commercial

Banks

1.49% +0.24ppts


City Commercial

Banks & Rural

Commercial Banks

NPL ratio, 30 June 2015

30


PwC

NPL ratio and balance continued to rise

The Listed Banks recorded an aggregate NPL ratio of 1.44% in 1H 2015, up .023 ppts from 2014.

The NPL ratio of most banks was higher in 1H 2015, than in 2014. The exception was SJB. The NPL ratio of CMB, PAB and ABC rose rapidly over the period.

Among all listed banks, SJB recorded the lowest NPL ratio.

The NPL balance of most Listed Banks grew by double-digit rates in 1H 2015, with PAB and HRB having the highest growth.

Figure 27 Change of NPL ratio

Figure 28 NPL balance growth, 1H 2015

ABC

CCB

BOC

ICBC

BOCOM

CMB CEB

CMBC

HXB

CITIC

PAB

CIB

SPDB

HRB

HSB

NJB

BOB BCQ

NBB

CQRCB

SJB

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2015 1H 2014

31%

28%

28% 24%

17%

50%

42%

33%

30%

29%

27%

25%

7%

48%

42%

29%

20%

19%

17%

12%

10%

ICBC

ABC

CCB

BOC

BO…

PAB

CMB

HXB

CEB

SPDB

CIB

CMBC

CITIC

HRB

BCQ

HSB

CQ…

NJB

BOB

SJB

NBB

31


PwC

Both corporate and personal NPL ratio deteriorated

By customer types, the LCBs recorded the highest NPL ratio for corporate loans in 1H 2015, followed by the JSCBs.

The CCBs and RCBs’ corporate NPL were relatively lower.

Most Listed Banks’ corporate NPL rose except Citic and CQRCB. CMB’s NPL ratio saw the most rapid rise. SJB’s corporate NPL remained the same.

Personal NPL was higher for most Listed Banks during 1H 2015. SJB, however; was lower.

Figure 29 Change of NPL ratio – corporate loan

Figure 30 Change of NPL ratio – personal loans

Note：HXB and NBB did not disclose this ratio.

Note：HXB and NBB have not disclosed change of NPL ratio for the period.

ICBC BOCOM ABC

BOC

CCB

PAB

CMBC CITIC

SPDB

CEB

CMB CIB

HRB

NJB

CQRCB

BCQ HSB

BOB

SJB

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

2015 1H 2014

ABC

BOC CCB

ICBC

BOCOM

CMB

CEB

CMBC

CIB

CITIC SPDB

PAB

HSB

BOB

BCQ

NJB

HRB

CQRCB

SJB

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2015 1H 2014

32


PwC

Special mention loans on the rise

Most Listed Banks’ loans classified as “special mention” (second class according to 5 tier loan classification) were on an upward trajectory in 1H 2015, with BOCOM and the JSCBs rising most significantly.

Smaller banks such as PAB, CEB and HXB recoded a relatively higher ratio for special mention loans.

3.61%

2.79%

4.13%

2.30%

3.24% 2.42% 2.73%

3.20%

3.92% 3.42%

4.31% 4.46% 4.30%

1.05%

2.30%

1.69%

1.11%

2.45% 2.05%

2.31% 2.57%

92%

93%

94%

95%

96%

97%

98%

99%

100%

Loss Doubtful Substandard Special mention Normal

Figure 32 Distribution of loans by 5-tier classification, as of 30 June 2015

Figure 31 Change of special mention loan ratio

ABC

ICBC

BOCOM

CCB

BOC

PAB

CEB

HXB

CITIC

CMBC SPDB

CIB

CMB

CQRCB

HSB

BCQ

NJB

HRB

NBB

SJB

BOB

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

2015 1H 2014

33


PwC

Overdue loans growing rapidly

Trends in overdue loans, another indicator of credit asset quality, suggest that risk is rising as most banks’ overdue loan balance and ratio were higher in 1H 2015 than in 2014.

BCQ recorded the highest growth in overdue loan balance, of nearly 200% in 1H 2015, while the overdue loan ratio rose by 2.43 ppts to 3.82%.

In addition, HXB, BOCOM, CMB, CIB and CMBC all saw their respective overdue loan ratios rise rapidly in 1H 2015.

Figure 33 Change of overdue loan ratio

Figure 34 Overdue loan balance growth, 1H 2015

BOCOM ABC

ICBC

CCB BOC

PAB

HXB

CEB CMBC

CITIC CIB

CMB

SPDB

BCQ

HRB

HSB

CQRCB

NJB

BOB NBB

SJB

0%

1%

2%

3%

4%

5%

6%

2015 1H 2014

78.33%

51.67%

43.41%

39.08%

37.37%

108.44%

62.21%

55.77%

57.36%

52.24%

31.78%

29.02%

9.01%

198.93%

130.46%

73.62%

72.53%

47.46%

30.07%

22.58%

-14.65%

BOCOM

CCB

ABC

BOC

ICBC

HXB

CIB

SPDB

CMB

CMBC

PAB

CEB

CITIC

BCQ

SJB

HSB

CQRCB

HRB

NJB

BOB

NBB

34


PwC

Loans that past due but not impaired increased

Most Listed Banks’ proportion of loans that past due but not impaired increased in 1H 2015, with JSCBs’ ratio rising notably. The ratio for LCBs, CCBs and RCBs were roughly the same.

Figure 36 Total credit risk exposures of loan, as of 30 June 2015

Figure 35 Change of past-due-but-not-impaired loans ratio

Note：BOC,CMB, SJB and BCQ did not disclose such information

BOCOM

ICBC ABC

CCB

PAB

HXB

CEB

CMBC

CITIC CIB

SPDB

HRB

CQRCB

HSB NBB

BOB CMB

NJB

BCQ

SJB 0%

1%

2%

3%

4%

2015 1H 2014

35


1.10% 0.65%

0.95% 1.67% 2.10% 1.52%

2.28% 2.53% 2.74%

3.79% 3.37%

0.57% 0.77% 0.66% 1.32%

2.23%

1.38%

Neither passed due nor impaired Passed due but not impaired Impaired

PwC

Overdue loans grew faster than NPL

ABC CCB BOC

ICBC

BOCOM CMB

CEB

CMBC

HXB

PAB CITIC

CIB

SPDB HRB

HSB

NJB

BOB

BCQ NBB

CQRCB SJB

0%

1%

2%

3%

4%

5%

6%

NPL ratio Overdue loan ratio

Figure 37 NPL ratio Vs. overdue loan ratio, 1H 2015

Figure 38 NPL growth Vs. overdue loan growth, 1H 2015

While NPL exhibits the current picture of banks’ credit asset quality, overdue loans can be a more useful indicator to predict future asset quality.

Both JSCBs and smaller CCBs’ had a much higher overdue loan ratios than NPL ratios.

The overdue loan growth at most of the Listed Banks had grown much faster than NPL in 1H 2015, which suggests the Listed Banks’ credit asset quality risk has not yet been fully exposed.

31% 28% 28% 24% 17%

42%

27% 29%

7%

25% 30%

50%

33%

17% 19%

10% 12%

29%

48%

42%

20%

37%

52% 43%

39%

78%

57% 62%

56%

9%

52%

29% 32%

108%

23% 30%

-15%

130%

74%

47%

199%

73%

NPL growth Overdue loan growth

36


PwC

Overdue loans with 90 days above increased

There is a commonly held belief that the longer an overdue period is, the lower the probability will be for the borrowers to repay loans. Analysis of the structure of overdue loans suggests that the bulk of overdue loans are those with overdue periods longer than 90 days.

Consequently, a bank’s credit asset quality might further deteriorate if overdue loans turn into non-performing loans.

46% 38% 39% 42%

36%

53%

43%

17%

54% 46% 49%

30% 37% 35%

57%

25%

49%

36%

60% 66%

55%

33% 43% 41%

58%

39%

37%

46%

56%

30% 44% 37%

47%

50%

29%

30%

55%

27% 55%

25% 25%

29%

15% 14% 14% 21%

8% 11%

26%

14% 10% 12%

22% 12%

28%

12% 18%

16%

9% 15% 7%

11%

5% 4% 6% 3% 1% 1% 1% 1% 1% 1% 2%

9%

1% 1%

7%

2% 4%

1-90 days 91 days -1 year 1-3 years over 3 years

Figure 39 Breakdown of overdue loans by days, as of 30 June 2015

Note：BOC only disclosed overdue loans by two categories: below 90 days and over 90 days.

37


PwC

Provision levels showed alarming signal

Provision levels of the Listed Banks showed an alarming signal in 1H 2015, according to two main indicators, namely; allowance to total loans ratio and provision coverage ratio.

The change for allowance to total loans ratios were small, with CMB, SPDB and PAB being relatively evident.

The provision coverage ratios at most Listed Banks were lower in 1H 2015, compared to 2014. This is due to an increasing loan impairment charges.

Ratios at BOC and CEB were very close to the regulatory threshold of 150%.

Figure 40 Allowance to total loans ratio

Figure 41 Provision coverage ratio

ABC

CCB

BOCOM BOC

ICBC

SPDB CMB

CIB

HXB PAB

CITIC

CMBC

CEB

CQRCB

NJB

BOB

NBB BCQ

HSB

HRB

SJB

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

2015 1H 2014

ABC

CCB BOCOM ICBC

BOC

SPDB

CIB

CMB HXB

PAB

CITIC

CMBC

CEB

SJB

CQRCB

NJB BOB

NBB

BCQ

HSB

HRB

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

500%

2015 1H 2014

38


PwC

Capital adequacy remains stable

Most of the LCBs’ had a higher core tier-1 capital adequacy ratio (CAR) in 1H 2015, than in 2014.

But some JSCBs and CCBs had a core tier-1 ratio that was lower in 1H 2015 than in 2014. This suggests small and mid-sized banks have been facing more pressure with regard to capital.

A number of Banks saw capital adequacy ratio (CAR) fall in 1H 2015.

