Chinese Bankers Survey 2018...Chinese Bankers Survey 2018 We would like to take this opportunity to thank all those who participated in the survey. They spared time to complete questionnaires

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Chinese Bankers Survey 2018

Executive summary

January 2019


We are pleased to present the Chinese Bankers Survey 2018 report, prepared jointly by the China Banking Association (CBA) and PwC. Now in its tenth year, the report tracks developments in the sector from the perspective of Chinese bankers.

This year’s survey digs deep into the core issues while maintaining a broad scope. The CBA was responsible for project management, while Dr. Ba Shusong, together with the project team, interviewed bankers from typical financial institutions to get their insights into the sector. The interviews complement an online survey covering 31 provinces in mainland China (excluding Hong Kong, Macau and Taiwan), resulting in a broad representation of China’s banking sector as well as high quality and efficiency. The survey was conducted through online questionnaires, face to face interviews, telephone interviews and letters. The survey tracks internal and external economic conditions, and looks into hot topics and challenges facing the sector through extensive studies. With a total of 2,380 valid responses collected over eight months, large amount of real, accurate and valuable data have been collected.

The year of 2018 was the first year following the 19th National Congress of the Chinese Communist Party (the “19th Party Congress”), and the 40th anniversary of China’s Reform and Opening-up. It is also a critical year in implementing the 13th “Five-Year Plan”. The Central Economic Work Conference pointed out that upheavals remain despite a stable economy, given mixed external environment and downward pressure in economic growth. These concerns were echoed in the survey, as Chinese bankers’ satisfaction to macroeconomic policies was lower in 2018 than it was in previous years, averaging 4.04 points (on a scale of 1 to 5 points). This was 0.11 point lower than that in 2017. That said, most Chinese bankers are optimistic about the country’s economic growth, with the majority expecting a GDP growth of around 6.5%.

Preventing and mitigating financial risks have been on bankers’ radar. Risk management and internal controls continue to be focused areas in the survey. A comparison of the survey findings over the past 10 years reveals that “improving the capability of risk management and risk control” has been put at the heart of the operations and strategies of Chinese banks. More than 60% of respondents see the surge of non-performing loans as the main risk, while over 50% believe local government debt burden is a key risk area. The majority of respondents cite credit risk as their main concern and advocate stringent measures to strengthening pre-loan reviews, monitoring loans that have been granted, and establishing firewalls to prevent risks from spreading.

The Sino-US trade dispute intensified in 2018. More than 60% of respondents believe trade dispute is a threat for financial markets, as it will lead to higher depreciation pressure on CNY exchange rates and heightened volatility on capital markets. This will in turn jeopardise the effectiveness of the central bank’s neutral monetary policy or even bring downward pressure for the economy.

According to the survey, Chinese bankers are particular upbeat in two areas. The first being the rapid development of small and micro-sized enterprises (SMEs). Loans to those SMEs took 75.2% of banks’ new lending in corporate banking, remaining top business for seven consecutive years. This clearly showcases the adaptability, agility and innovation capability of those SMEs. The second area that bankers are confident with stems from the opportunity brought by FinTech. It is widely believed that FinTech has empowered various businesses in the form of lower costs, higher efficiency and better customer experience. Most bankers are committed to increase investment intechnologies such as data analytics, cloud computing and artificial intelligence. They are confident about the deep integration of FinTech with operations, data and the organisation.

Preface

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

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

PAN GuangweiExecutive Vice President,

China Banking Association

Daniel LiSenior Partner,

PwC Zhongtian LLP

Dr. BA ShusongProject Leader

December 2018, Beijing

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The report of the 19th National Congress of the Communist Party of China in October 2017 highlighted the importance of preventing systemic financial risks. The banking sector, which accounts for more than 80% of China’s financial assets, has become the central battlefield in this risk prevention. Banks’ risk management is under great pressure, as financial regulation tightens and the economy slows. The latest Chinese Bankers’ Survey, now in its tenth year, gives a comprehensive picture of how bankers view industry developments.

Bankers confident despite uncertainties

It is widely believed that the Sino-US trade dispute will impact the macro economy. Despite such uncertainties over the course of 2018, bankers remain confident about China’s growth, with most expecting a GDP increase of around 6.5%. The Belt & Road Initiative has challenged banks’ capacity to innovate. This is clearly on bankers’ radar, with as many as 60% regarding technological innovation as the hottest topic in finance and economics.

In terms of policy, Chinese bankers are positive about existing macroeconomic measures and expect more expansive fiscal policies in the future. Following the top leadership’s curbing of house prices in 2018, bankers are more confident about the real estate market in second-tier cities. Since preventing and mitigating major risks is the top priority of the “three critical battles”1 , almost 80% of respondents believe that the establishment of the Financial Stability and Development Committee has been helpful in cracking down on financial violations. Chinese bankers also expect slower growth in banks’ assets and liabilities, as risk prevention and deleveraging remain major themes.