Figure 42 Core tier 1 capital adequacy ratio

Figure 43 Capital adequacy ratio

CCB ICBC

BOCOM

BOC

ABC

CMB

CEB CMBC CITIC

PAB

HXB SPDB

CIB

HRB CQRCB

SJB

BCQ

HSB NJB

NBB

BOB

7%

8%

9%

10%

11%

12%

13%

14%

2015 1H 2014

CCB

ICBC

BOC

BOCOM ABC

CMB

CEB CITIC

CMBC

SPDB CIB

PAB

HXB

NBB HRB

NJB

BOB

CQRCB

SJB

HSB

BCQ

10%

11%

12%

13%

14%

15%

2015 1H 2014

39


PwC

Differentiated operating strategies • Overview

• Large commercial banks

• Joint-stock commercial banks

• City commercial banks & rural commercial banks

41


PwC

Overview: Income mix exhibited differentiated growth patterns

Figure 44 Operating income – by types, 1H 2015

71% 72% 80%

68% 73%

63%

76% 75%

71% 61%

71% 67%

82%

78%

82%

84%

80% 87%

81%

80%

93%

22% 20%

17%

21% 20% 30%

21% 21%

25% 33%

30% 29%

19%

19% 16%

19% 9%

12% 17% 18%

6%

8% 7% 3% 11% 6% 7% 3% 4% 4% 6% 4%

-1%

3% 2%

-4%

11% 1% 2% 2% 1%

Net interest income Net fee and comission income Other non-interest income

Note：Other non-interest income include: net trading gain/(loss),revaluation loss/(gain)

on financial instruments at fair value through profit or loss, net foreign exchange

gain/(loss), Other operating income.

China continued to push through economic structural reform and interest rate liberlisation in 1H 2015 under the “new normal” environment. Listed Banks’ profitability continue to slow as operating income growth slowed and risk on the rise.

Against this backdrop, we noticed that different groups of Listed Banks, i.e. Large Commercial Banks (LCBs), Joint-stock Commercial Banks (JSCBs), City Commercial Banks and Rural Commercial Banks (RCBs) have been adopting differentiated operating strategies.

Interest income is still Listed Banks’ major source of income. But as restrictions on interest rates continued to be lifted, most banks have been transforming themselves into a “less capital-intensive” business model by increasing the proportion of fee and commission income as well as investment income. As a result those banks have built a diversified business portfolio.

42


PwC

Overview: Income mix exhibited differentiated growth patterns (continued)

Figure 45 Operating income – by businesses, 1H 2015 Analysis of business segments suggested that most banks still heavily rely on corporate banking business except CMB and CQRCB.

The proportion of personal banking business for LCBs and JSCBs were higher than that of CCBs. Likewise, the proportion of personal banking business for LCBs were higher than that of JSCBs.

This was due to the fact that larger banks have a more extensive branch network and easier to build retail customer base.

45% 45% 53%

43%

54%

37% 50%

51% 58%

51%

66%

54% 59% 56%

48%

61%

33%

35% 34%

37%

29%

27% 43%

23%

28%

37%

25%

15%

9% 29% 5%

17%

20%

12%

32%

15% 13%

8%

21%

14% 14%

31%

18%

5%

17%

18%

35%

25%

37%

26%

31% 27%

35%

5% 8% 3%

8% 6% 5%

-4%

3% 7% 2% 1% 1%

Corporate banking Personal banking Treasury Others

43


PwC

Overview：assets & liabilities portfolio revealed differentiated strategies

51% 54%

48% 53% 51% 49%

33%

46% 49%

44% 46% 45% 51%

44%

27% 34% 32%

41% 38% 40% 38%

22% 21%

23%

20% 20% 25%

41%

34% 31%

17%

28%

22%

21%

24% 51%

49%

40%

32%

25%

29%

25%

8% 8%

10% 8% 9%

11% 13% 6% 5%

21%

11%

17% 12% 20%

10% 5%

14% 13%

19%

15% 22%

16% 14% 16% 14% 16% 12% 9% 11% 12%

11% 11%

12% 14% 10% 10% 9% 11% 12%

12% 14% 12%

3% 3% 3% 5% 4% 3% 4% 3% 3% 6% 3% 5% 2% 2% 2% 2% 2% 2% 6% 2% 2%

Loans Investments Interbank Cash&deposits with central bank Others

Figure 46 Total assets, as of 30 June 2015

78% 81% 82% 77%

68% 70%

51%

69% 72% 66% 68% 68%

73%

65% 69%

58% 65% 65%

72% 68%

72%

14% 12% 11%

14% 25% 22%

41%

23% 22%

25% 24% 25%

22%

23% 19%

21%

33%

23%

22% 26% 23%

1% 1% 1% 2% 2% 3% 5% 5% 4%

5% 5% 4% 2%

8% 9%

15%

1%

9% 2% 3% 3% 3%

1%

6% 5% 6% 4% 4% 4% 2% 2% 2% 5% 2% 2% 2% 3% 2%

6%

2% 2% 4% 3% 2%

Deposits Interbank Debt issued Due to central bank Others

Figure 47 Total liabilities, as of 30 June 2015

Listed Banks’ assets and liabilities revealed differentiated strategies too. As of 30 June 2015, 21 Listed Banks’ total assets were RMB 110.34 bn, up by 9.59% from the end of 2014. CCBs recorded the fastest growth followed by JSCBs, both of which grew at a double digit rate.

While loans were still the largest portion of LCBs’ assets, JSCBs such as CIB, and CCBs such as NJB, NBB and SJB have had investments to eb the largest portion.

44


PwC

Large commercial banks: Income mix remained stable

45% 45% 45% 48% 53% 54%

43% 45% 54% 51%

35% 33% 34% 35%

37% 36%

29% 27%

27% 27%

15% 18% 13%

12% 8% 7%

21% 22% 14% 18%

5% 3% 8% 5% 3% 3%

8% 6% 6% 4%

20151H

20141H

20151H

20141H

20151H

20141H

20151H

20141H

20151H

20141H

ICBC CCB ABC BOC BOCOM


Figure 49 Operating income – by business segments

71% 72% 72% 74% 80% 79%

68% 67% 73% 74%

22% 22% 20% 21% 17% 18%

21% 22%

20% 17%

8% 5% 7% 5% 3% 4% 11% 11%

6% 8%

20151H

20141H

20151H

20141H

20151H

20141H

20151H

20141H

20151H

20141H



Figure 48 Operating income – by income nature Compared with last year, LCBs income structure are generally the same in 1H 2015. BOC’s fee and commission income fell in 1H 2015. According to the bank, it was mainly due to the fulfilment of social responsibility and support of real economy and small and medium sized enterprises by waving service fee.

LCBs’ share of net interest in total operating income remained at around 73%.

Compared with JSCBs and CCBs, LCBs started earlier in diversification, with businesses ranging from securities, trust, fund, insurance, leasing other non-bank financial institutions. LCBs’ diversified business platform help them to deepen business interaction, actively promote cross-selling and product innovation, to enhance the synergy. In 1H 2015 LCBs insurance, leasing and other operating income increased by 32% compared with the same period in 2014. The growth was substantially higher than that of traditional banking business.

45


PwC

Large commercial banks: assets & liabilities grew steadily

51% 52% 54% 55% 48% 48%

53% 54% 51% 54%

22% 22% 21% 22%

23% 22% 20% 18%

20% 19%

8% 6% 8% 5%

10% 9% 8% 7% 9% 8%

16% 17% 14% 16% 16% 17% 14% 16% 16% 15%

3% 3% 3% 2% 3% 3% 5% 5% 4% 5%

20151H

2014 20151H

2014 20151H

2014 20151H

2014 20151H

2014



Figure 50 Change of total assets – large commercial banks Asset growth was relatively stable. Compared with 31 December 2014 LCBs total assets grew by 8.91% in 1H 2015 similar with the growth of 8.98% in 2014.

LCBs’ interbank assets and liabilities increased in share in 1H 2015. This was due to the market liquidity was ample in 1H 2015, most banks expanded their interbank businesses.

78% 82% 81% 83% 82% 84% 77% 75%

68% 70%

14% 10% 12% 9% 11% 8% 14% 14%

25% 23%

1% 1% 1% 1% 1% 1% 2% 2%

2% 2% 1% 1% 3% 2% 1% 1% 6% 7% 5% 6% 6% 6% 4% 6% 4% 4%

20151H

2014 20151H

2014 20151H

2014 20151H

2014 20151H

2014



Figure 51 Change of total liabilities – large commercial banks

46


PwC

Large commercial banks: assets & liabilities grew steadily (continued)

On top of their domestic business, LCBs have been fully embracing the government’s “building an open and new economy“ strategy, and respond positively to the "One Belt and One Road" initiative, as the pace of RMB internationalisation continued to promote a global strategy. As of June 30, 2015, BOC overseas branches across six continents in 42 territories, reaching 635 overseas branches. ICBC in 1H 2015 also added 61 overseas branches; CCB, BOCOM and ABC added five, four and one respectively.

ICBC acquire Standard Bank’s London Holdings Company and officially changed its name to ICBC Standard Bank. BOCOM has also completed the acquisition of a Brazilian banks in 1H 2015, Banco BBMS.A. The average income of overseas business of LCBs as proportion of total income rose from 3.5% in 1H 2014 to 4.6% in 1H 2015. As of 30 June 2015, LCB’s overseas business contributed 7% of pre-tax profit and 14.44% of total assets.

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Joint-stock commercial banks: fee & commission income rose in proportion

63% 64%

76% 76% 75% 79%

71% 73%

61% 67%

71% 74%

67% 71%

82% 84%

30% 28%

21% 22% 21% 18%

25% 21%

33% 28%

30% 23%

29% 22%

19% 14%

7% 8% 3% 2% 4% 4% 4% 6% 6% 5% 3% 7%

-1%

2%

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CMB CIB SPDB CITIC CMBC CEB PAB HXB


Figure 52 Operating income – joint-stock commercial banks JSCBs subject to capital and deposit base, in light capital business vigorously explore, intermediate business income accounted growing trend. From the income structure, in addition to CMB and CMBC, remaining six in the first half fee and commission income accounted for operating income exceeded last year, of which CIB, CEB, PAB and HXB is particularly significant, sustained investment bank CIB Asset management and wealth management fee income driven by growth. Meanwhile, the JSCBs in opening up new channels of connection, comply with the national implementation of the "Internet +" strategy, vigorously innovative mobile banking, direct banking, online payment, online banking, banks and other micro-channel network of financial products and services, and accelerate the transformation of the traditional outlets transformation, enhance the customer experience, and promote revenue growth.

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Joint-stock commercial banks: fee & commission income rose in proportion

Citic, CEB andPAB’s parent groups has financial full license, enabling them to generate synergies with other financial institutions within the group, such as PAB might have support from Ping An Group to obtain a large number of client resources through insurance companies, and bring in substantial income from cross-selling. CIB currently has a lease, trust, fund, consumer loans and other subsidiaries, and through the Trust has futures license; CMB and CMBC have lease and fund subsidiaries, allowing them to explore the potential of traditional banking business, leading to net interest income as proportion of operating continues to rise year on year.

Figure 53 Growth in Wealth management, agency,

custodian & other fiduciary services and bank

card business, 1H 2015

34.19%

63.51%

32.91%

13.02%

46.72%

53.28%

Large commercial banks Joint-stock commercialbanks

City commercial banks &rural commercial banks

Wealth management, agency, custodian & other fiduciary services

Bank card

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Joint-stock commercial banks: investments rose in proportion in total assets

Figure 54 Investment as proportion in total assets – joint-stock

commercial banks

JSCBs in 1H 2015 as a whole showed a decline in the proportion of loans and interbank and rise in investments.

In the downward interest rate environment, thanks to the central bank's liquidity easing, JSCBs leveraged more low-cost interbank funding, bonds and increased the trust beneficiary and other investment services so that the overall net interest margin compared with the same period last year were flat or rise.

28.49% 23.87%

2015 1H 2014

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Joint-stock commercial banks: eyes on overseas expansion

Figure 55 Change of total liabilities – joint-stock commercial banks In the new normal, JSCBs according to their actual circumstances take a different business strategy. Overall, the JSCBs, while maintaining the existing market share, and actively promote the group, integrated management, increase product innovation and channel innovation, started the globalization strategy.

Under the premise to ensure that the domestic market share, followed by larger JSCBs also state “One Belt and One Road" strategy, as well as the pace of internationalization of the RMB, he began to get involved in overseas markets. In addition to setting up a branch in Hong Kong, CMB has opened a branch in New York, Singapore, London representative office in Taiwan. SPDB is expected to open a number of overseas branches in the country’s thirteenth five-year plan period, the establishment of a working application CITIC London, Sydney and other areas in the overseas institutions are also in an orderly way.

70% 75%

51% 55%

69% 69% 72% 74%

66% 64% 68% 70% 68%

75% 73% 74%

22% 19%

41% 35%

23% 23% 22% 19%

25% 26% 24%

23% 25%

21% 22% 21%

3% 2% 5%

4% 5% 4%

4% 3% 5% 3%

5% 3%

4% 2% 2% 1% 1% 1%

1% 1% 1% 1% 1%

1% 1% 1% 4% 3% 2%

5% 2%

4% 2% 3% 5% 5% 2% 2% 2% 3% 2% 2%

20151H

2014 20151H

2014 20151H

2014 20151H

2014 20151H

2014 20151H

2014 20151H

2014 20151H

2014

CMB CIB SPDB CITIC CMBC CEB PAB HXB


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City commercial banks & rural commercial banks: fee & commission to be increased

78%

80%

82%

83%

84%

87%

80%

88% 87%

89%

81%

81%

80%

83% 93%

93%

19% 17% 16% 12% 19% 17% 9%

13% 12% 8% 17% 17% 18% 13%

6% 4%

3% 3% 2% 5%

-4% -4%

11%

-2%

1% 3% 2% 2% 2% 5% 1% 2%

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BOB NJB NBB SJB HSB HRB BCQ CQRCB


Figure 56 Operating income – by income nature Thanks to the completion of a number of CCBs IPO or private placement and to achieve rapid development of regulatory assets in 1H 2015, the growth in total assets increased by 13.92%, year on year, with revenue growth of 24.78%.

In terms of income structure, in addition to BOB, interest income accounted for 78.48%, the other CCBs accounted for more than 80%. Interest income for Listed Banks, accounting for a traditional loan interest income is lower, on average accounted for 49 percent, while joint-stock banks accounted for 59%, while the five LCBs was 70%. While investment in bonds, high-yield products accounted for interbank and non-standard assets was 47.6%. In the case of the economic downturn and the limited size of the loan, and increase investment in business investment in the city to improve their profitability.

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City commercial banks & rural commercial banks: income driven by corporate banking

Figure 57 Operating income – by business segments With respect to the strategic transformation started LCBs and JSCBs, CCBs relatively late, intermediate business income in the proportion of its overall revenue is still relatively low. 7 Ayutthaya net accounting firm intermediary business revenue accounted for 16%, 26% joint-stock banks, five state-owned banks was 20%. But we still see that the first half of 2015, in the middle of CCBs income each year have been rapid growth in financial services revenue grew by 135%, reflecting the development of CCBs wealth management business. NJB to achieve intermediate business income doubled year on year, bond underwriting and other investment banking has formed a characteristic in the industry.

66% 66%

54%

64%

46%

54% 59%

74%

56% 54% 48%

44%

61% 64%

33% 35%

15% 17%

9%

11%

29%

25%

5%

5%

17% 26%

20% 29%

12%

18%

32% 31%

18% 17%

35%

25% 25% 20%

37%

23% 26% 19%

31% 27% 27%

18%

35% 34%

1% 2%

-2%

1% 1% 1% 1%

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City commercial banks & rural commercial banks: investments remained high in assets

Figure 59 Change of total liabilities – city commercial banks &

rural commercial banks

65% 65% 69% 68%

58% 59% 65% 68% 65%

71% 72% 74% 68%

65% 72% 71%

23% 28% 19% 23%

21% 25%

33% 29%

23%

22% 22% 21%

26% 30% 23% 25%

8% 4% 9% 6%

15% 10%

1% 1%

9% 4% 2% 1% 3% 1% 3% 1% 0% 0% 3% 2% 2% 2%

6% 7% 2% 2% 2% 2% 4% 3% 3% 2% 2% 2%

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2014 20151H

2014 20151H

2014 20151H

2014 20151H

2014 20151H

2014 20151H

2014 20151H

2014



Figure 58 Change of total assets – city commercial banks &

rural commercial banks

44% 43%

27% 30% 34% 37%

32% 31%

41% 44% 38% 35%

40% 38% 38% 38%

24% 23% 51% 48%

49% 39%

40%

30%

32% 23%

25% 25%

29% 28% 25% 22%

20% 20%

10% 7% 5%

9% 14%

22%

13% 15%

19% 19%

15% 20% 22% 26%

10% 12% 10% 13% 9% 13% 11% 14% 12% 16%

12% 16% 14% 13% 12% 13%

2% 2% 2% 2% 2% 2% 2% 2% 2% 1% 6% 5% 2% 2% 2% 2%

20151H

2014 20151H

2014 20151H

2014 20151H

2014 20151H

2014 20151H

2014 20151H

2014 20151H

2014



Asset Allocation city commercial banks and agricultural firms are more dependent on investment business. Assets structure, loans accounted for ups and downs, but with the industry trend of investment and JSCBs the same, namely: investment rise, with the industry down.

The fastest growing asset classes in which the investment is NBB, SJBs and CMBs, the proportion of total assets have increased substantially.

NJB’s investment asset class expanding, due from banks and placements are also quite active, leading to its interbank assets accounted rise, not fall.

Although in recent years the pace of cross-regional business slowdown, some CCBs continue to develop the province of other surrounding cities. BOB, for example, have built a comprehensive business platform ranging from insurance, fund, consumer finance, leasing and rural banks. NJB has also established fund, asset management, private equity fund, and rural banking business.

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Features

• Exploring securitisation of banks’ NPL assets

• How can privately-owned banks compete?

• Managing shareholder value through a multi-factor approach

• How can banks deal with Internet finance?

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Exploring securitisation of banks’ NPL assets

With increasing uncertainty in the global economic recovery, as well as downward pressure on the domestic economy, banks are seeing more non-performing loans (NPLs), which in turn are impacting regional and domestic credit risks. In order to maintain a strong capacity for absorbing risk, Listed Banks are increasing provisions. However, due to the rapid growth of bad loans, the bank's provisions for coverage levels are still facing a downward trend. Consequently, in addition to traditional measures such as collection, transfer and write-offs, Listed Banks are having to explore a variety of new approaches to dispose of, and manage “bad assets”.

Since the third pilot asset securitization in May 2012, securitization has been gradually, but steadily advancing. Progress has been marked by the continuous development of institutions, active market participation, and an improvement of product recognition.

As a result of the rapid growth of the securitization business, together with the development of NPL, there will be a shift in the underlying assets of securitisation, from good to bad assets. In this environment, timely disposal of NPL by securitization will help to broaden the channels, facilitate the processing speed, and improve the asset quality of Commercial Banks.

Regarding regulatory policy, in May 2015, the State Council decided to further promote the securitization of credit assets, and spur reform and innovation to revitalize existing funds. The Deputy Director of the CBRC Prudential Regulation Bureau stated that although the securitization of credit assets so far used quality assets as underlying assets, there was no limit in asset classes. He also noted that, this year more consideration would be given to the prospect of allowing a NPL securitization pilot. Subsequently, during a policy briefing at the State Council, PBoC’s Deputy Governor, Mr. Pan, said that

securitization of NPL should draw on previous experience together with strong risk control.

As the securitisation of NPL involves assets structure, costs, product design, and a higher risk of default than normal assets, a higher standard of information disclosure as well as risk assessment are required. China, currently has limited historical data regarding the disposal of bad loans and lacks a comprehensive set of data to project future cash flows of NPL, as well as recovery timeframes. As a result, NPL securitisation will pose three key challenges:

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1. Structural Design

There are uncertainties with the allocation of NPL repayments due to a lack of cash flow estimations concerning underlying assets. It is unclear what degree of security the prioritised tranche might enjoy, as the proportion of the sub-class tranche remains uncertain. As a result, the pricing for each tranche remains uncertain.

2. Product sales

Due to the uncertainties that derive from the structural design, the sale of assets are challenging, as investors tend to demand higher returns. Further, since the Chinese asset securitisation market is still in early stages of development, investors are not familiar with the potential risks of each tranche, and are consequently more cautious when it comes to securitised products with NPL as underlying assets. This, in turn, leads to reluctance in accepting such products.

3. Confirmation of termination

The prerequisite of NPL termination is the full transfer of risk and return of the underlying assets to a third-party. If the issuing bank still holds the sub-class tranche for the sake of sales, the risk and return is not actually transferred.

These three challenges cannot be addressed overnight. However, there is a general expectation that that there will be issuers in the market willing to break the ice (in a relatively conservative manner), laying a more solid foundation for the future development of NPL securitisation. At the same time, banks in the securitisation of NPL should maintain close communication with regulatory bodies to ensure compliance.

Key recommendations include;

Adding liquidity arrangements to the trading mechanism to ensure investors with priority are able to collect the repayment on time. This is particularly important as the timing of cash flow collection of the underlying assets is uncertain.

Issuing banks ensuring that contracts specify responsibilities when providing clear settlement services, as they are in the best position of understanding the NPL borrowers circumstances. For example, this could include collateral, where the guarantor and the property controlled by the guarantor could be used to ensure fulfilment of the responsibilities, thereby, protecting the best interests of investors.

Further, Issuing banks can collect detailed information such as loss ratio, collection time, and discrepancies between expected and actual collection times. This information would help improve the cash flow model for NPL, assist with more accurate estimates of the cash flow, and improve capacity for designing and assisting pricing, leading to better matching of risk and returns for investors.

Future development of NPL securitization will take time. It will involve ongoing collaboration across the industry and close communication with regulatory bodies.

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How can privately-owned banks compete?

Bringing in private capital by allowing small and medium sized banks (privately-owned banks) to set up, helps improve the landscape of China’s banking sector by enhancing the competitiveness, and vitality of the markets. The emergence of privately-owned banks not only challenges the existing banks’ operating model, but also puts a fresh onus on innovation. What remains to be seen is the differentiated operating strategies and sustainable growth of privately-owned banks. In addition, further deregulation will be required to fully unleash these banks’ technological potential.

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State Council: "2015 Government Work

Report." Presented the conditions

required to continue to promote private

capital according to the law, facilitating

the establishment of small and medium

sized banks and other financial

institutions.

CBRC announced the first batch of

five private banks in a pilot

approved by the State Council,

marking the official launch of the

private banking pilot.

State Council: "Opinions on

Encouraging and Guiding Healthy

Development of Private Investment."

2010.05 State Council: "Opinions on Support and

Encouragement of Private and Other

Non-public Economic Development."

2005.02

CBRC: "Implementation Opinions on

Encouraging and Guiding Private Capital

into the Banking Sector."

2012.05

State Council “Guidance on

Financial Support for Economic

Restructuring and Transformation."

Related to the establishment of

privately-owned banks assuming

their own risk.

2013.07

CBRC "Guiding Opinions on Promoting the

Development of Privately-owned Banks.", provided

clear policy guidance for privately-owned banks.

The first batch of five pilot banks all

opened for business.

CPC Central Committee: "Decision on

Deepening Reform." The Decision

officially made qualified private capital

legal, paving the way for the

establishment of small and medium

sized banks and other financial

institutions.

2013.11

2014.03

2015．03

2015.06

2015.06

In recent years, China has maintained a positive approach to guiding private capital into the banking sector. The State Council and the CBRC have issued a series of Opinions and Guidelines supporting private investment in the financial sector. A summary of the key developments are charted in the following timeline;

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With the implementation of a series of reforms, China continues to accelerate the

pace of financial reform and encourage establishment of privately-owned banks.

Increasing numbers of private shareholders are investing in privately-owned banks.

In light of banking reformation and transformation, privately-owned banks must

seize opportunities, while addressing key challenges.

Structural

reform of

banking sector

As privately-owned banks are rooted in the private sector, they

are well positioned to understand the key drivers and success

factors of the sector. This includes awareness of the needs of

small and medium sized enterprises as well as other target

customers, which complements the traditional, large banks by

providing customised products and services. At this stage, the

first five privately-owned banks remain in early stages of

business development, and are smaller in size, which makes it

difficult to challenge the competitive advantages of the

established banks.

Some privately-owned banks are look at how they can use the

Internet and other resource advantages to form new business

models that could break barriers set by the physical limitations

associated with traditional banking. However, the current

supervision requirements and policies are preventing a major

reshape of banking at this time. For example, current

regulations require customers to go a branch to open an

account. As a result "Remote Account Opening" and other bold

new concepts remain difficult to implement.

Innovative

operating and

business

models

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Initiatives such as "Made in China 2025“ and "Industry 4.0“ have placed focus on macroeconomic-oriented transformation in China's industry value chain. This includes the role of privately-owned banks, and their capacity to leverage their industry backgrounds and nuanced understanding to provide specialized, targeted financial services along the value chain. But privately-owned banks also need to enhance their approach to customer channel expansion, IT system investment, awareness and risk control to meet regional and industry levels.

Shareholders of privately-owned banks are more diversified and close to the industry, which helps to build a broad-based, loyal group of customers. Banks must also strike a balance between new business models and prudent supervision systems to ensure sustainable development remains at the heart of operations. Sustainability will require a number of factors including selection of the shareholders, the management of related-party transactions, competition as well as cooperation with other financial subsidiaries.

China's financial institutions have been rapidly adopting technology in recent years, especially in relation to payment platforms and enhancing customer experiences. The regulatory authorities may consider giving privately-owned banks approval to open accounts remotely, while lifting regional and other related restrictions.

Support value

chain upgrade

Sustainable

and

differentiated

strategies

Technological

breakthrough

requires

deregulation

Bringing in private capital by allowing the set up of small and medium sized banks (privately-owned banks) is helping to improve the landscape of China’s banking sector and enhance the competitiveness and vitality of the markets. The emergence of privately-owned banks not only challenges the operating model of existing banks, but also stimulates innovation across the sector. However, how sustainable growth of the differentiated operating strategies of privately-owned banks will be, remains to be seen.

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Managing shareholders’ values through a multi-factor approach

Chinese stock markets have been through a roller-coaster year since last summer, impacting hundreds of millions of domestic investors, as well as the global markets. Listed Banks’ stock price movement has been more than a matter of household wealth. It has involved the preservation and appreciation of state-owned financial capital. This section reviews 16 A-share listed banks’ stock returns from 1 July 2014 to 30 June 2015, the period in which the stock market was most turbulent, and views findings through a multi-factor approach. The analysis seeks to balance measures between so-called "good company" and "good stock". Although banks’ management cannot manipulate stock price movement, they are still advised to focus on these factors in delivering shareholder value.

When it comes to investment, the purpose for both individual and institutional investors’ are the same; a steady growth of portfolio. Historical experience shows that for the mid and long term, stock offers the highest risk-adjusted return of all financial assets – if you choose the right ones. So it all comes down to stock selection, to identify those top performers which can beat the market.

In this section, we look at 16 A-share listed bank stocks in Shanghai and Shenzhen. H-share stocks are not included as they are traded in a market with substantive differences spanning the investors’ preferences, risk appetites, and regulation. Nevertheless, the analysis uses internationally accepted factors to measure stock price performance.

Four banks outperformed

As the 16 banks are traded in Shanghai or Shenzhen markets, the CSI 300 index’s gain is used as the market rate of return. The results showed that in a 12-month period from 1 July 2014 30 June 2015, the CSI 300 index has risen by 106.05%. In the same period, only the returns from NJB, NBB, BOCOM and CEB’s were higher.

NJB’s return peaked at 186% during the period, and significantly outperformed the other three banks. NBB slightly outperformed the market followed by BOCOM and CEB.

The difference between the top performers and the majority of those lagging behind was substantial. For instance, NJB’s return was four times higher than the two lowest among the 16 bank stocks reviewed.

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Good company Vs. good stock

The rise and fall of stock prices are largely due to fundamental factors such as industry environment and a company’s financial results. In a developed market, investors should be able to distinguish between a "good company" and "good stock."

The so-called "good companies” refer to organisations with steady growth of earnings and dividends, good financial health and robust corporate governance. In the case of a "good bank”, criteria should include resilient NIM and NIS, sound asset quality, adequate provisions, a strong capital base, and quality customer service experiences. "Good stock" features would include a steady rise in price, reasonable valuation, ample liquidity and a loyal shareholder base.

"Good company" and "good stock" can be two sides of the same coin. They do not always equate to each other, but do tend to complement each other.

186%

131%

112% 110%

91% 87% 86%

83% 81%

73% 72%

65% 60%

56%

47% 47%

CSI 300 return106.05%

Figure 60 Listed Banks’ stock returns, July 2014 - June 2015

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Multi-factor management approach

Can a bank be a "good company“ and provide "good stock"? The following section tries to answer this question by introducing ten relevant factors, in an attempt to establish a comprehensive shareholder value management system. Findings are summarised as follows;

Figure 61 Multi-factor shareholder value management diagram

Dividend

ROE

Valuation

Liquidity

Volatility

Assets allocation

Diversity

Shareholders

Ownership

Earnings

Multi-factor

shareholder

value

management

Factor Proxy and description

Volatility Standard deviation of daily return - a higher

score is desirable

Liquidity Average daily trading amount – a higher score

is desirable

Valuation P/E – a lower score is desirable

ROE ROE – a higher score is desirable

Dividend Payout ratio – a higher score is desirable

Earnings Profit growth – a higher score is desirable

Ownership Stake of single largest shareholders – a lower

score is desirable

Shareholders Number of shareholders – a higher score is

desirable

Diversity Proportion of fee and commission income – a

higher score is desirable

Assets

allocation

Proportion of foreign exchange assets – a

higher score is desirable

Table 4 Proxy and description of each factor

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Analysis shows that the best performer was NJB, which achieved particularly strong results with regard to ROE, earnings and ownership. NBB scored well in volatility, earnings and ownership. BOCOM’s strength lies in the volatility and shareholders. CEB achieved a high score in volatility and liquidity while BOC thrived in shareholders, asset allocation and dividend.

The same approach was used to analyse underperformers. The results show that underperforming banks record relatively low scores in volatility and liquidity, in addition to having obvious weaknesses in other factors.

ABC recorded a high score in the shareholders category, as well as dividends and valuation, but did not appear to score highly as a diversified business. PAB was prominent in earnings and diversification, but other factors were not as strong. The advantages of ICBC and ABC were similar, both scoring well in asset allocation and diversification. Their weakness were also similar, such as ownership and earnings. CMBC showed strength in diversification, ownership and ROE, but had a low score for dividend. BOB demonstrated certain advantages in ownership and earnings, but showed room to improve in other factors.

Factors that are difficult to quantify

It is worth noting that the top five performers in stock returns all rank in the middle of our multi-factor assessment. This shows that the rise and fall of stock prices are also driven by some factors that can’t be measured directly. For example, effects from the mixed ownership reform outlook for BOCOM, CEB’s parent group, and the restructuring theme of BOC’s “One Belt and One Road."

So focusing purely on the fundamentals may not be enough to boost a company’s stock price. It is also important for management to relate a company’s growth story and development blueprint in a manner that is appealing to existing and potential investors.

Figure 62 Multi-factor analysis of top performers

股价波动

成交活跃

估值

净资产回报

现金分红

盈利增长

股权分散

股东基础

业务多元

资产配置

南京

宁波

交行

光大

中行

Valuation

ROE

Liquidity

Shareholders

Ownership

Earnings

Diversification

Assets allocation

Volatility

Dividend

NJB

NBB

BOCOM

CEB

BOC

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Banks face up to reform & innovation

Internet finance benefits from unique advantages brought about by information processing, including big data, cloud computing, and artificial intelligence. Such developments have enabled IT firms to enter into areas that had

previously been the domain of traditional banking, by providing new and enhanced experiences for customers. The changes are adding to the financial industry, though exerting more pressure on the traditional banking community.

How can banks deal with Internet finance?

Internet finance is playing a substantial role in the development of the domestic financial industry. Lending via the Internet has seen explosive growth since 2014, and has already led to myriad innovations with financial products. Indeed, new technology is constantly being developed and brought to market. This rapid expansion is applying pressure to traditional commercial banks. In 2015, as a consequence of external pressures including economic forces, increasing regulation, and rising awareness of risk among investors, there has been a convergence of Internet finance and traditional banking.

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1999 June,2012 2012 2012 2013

2013

2013 2014~2015

2014 2015

CMB launched “All In One Net”, which established an Internet service system including self- service banking, telephone banking and mobile banking.

CCB launched "E.CCB.COM", which relies on a self-built electric business platform to carry out small loans.

BOCOM launched “E-MALL BOCOM", which provides a one-step service to consumers via a binding bank payment function for commodity marketing.

CMB’s first joint Unicom launched mobile payment products called CMB mobile wallet.

CMBC launched its “Community Finance” strategy, which provides comprehensive family financial services for consumers. The move reflects when Traditional commercial banks began to use the Internet to establish credit intermediary platforms to provide financing services.

CMB and ICBC launched “WeChat banking”.

Banking’s explosive period for Internet innovation. New products emerge. Strong capital strength and market position enable banking to rapidly expand the Internet financial markets.

The first year for development of Internet finance, Alipay launched “Yu E Bao” in June, 2013.

The period of development and innovation, for Internet finance transforms into a phase of explosive growth.

Economic pressure, greater awareness of risks and new regulation underpin a trend of convergence in the Internet finance industry.

Figure 63 Commercial banks’ Internet practice and non-financial institutions’ cross-border

Internet finance practice

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The rapid development of Third-party payments offers a prime example of how the expanding role of Internet finance is encroaching on the intermediary business of Commercial Banks.

Commercial Banks have made full use of core strengths such as extensive customer bases, strong capital, and established reputations and are using these to set up their own online banking systems. Consumers can make inquiries, payments, remittances, and utilise other individual account functions at home at any time. The improved efficiency of Commercial Banks, based on the Internet and related technology, has also brought about reductions in costs. In short, Commercial Banks are using Internet technology to improve their efficiency and reduce costs.

Regulators have been monitoring the rapid rise of Internet finance, particularly as industry convergence accelerates and a range of policies are being considered. Traditional Banks should continue to adapt to Internet finance and stay at the forefront of the information technology evolution.

In order to meet the challenges and opportunities brought about by Internet finance, banking services should become more intricately combined with Internet finance instruments. This would spur more investment in technology and strengthen the advantages that Commercial Banks have in electronic banking, with developments notably in structural adjustments, data applications and risk management.

Structural adjustment: customer centric

business model

Banking has historically been a heavily regulated industry, and banks have traditionally adopted a relatively conservative approach to management. As a result, Commercial Banks face distinct challenges in adapting to the rapid changes brought on by Internet finance.

Banks will benefit from embracing advances in customer experience by implementing “Customer Centric” strategies. These should include;

Strategy

• Target customers, clearly outlining the bank’s competitive advantages.

• Coordination with other corporate strategies, generating input from the business units.

Management

• Establish consolidated customer segmentation, detailed criteria and a customer allocation mechanism, to fulfil customer needs and decrease internal cost.

• Amend product-oriented organisation structure and establish a “Customer Centric” customer management model.

2Big Data

Application

1Customer

Centric

3Risk

Management

PwC

• Tackle out-dated attitudes, for instance helping Business Units to appreciate benefits brought by customer management.

Execution and Support

• Establish standardised procedures for cross-line marketing, sales and services, and improve initiatives to attract high-value customers within business units.

• Adjust relevant motivating mechanisms to advance the customer management capabilities of front-line staff.

• Ensure sales opportunities are managed, allocated and followed-up effectively.

• Strengthen IT infrastructure and integrate customer recourses across the business.

• Develop system structure to be flexible and exclusively focused on the core business, while strengthening customer analysis capabilities and expediting customer operations.

The Internet finance industry is characterized by intense competition, rapid product updates and short life cycles. Conversely, many processes at Commercial Bank can be lengthy, with a range of constraints that stem from a compliance culture and involving various business elements that emphasize specification, and include monitoring measures, such as business license and post-supervision, as well as system control. As a result it is often difficult to respond quickly to customer requirements or innovate new solutions. Corporate cultures impact innovation. As banks and Internet finance combine more closely, organisations need to consider how to ensure the business is “Customer Centric.”

A potentially productive approach could entail establishing separate subsidiaries with more agile

management that are attuned to identifying customers’ potential requirements, for instance, with regard to consumption and investment. This information would enable design of more efficient operating frameworks, with innovative financial products that are more closely aligned to the evolving needs of customers.

Data applications: utilize data and strengthen big data applications

The rapid development of information technology, data management, and applications will continue to impact the financial service industry, in tandem with clients’ demands and the evolving market environment. Big data will play a pivotal role in the banking industry. Analysis based on big data will be a very important factor both for business development and risk management.

In addition, the release of BCBS’s “Principles for effective risk data aggregation and risk reporting” as well as CBRC’s “Fine Standard of Banks’ Regulatory Statistical Data Quality Management” and “Directive on Capital Management Rules (Trial Version)” also reflect the regulators’ high expectations in this area.

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2Big Data

Application

1Customer

Centric

3Risk

Management

PwC

A massive amount of data that banks have can and should be channelled into the data service system across each bank’s entire network. Banks should also be looking at converting business procedure data into management information to support business management and decision making. Establishing a fully integrated and multi-risk datamart would ensure bank-level data storage would be well-ordered and supportive of a range of risk management applications. A further benefit would be enhanced convenience for analysing data across business lines. Setting-up a long-term mechanism to monitor and improve the quality of risk data and to safeguard the accuracy, completeness, comprehensiveness, timeliness and flexibility of risk data should also be a priority for banks. In addition, designing applications for risk data as part of a big data strategy would open new opportunities for banks. Applications could span areas such as customer analysis, risk analysis, enterprise operations and performance evaluation.

Broaden the remit of risk management

Commercial Banks are an essential component of the financial system and play a critical role in maintaining financial stability. The risk management level of Commercial Banks affects the whole system for risk prevention and control capacity at Commercial Banks. The credit of large state-owned Commercial Banks and Joint-stock Banks are the most widely recognized,

especially in China. Each Commercial Bank will have to incorporate the new risks associated with Internet finance into their overall risk system, in reference to respective risk tolerance frameworks. This is particularly important given the role of Commercial Banks in securing financial stability, and consequently represents an area where development of internet finance offerings by Commercial Banks differs notably from those of non-financial organisations. As a result of structural adjustment and applications utilising big data, banks can consider developing a range of tools for risk data analysis. Comprehensive risk data would, among other things, support banks in undertaking risk modelling, model validation and monitoring, which would support comprehensive risk management reporting, regulatory reporting, and public disclosure. In addition to setting up criteria for risk management reporting, banks would also see advantage in developing of comprehensive, clear and forward-looking risk reports from the perspective of both risk control and performance enhancement. Establishing a reporting mechanism for risk management reports could include aspects such as setting reporting requirements, procedures, frequency, and confidentiality. The Internet finance sector should be appropriately managed. Looking ahead, we should be careful not to be penny wise, pound foolish.

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2Big Data

Application

1Customer

Centric

3Risk

Management

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PwC

Outlook

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PwC

Three policy recommendations to seize the opportunities in challenging environment

Some banks’ 2015 full-year net profit might be "zero growth" or "negative growth". Interest rate cuts will continue to challenge banks’ pricing ability on the asset side. With the interest rate liberlisation almost completed, banks’ cost control on liabilities side might face higher requirements. Special-mentioned class loans and overdue loans will continue to be converted to non-performing loans, causing further pressure to banks’ asset quality. A-share market will continue to fluctuate, with the expectation of RMB exchange rate depreciation building up. market risk and liquidity risk management for banks are more challenging than ever.

Profit growth continue to

slow

The global economy is still in the recovery process. We expect the recovery in 2H 2015 will be as divergent as the 1H and uncertainty will continue to be the main feature: while growth in developed economies will accelerate, emerging market economies’ growth will continue to slow.

China’s downward pressure calls for structural reform and manufacturing upgrading. Banks operating environment remains challenging. It is expected to they will continue to face the following challenges:

NIM & NIS narrowed

further

Credit asset quality

deterioration

More Challenges in

risk management

That said, opportunities come hand in hand with challenges. The launch of the a series of national initiatives such as One Belt and One Road, the joint development of Beijing, Tianjin and Hebei, the Yangtze River economic belt, Made in China 2025, Internet+ etc. , offer banks a broader stage for development.

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Listed banks non-performing assets still remain on its balance sheet, and the existing disposition approach is not conducive to defuse the quality of risk assets.

We suggested that the relevant policy-makers should "revitalize" the perspective of non-performing assets by opening markets, i.e. allowing those who willing to invest or have the ability to digest these bad assets, regardless domestic or foreign capital , to enter the market, as well as encouraging new securitization disposal.

In the early stages of market opening up. Product design, investor suitability and relevant laws and regulations need to be put in place.

Short term – Explore viable NPL disposal alternatives

As such, we proposed that the Listed Banks and regulators in the short, medium and long term, to focus on the following three aspects to ensure the sustainable development of the banking sector.

Mid term – Embrace the government

initiatives

Long term – Secure a

landscape for industry

development

“One Belt and One Road" and "Made in China 2025" and other initiatives currently proposed by the Government, will be the new growth engine in the medium and long term.

Banks should actively follow up these initiatives, supporting domestic enterprises to implement industrial restructuring, industrial upgrading; externally banks should expand international presence in order to provide funding to companies and projects that in line with "One Belt and One Road" strategic enterprises, to help them "going out" .

To support the real economy, the development of an inclusive financial system, banks cannot do it single-handedly. Current internet financial institutions and privately-owned banks are just emerging, which are good supplement besides banks, to provide financial products and services to enterprises and individuals.

Following the release of the Internet Finance Regulatory Guidance, related government departments should draft the implementation details to encourage and nurture related businesses, and be tolerant to their development.

As privately-owned banks are new kind of financial institution, supervision should be flexible enough to create space for their development.

Regulators in the development of policy, should be in-depth study of new industry characteristics, risks and advantages, having a good grasp of regulatory standards, controlling risks without restricting the development of these new financial institutions and ensuring they have equal opportunity to participate market in competition.

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Appendix

• Financial highlights of Listed Banks

• Definitions

• Banking and Capital Markets Contacts

• PwC Offices in China

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Financial highlights of Listed Banks (I)

Operating Results in 1H 2015 ICBC CCB ABC BOC BOCOM LCBs Total

Operating income 356,242 311,042 274,147 239,561 96,722 1,277,714

Net interest income 252,087 224,619 219,493 163,391 71,059 930,649

Non-interest income 104,155 86,423 54,654 76,170 25,663 347,065

Net fee & commission income 77,120 63,645 47,643 50,044 19,386 257,838

Other non-interest income 27,035 22,778 7,011 26,126 6,277 89,227

Operating expenses (162,893) (143,094) (141,343) (115,574) (48,742) (611,646)

Business tax and surcharges (21,667) (18,234) (15,059) (13,549) (7,290) (75,799)

Business & administration

expenses (79,550) (68,809) (81,063) (59,533) (24,506) (313,461)

Allowance for impairment losses (41,951) (41,249) (39,321) (28,576) (12,045) (163,142)

Other business expenses (19,725) (14,802) (5,900) (13,916) (4,901) (59,244)

Operating profit 193,349 167,948 132,804 123,987 47,980 666,068

Profit before tax 194,678 169,207 134,679 124,482 48,289 671,335

Income tax expense (45,252) (36,963) (30,115) (29,496) (10,783) (152,609)

Net profit 149,426 132,244 104,564 94,986 37,506 518,726

Non-controlling interests 405 349 249 4,240 182 5,425

Profit attributable to

shareholders 149,021 131,895 104,315 90,746 37,324 513,301

Large Commercial Banks (In RMB millions)

Financial Position,

as of 30 June2015 ICBC CCB ABC BOC BOCOM LCBs Total

Total assets 22,417,295 18,219,186 17,459,554 16,298,593 7,122,155 81,516,783

Loans and advances, net 11,374,947 9,889,596 8,346,156 8,700,360 3,623,674 41,934,733

Loans and advances 11,642,085 10,157,079 8,727,449 8,897,154 3,709,152 43,132,919

Less: Allowance for impairment losses (267,138) (267,483) (381,293) (196,794) (85,478) (1,198,186)

Investments 4,882,824 3,802,132 4,018,438 3,288,382 1,422,010 17,413,786

Interbank assets 1,823,420 1,431,466 1,788,927 1,263,529 652,691 6,960,033

Cash & deposits with central bank 3,615,260 2,617,781 2,829,814 2,248,752 1,111,252 12,422,859

Others assets 720,844 478,211 476,219 797,570 312,528 2,785,372

Total liabilities 20,803,658 16,906,736 16,337,512 15,031,444 6,630,355 75,709,705

Deposits from customers 16,287,768 13,696,977 13,406,292 11,536,547 4,514,566 59,442,150

Interbank liabilities 2,893,708 2,056,124 1,748,194 2,166,567 1,635,484 10,500,077

Debt securities issued 284,903 211,547 209,317 268,727 133,432 1,107,926

Due to central bank 332 40,099 1,705 403,588 63,724 509,448

Other liabilities 1,336,947 901,989 972,004 656,015 283,149 4,150,104

Total owners’ equity 1,613,637 1,312,450 1,122,042 1,267,149 491,800 5,807,078

Non-controlling interests 10,612 11,020 1,713 47,064 3,021 73,430

Total equity attributable to equity

shareholders 1,603,025 1,301,430 1,120,329 1,220,085 488,779 5,733,648

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Financial highlights of Listed Banks (II)

Operating Results in 1H 2015 CMB CIB SPDB CITIC CMBC CEB PAB HXB JSCBs Total

Operating income 104,135 72,258 70,701 70,038 76,902 45,538 46,575 28,328 514,475

Net interest income 66,104 55,120 52,940 49,744 46,994 32,105 31,118 23,241 357,366

Non-interest income 38,031 17,138 17,761 20,294 29,908 13,433 15,457 5,087 157,109

Net fee & commission income 31,097 14,922 14,693 17,480 25,145 13,558 13,722 5,335 135,952

Other non-interest income 6,934 2,216 3,068 2,814 4,763 (125) 1,735 (248) 21,157

Operating expenses (60,997) (36,809) (39,490) (39,928) (41,597) (24,063) (31,308) (15,942) (290,134)

Business tax and surcharges (6,266) (5,964) (4,493) (5,065) (5,047) (3,543) (3,380) (2,075) (35,833)


expenses (25,414) (14,715) (14,292) (18,172) (21,025) (12,081) (15,005) (10,368) (131,072)

Allowance for impairment losses (29,171) (15,846) (20,292) (16,691) (15,011) (8,387) (12,923) (3,491) (121,812)

Other business expenses (146) (284) (413) - (514) (52) - (8) (1,417)

Operating profit 43,138 35,449 31,211 30,110 35,305 21,475 15,267 12,386 224,341

Profit before tax 43,384 35,582 31,526 30,120 35,529 21,490 15,259 12,416 225,306

Income tax expense (10,215) (7,598) (7,400) (7,151) (8,257) (5,223) (3,674) (3,104) (52,622)

Net profit 33,169 27,984 24,126 22,969 27,272 16,267 11,585 9,312 172,684

Non-controlling interests 193 240 223 383 494 26 - 49 1,608


shareholders 32,976 27,744 23,903 22,586 26,778 16,241 11,585 9,263 171,076

Joint-stock Commercial Banks (In RMB millions)

Financial Position,

as of 30 June2015 CMB CIB SPDB CITIC CMBC CEB PAB HXB JSCBs Total

Total assets 5,221,221 5,125,903 4,603,740 4,561,277 4,301,073 3,000,336 2,570,508 1,917,232 31,301,290

Loans and advances, net 2,565,277 1,673,831 2,106,342 2,253,593 1,906,497 1,386,947 1,159,045 985,727 14,037,259

Loans and advances 2,646,157 1,722,946 2,174,434 2,308,003 1,949,336 1,418,201 1,187,834 1,011,014 14,417,925

Less: Allowance for

impairment losses (80,880) (49,115) (68,092) (54,410) (42,839) (31,254) (28,789) (25,287) (380,666)

Investments 1,305,284 2,082,646 1,559,275 1,429,531 745,190 844,377 555,498 395,859 8,917,660

Interbank assets 593,451 688,062 286,529 227,928 922,556 344,234 439,280 226,826 3,728,866

Cash & deposits with central

bank 621,035 467,479 505,979 532,917 473,449 344,523 298,618 276,285 3,520,285

Others assets 136,174 213,885 145,615 117,308 253,381 80,255 118,067 32,535 1,097,220

Total liabilities 4,888,303 4,834,473 4,314,744 4,270,195 4,012,760 2,791,880 2,419,628 1,805,434 29,337,417

Deposits from customers 3,441,792 2,445,022 2,988,843 3,081,463 2,628,626 1,894,576 1,655,112 1,320,604 19,456,038

Interbank liabilities 1,096,782 2,005,840 985,580 931,266 1,003,638 666,355 592,978 397,368 7,679,807

Debt securities issued 142,466 250,145 212,802 161,537 180,901 152,372 108,254 31,221 1,239,698

Due to central bank 25,000 40,000 40,897 10,050 6,432 11,040 2,921 17,520 153,860

Other liabilities 182,263 93,466 86,622 85,879 193,163 67,537 60,363 38,721 808,014

Total owners’ equity 332,918 291,430 288,996 291,082 288,313 208,456 150,880 111,798 1,963,873

Non-controlling interests 843 3,407 3,300 8,081 8,034 531 - 690 24,886

Total equity attributable to

equity shareholders 332,075 288,023 285,696 283,001 280,279 207,925 150,880 111,108 1,938,987

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Financial highlights of Listed Banks (III)

Operating Results in 1H 2015 BOB NJB NBB SJB* HSB* HRB* CQB* CRCB* CCBs &

RCBs total

Operating income 21,518 10,915 9,007 6,990 7,707 5,514 4,263 10,528 76,442

Net interest income 16,887 8,921 7,598 5,626 6,700 4,452 3,412 9,772 63,368

Non-interest income 4,631 1,994 1,409 1,364 1,007 1,062 851 756 13,074

Net fee & commission income 3,986 1,793 1,743 620 902 946 766 684 11,440

Other non-interest income 645 201 (334) 744 105 116 85 72 1,634

Operating expenses (8,745) (6,306) (4,569) (2,819) (3,752) (2,753) (1,825) (5,388) (36,157)

Business tax and surcharges (1,443) (836) (506) (697) (602) (442) (276) (725) (5,527)


expenses (4,259) (2,315) (2,709) (1,231) (1,343) (1,554) (1,016) (3,421) (17,848)

Allowance for impairment losses (3,034) (3,123) (1,348) (891) (1,807) (757) (533) (1,241) (12,734)

Other business expenses (9) (32) (6) - - - - - (47)

Operating profit 12,773 4,609 4,438 4,171 3,955 2,761 2,438 5,140 40,285

Profit before tax 12,748 4,633 4,437 4,171 4,005 2,785 2,439 5,140 40,358

Income tax expense (2,686) (1,032) (869) (970) (932) (653) (601) (1,221) (8,964)

Net profit 10,062 3,601 3,568 3,201 3,073 2,132 1,838 3,919 31,394

Non-controlling interests 26 33 16 7 6 30 - 32 150


shareholders 10,036 3,568 3,552 3,194 3,067 2,102 1,838 3,887 31,244

City Commercial Banks & Rural Commercial Banks (In RMB millions)

Financial Position,

as of 30 June2015 BOB NJB NBB SJB* HSB* HRB* CQB* CRCB*

CCBs &

RCBs total

Total assets 1,624,228 731,302 657,313 588,290 575,156 391,787 282,810 672,781 5,523,667

Loans and advances, net 713,919 197,306 225,900 188,428 236,487 149,761 112,995 254,905 2,079,701

Loans and advances 736,992 204,049 231,683 191,854 241,983 153,152 115,767 264,601 2,140,081

Less: Allowance for

impairment losses (23,073) (6,743) (5,783) (3,426) (5,496) (3,391) (2,772) (9,696) (60,380)

Investments 386,456 373,532 321,626 235,838 185,639 97,603 82,453 170,274 1,853,421

Interbank assets 326,235 71,971 35,550 84,760 73,457 74,944 41,844 150,664 859,425

Cash & deposits with central

bank 169,922 71,263 61,575 67,159 69,809 47,092 40,368 83,944 611,132

Others assets 27,696 17,230 12,662 12,105 9,764 22,387 5,150 12,994 119,988

Total liabilities 1,520,725 686,971 619,209 550,023 536,257 360,567 265,621 627,860 5,167,233

Deposits from customers 981,337 476,256 358,183 354,900 349,426 258,229 181,479 454,699 3,414,509

Interbank liabilities 352,410 132,813 127,337 179,569 125,686 78,576 69,600 143,864 1,209,855

Debt securities issued 120,371 59,433 95,487 3,100 50,127 8,495 6,774 17,461 361,248

Due to central bank 20,035 2,350 - - 160 919 - 382 23,846

Other liabilities 46,572 16,119 38,202 12,454 10,858 14,348 7,768 11,454 157,775

Total owners’ equity 103,503 44,331 38,104 38,267 38,899 31,220 17,189 44,921 356,434

Non-controlling interests 244 355 89 441 1,165 697 - 1,454 4,445

Total equity attributable to

equity shareholders 103,259 43,976 38,015 37,826 37,734 30,523 17,189 43,467 351,989

* SJB, HSB, HRB, CQB, CRCB are listed in Hong Kong Exchanges.

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Financial highlights of Listed Banks (V)

Financial Ratios for 1H 2015 ICBC CCB ABC BOC BOCOM

Profitability (Jan - Jun 2015)

Return on average total assets (ROA) 1.39% 1.51% 1.25% 1.20% 1.12%

Return on weighted average equity (ROE) 18.86% 20.18% 19.96% 16.31% 15.24%

Net Interest Spread (NIS) 2.34% 2.48% 2.61% 2.03% 2.10%

Net Interest Margin (NIM) 2.53% 2.67% 2.78% 2.18% 2.27%

Cost to income ratio 22.33% 23.23% 29.57% 24.85% 25.69%

Income Mix (Jan - Jun 2015)

Net interest income 70.76% 72.22% 80.06% 68.20% 73.47%

Non-interest income 29.24% 27.78% 19.94% 31.80% 26.53%

Fee and commission income 21.65% 20.46% 17.38% 20.89% 20.04%

Other non-interest income 7.59% 7.32% 2.56% 10.91% 6.49%

Asset Quality (As of 30 Jun, 2015)

Non performing loan (NPL) balance, in millions 163,495 144,359 159,543 125,053 50,153

NPL ratio 1.40% 1.42% 1.83% 1.41% 1.35%

Overdue loan balance, in millions 289,274 202,053 238,951 175,158 111,482

Overdue loan ratio 2.48% 1.98% 2.74% 1.97% 3.01%

Allowance to total loans ratio 2.29% 2.63% 4.37% 2.68% 2.30%

Provision coverage ratio 163.39% 185.29% 238.99% 157.37% 170.43%

Capital Adequacy (As of 30 Jun, 2015)

Common Equity Tier 1 capital adequacy ratio 12.13% 12.35% 9.30% 10.63% 10.86%

Tier 1 capital adequacy ratio 12.40% 12.35% 10.02% 11.62% 10.86%

Capital adequacy ratio 14.17% 14.70% 12.95% 13.69% 13.12%

Total equity to total assets ratio 7.20% 7.20% 6.43% 7.77% 6.91%

Risk-weighted assets to total assets ratio 57.37% 57.58% 63.72% 63.47% 62.98%

Financial Ratios for 1H 2015 CMB CIB SPDB CITIC CMBC CEB PAB HXB

Profitability (Jan - Jun 2015)

Return on average total assets (ROA) 1.33% 1.17% 1.10% 1.06% 1.31% 1.13% 0.97% 0.99%

Return on weighted average equity (ROE) 20.40% 21.54% 18.70% 16.79% 20.98% 17.30% 15.77% 17.42%

Net Interest Spread (NIS) 2.60% 2.22% 2.22% 2.14% 2.19% 2.03% 2.57% 2.45%

Net Interest Margin (NIM) 2.77% 2.44% 2.42% 2.32% 2.35% 2.27% 2.71% 2.63%

Cost to income ratio 24.40% 20.76% 20.21% 25.95% 27.34% 26.53% 32.22% 36.60%


Net interest income 63.48% 76.28% 74.88% 71.02% 61.11% 70.50% 66.81% 82.04%

Non-interest income 36.52% 23.72% 25.12% 28.98% 38.89% 29.50% 33.19% 17.96%

Fee and commission income 29.86% 20.65% 20.78% 24.96% 32.70% 29.77% 29.46% 18.83%

Other non-interest income 6.66% 3.07% 4.34% 4.02% 6.19% -0.27% 3.73% -0.88%


Non performing loan (NPL) balance, in millions 39,615 22,203 27,742 30,476 26,423 20,141 15,729 13,668

NPL ratio 1.50% 1.29% 1.28% 1.32% 1.36% 1.42% 1.32% 1.35%

Overdue loan balance, in millions 82,933 58,120 60,322 82,786 75,643 58,245 60,612 47,579

Overdue loan ratio 3.13% 3.37% 2.77% 3.59% 3.88% 4.11% 5.10% 4.71%

Allowance to total loans ratio 3.06% 2.85% 3.13% 2.36% 2.20% 2.20% 2.42% 2.50%

Provision coverage ratio 204.17% 221.21% 245.45% 178.53% 162.13% 155.18% 183.03% 185.01%


Common Equity Tier 1 capital adequacy ratio 10.50% 8.15% 8.16% 8.98% 9.15% 9.24% 8.85% 8.71%

Tier 1 capital adequacy ratio 10.50% 8.95% 9.11% 9.03% 9.17% 10.23% 8.85% 8.71%

Capital adequacy ratio 12.40% 11.03% 11.11% 11.88% 11.57% 11.92% 10.96% 10.72%

Total equity to total assets ratio 6.38% 5.69% 6.28% 6.38% 6.70% 6.95% 5.87% 5.83%

Risk-weighted assets to total assets ratio 58.22% 62.62% 68.52% 69.79% 72.59% 67.21% 61.24% 66.86%

Large Commercial Banks


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Financial highlights of Listed Banks (IV)

City Commercial Banks & Rural Commercial Banks

Financial Ratios for 1H 2015 BOB NJB NBB SJB* HSB* HRB* CQB* CRCB*

Profitability (Jan - Jun 2015) Return on average total assets (ROA) 1.28% 1.10% 1.18% 1.17% 1.16% 1.16% 1.33% 1.21%

Return on weighted average equity (ROE) 19.98% 20.84% 19.70% 17.21% 16.55% 14.00% 22.40% 17.49%

Net Interest Spread (NIS) No data 2.49% 2.38% 2.02% 2.46% 2.43% 2.33% 3.04%

Net Interest Margin (NIM) No data 2.65% 2.39% 2.17% 2.68% 2.68% 2.58% 3.25%

Cost to income ratio 19.79% 21.20% 30.07% 17.61% 25.24% 28.18% 23.84% 32.50%


Net interest income 78.48% 81.73% 84.35% 80.50% 86.93% 80.74% 80.04% 92.82%

Non-interest income 21.52% 18.27% 15.65% 19.50% 13.07% 19.26% 19.96% 7.18%

Fee and commission income 18.52% 16.43% 19.35% 8.87% 11.70% 17.15% 17.97% 6.50%

Other non-interest income 3.00% 1.84% -3.70% 10.63% 1.36% 2.11% 2.00% 0.69%


Non performing loan (NPL) balance, in millions 6,787 1,942 2,052 777 2,350 2,079 1,039 2,258

NPL ratio 0.92% 0.95% 0.89% 0.40% 0.97% 1.36% 0.90% 0.85%

Overdue loan balance, in millions 10,906 3,242 3,468 1,138 5,510 5,484 4,423 5,210

Overdue loan ratio 1.48% 1.59% 1.50% 0.59% 2.28% 3.58% 3.82% 1.97%

Allowance to total loans ratio 2.83% 3.30% 2.50% 1.79% 2.27% 2.21% 2.39% 3.66%

Provision coverage ratio 306.97% 347.15% 281.79% 440.92% 233.88% 163.15% 266.76% 429.37%


Common Equity Tier 1 capital adequacy ratio 8.60% 9.41% 9.12% 9.99% 9.70% 12.02% 9.84% 9.32%

Tier 1 capital adequacy ratio 8.60% 9.41% 9.12% 9.99% 9.70% 12.02% 9.84% 9.32%

Capital adequacy ratio 11.51% 12.30% 12.64% 11.50% 11.24% 12.53% 11.16% 11.51%

Total equity to total assets ratio 6.37% 6.06% 5.80% 6.50% 6.76% 7.97% 6.08% 6.68%

Risk-weighted assets to total assets ratio 74.00% 64.11% 63.14% 64.89% 67.88% 66.08% 61.48% 69.69%

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Definitions

Terms Definition or formula

Non performing loan (NPL)

balance Refers to the sum of Substandard, doubtful and loss loans in accordance with 5-tier classification

NPL ratio NPL balance / Total loans and advances to customers × 100%

Overdue loan balance In case of one day overdue for any principal or interest, the whole loan is classified as overdue

Overdue loan ratio Overdue loan balance / Total loans and advances to customers ×100%

Provision coverage) ratio Allowance for impairment losses on loans / NPL balance ×100%

Return on average assets

(ROA) Net profit / average balance of total assets × 100% × annualised coefficient

Return on weighted

average equity (ROE)

Net profit / average balance of the sum of owner's equity and minority's interest × 100% × annualised

coefficient

Net interest margin (NIM) Net interest income / average balance of interest-earning assets × 100% × annualised coefficient

Net interest spread (NIS) Average yield of interest-earning assets - average cost of interest-bearing liabilities x annualised

coefficient

Other non-interest income Non-interest income other than net fee and commission income, including net income from treasury

business, fair value gains and losses of financial assets, income from other businesses, etc.

Cost-to-income ratio Business and administration expenses / operating income x 100%

Current ratio Current assets / current liabilities × 100%

Loan to deposit ratio Balance of loans / Balance of Deposits × 100%

Net capital base Net capital base calculated as stipulated by the Capital Rules for Commercial Banks (Provisional) and

other regulations

Tier-1 capital after

deductions

Tier-1 capital after deductions calculated as stipulated by the Capital Rules for Commercial Banks

(Provisional) and other regulations

Net core tier-1 capital Net core tier-1 capital calculated as stipulated by the Capital Rules for Commercial Banks (Provisional)

and other regulations

Capital adequacy ratio

(CAR)

Net capital base / (credit risk-weighted assets + market risk-weighted assets + Operational risk-

weighted assets + capital floor adjustment <only applicable to those who use Internal Ratings-Based

Approach for credit risk weighted average assets calculation> × 100%

Tier-1 CAR

Tier-1 capital after deductions / (credit risk-weighted assets + market risk-weighted assets +

Operational risk-weighted assets + capital floor adjustment <only applicable to those who use Internal

Ratings-Based Approach for credit risk weighted average assets calculation> × 100%

Core tier-1 CAR

Net core tier-1 capital / (credit risk-weighted assets + market risk-weighted assets + Operational risk-

weighted assets + capital floor adjustment <only applicable to those who use Internal Ratings-Based

Approach for credit risk weighted average assets calculation> × 100%

81


PwC

Banking and Capital Markets Contacts

Assurance Advisory Tax

Raymond Yung – Beijing James Chang – Beijing Oliver Kang – Beijing

Tel: +86 (10) 6533 2121 Tel: +86 (10) 6533 2755 Tel：+86 (10) 6533 3012

[email protected] [email protected] [email protected]

Margarita Ho – Beijing Addison Everett – Beijing Matthew Wong – Shanghai

Tel: +86 (10) 6533 2368 Tel: +86 (10) 6533 2345 Tel: +86 (21) 2323 3052


Richard Zhu – Beijing William Gee – Beijing Florence Yip – Hong Kong

Tel: +86 (10) 6533 2236 Tel：+86 (10) 6533 2269 Tel：+852 2289 1833


Jimmy Leung – Shanghai William Yung – Shanghai

Tel: +86 (21) 2323 3355 Tel：+86 (21) 2323 1984

[email protected] [email protected]

Michael Hu －Shanghai Matthew Phillips – Hong Kong Assurance – Risk & Quality

Tel: +86 (21) 2323 2718 Tel: +852 2289 2303

[email protected] [email protected] Tracy Chen – Shanghai

Tel: +86 (21) 2323 3070

Shirley Yeung – Guangzhou Chris Chan – Hong Kong [email protected]

Tel：+86 (20) 3819 2218 Tel：+852 2289 2824

[email protected] [email protected] Nigel Dealy – Hong Kong

Tel: +852 2289 1221

Charles Chow – Shenzhen [email protected]

Tel: +86 (755) 8261 8988

[email protected]

82


PwC

PwC Offices in China

83


Beijing Shanghai Hong Kong 26/F, Office Tower A, Beijing Fortune Plaza 11/F, PricewaterhouseCoopers Center, 2 Corporate Avenue 22/F, Prince's Building

7 Dongsanhuan Zhong Road, Chaoyang District 202 Hu Bin Road, Huangpu District Central, Hong Kong

Beijing, P.R.C Shanghai, P.R.C Tel: +852 2289 8888

Zip: 100020 Zip: 200021 Fax: +852 2810 9888

Tel: +86 (10) 6533 8888 Tel: +86 (21) 2323 8888

Fax: +86 (10) 6533 8800 Fax: +86 (21) 2323 8800

Shenzhen Guangzhou Tianjin 34/F, Tower A, Kingkey100 18/F, PricewaterhouseCoopers Centre 36/F, The Exchange Tower Two,

5016 Shennan East Road, Luohu District 10 Zhujiang Xi Road, Pearl River New City, Tianhe District 189 Nanjing Road, Heping District

Shenzhen, P.R.C Guangzhou, P.R.C Tianjin, P.R.C.

Zip: 518001 Zip: 510623 Zip: 300051

Tel: +86 (755) 8261 8888 Tel: +86 (20) 3819 2000 Tel: +86 (22) 2318 3333

Fax: +86 (755) 8261 8800 Fax: +86 (20) 3819 2100 Fax: +86 (22) 2318 3300

Dalian Qingdao Hangzhou 8F Senmao Building 37/F, Tower One, HNA IMC Centre Unit 3205, Canhigh Center

147 Zhongshan Road, Xigang District 234 Yanan Third Road, Shinan District 208 North Huancheng Rd

Dalian, P.R.C Qingdao, P.R.C Hangzhou, P.R.C

Zip: 116011 Zip: 266071 Zip: 310006

Tel: +86 (411) 8379 1888 Tel: +86 (532) 8089 1888 Tel: +86 (571) 2807 6388

Fax: +86 (411) 8379 1800 Fax: +86 (532) 8089 1800 Fax: +86 (571) 2807 6300

Chongqing Ningbo Xiamen Room 1905, 19/F Metropolitan Tower Room 1203, Tower E, Ningbo International Financial Center Unit B, 11/F, International Plaza

68 Zou Rong Road 268 Min An Road East, Jiangdong District 8 Lujiang Road, Siming District

Chongqing, P.R.C. Ningbo, P.R.C Xiamen, P.R.C.

Zip: 400010 Zip: 315040 Zip: 361001

Tel: +86 (23) 6393 7888 Tel: +86 (574) 8187 1788 Tel: +86 (592) 210 7888

Fax: +86 (23) 6393 7200 Fax: +86 (574) 8187 1700 Fax: +86 (592) 210 8800

Suzhou Nanjing Xi'an

Room 1501, Genway Tower Unit 12A01, Nanjing International Centre 7/F, Block D, Chang'an Metropolis Center

188 Wang Dun Road, Suzhou Industrial Park 201 Zhongyang Road, Gulou District 88 Nanguan Street

Suzhou, P.R.C Nanjing, P.R.C Xi'an, P.R.C

Zip: 215028 Zip: 210009 Zip: 710068

Tel: +86 (512) 6273 1888 Tel: +86 (25) 6608 6288 Tel: +86 (29) 8469 2688

Fax: +86 (512) 6273 1800 Fax: +86 (25) 6608 6210 Fax: +86 (29) 8469 2600

Macau Wuhan Shenyang 29/F, Bank of China Building Unit 04, 41/F Wuhan Wanda Centre Room 705, EnterpriseSquare Tower A

323 Avenida Doutor Mario Soares, Macau 96 Linjiang Avenue, Jiyuqiao, Wuchang District 121 Qingnian Avenue, Shenhe District

Tel: +853 8799 5111 Wuhan, P.R.C Shenyang, P.R.C

Fax: +853 8799 5222 Zip: 430060 Zip: 110013

Tel: +86 (27) 5974 5818 Tel: +86 (24) 2332 1888

Fax: +86 (27) 5974 5800 Fax: +86 (24) 2326 3888

www.pwccn.com

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

advisors.

© 2015 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.

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