Risk control as the key to transformation

Nearly 70% of respondents believe that strengthening risk controls is the most important part of banks’ transformation strategies. While banks continue to favour small and micro-sized enterprises, rural and small town-based customers have been targetted for the first time. Nearly 85% of respondents are diversifying their operations in order to develop in a changing macro environment, with shifting customer needs and tightening regulation on capital adequacy ratios. Most (65.3%) bankers have turned to “FinTech” in their search for asset-light development. As China seeks tofurtherdevelop its capital markets, most banks are consolidating and strengthening their investment banking capabilities, as well as developing transaction banking. More than 70% of respondents agree that the Belt & Road Initiative and Asia-Pacific Free Trade Area are important pillars for overseas expansion. Most bankers see opportunities for trade finance and offshore finance following the establishment of Hainan Free Trade Zone and Free Trade Port.

Business portfolios are shifting

Competition is intensifying as Chinese banks innovate and develop new revenue streams. Business portfolios are fairly balanced for large commercial banks, with traditional asset and liability business remaining core for the next three years. For joint-stock commercial banks, off-balance sheet and intermediary business is expected to become more competitive, given their flexible operations and greater ability to innovate. In terms of credit portfolios, business priorities are shifting steadily.

Executive Summary

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1 In the Report of the 19th National Congress of the Communist Party of China that published on 27 October 2017, “three critical

battles” were highlighted as priorities for Chinese government to address from 2018 to 2020. Apart from “preventing and mitigating

major risks”, the other two are “poverty alleviation” and “environmental protection”.


Urban infrastructure has been the most supported sector for the last four years, with real estate the most restricted. In corporate banking segment, loans to small and micro enterprises, supply chain finance and loans to large corporate clients are top business priorities. For the retail banking segment, consumer lending comes top, with personal business loans gaining momentum and jumping to second place. Inter-bank lending has cooled and “back to basics”, while financial leasing for residential property is booming.

Strengthening risk management and internal controls

While China’s growth faces domestic and international pressure, the country continues to restructure its economy and implement “supply-side structural reforms”. As new regulations2 continue to be released , the survey finds that Chinese banks are expected to strengthen their risk management and internal controls, while streamlining organisationalstructures, so as to live up to changing government policies.

Over 60% of respondents cite credit risk as their main concern. This has spread from industries with excess capacity to small and micro-sized enterprises. Chinese bankers are also more concerned about compliance risk at a time of strict regulation, compliance and accountability. A rebound in non-performing loan (NPL) ratios and local governmental debt burdens are two other areas that concern survey respondents.

More needs to be done to increase skills

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

headcounts over the next three years. This compares to just 12.4% in 2014. Most Chinese banks have put technical capability building at the heart of their strategies, leveraging these efforts as a means of broadening employees’ career paths. Only 14.9% have not yet started building such technical capabilities. While this is common practice among Chinese banks, challenges remain: over half of respondents (51.8%) believe that not enough effort is put into increasing the skills of their workforce.

Calling for more efficient capital management

Pressures on banks’ asset and liability management cited in the survey include the New Asset Management Rule (32.4%), Macro Prudential Assessment (20.4%), regulations on liquidity management (19.7%), the capital adequacy ratio (15.4%) and violation crackdowns (11.4%). Against this backdrop, the proportion of loans to assets has risen, so as the proportion of deposits. For most Chinese banks, pressure on capital comes from expansion in size (68.3%), and from common equity tier 1 capital (77%). While retained earnings is one way to replenish capital, the proportion of banks that can do this (52.8%) is diminishing as a result of slowing profit growth. Accordingly, most banks will ease capital replenishment pressures by strengthening their capability of asset quality management (69.7%), balancing the pace of asset growth and capital utilisation (61.4%), and migrating to asset-light business models (53.4%).

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

September 2018.


FinTech: partnering for success

FinTech became more widely accepted in 2018. FinTechs such as Ant Financial and JD Digits (formerly JD Finance) have emerged as a result of deep integration between financial services and technology. This has also driven financial institutions, especially banks, to increase investment in research and development. Chinese banks are exploring new paths and models to develop technologies such as data analytics, cloud computing and blockchain. Yet challenges remain, including market competition, technological barriers and legal constraints. While FinTech brings opportunities in the form of lower costs, higher efficiency and better customer experience, it also leads to more complex risk management and more intense competition. Nevertheless, most respondents believe there are more opportunities than challenges in FinTech. Chinese bankers are allocating more resources to FinTech and IT development. Going forward, it is expected that the partnership between Chinese banks and FinTechswill be closer and more varied.

More innovation needed in corporate governance and social responsibility

In terms of corporate governance, Chinese bankers believe that remarkable achievements have been made in data management and “party building”3. That said, there is still more to be done in ownership management, employee incentives and restrictions, the function of independent directors, risk management and internal controls.

Supporting small and micro sized-enterprises and alleviating poverty continue to be the priority areas for corporate social responsibility. Yet greater progress in these areas will require more innovative approaches.

Job satisfaction declines

In 2018, Chinese bankers were expected to address many challenges. These included the central Government’s calls to support the real economy, dealing with complex financial risks, and adapting to a tougher regulatory environment. As a result, Chinese bankers’ job satisfaction was lower than in previous years. In terms of life satisfaction, the results were mixed. The job satisfaction of bankers in Central China was much lower in 2018 than in the previous year. Most bankers believe that key performance indicators are not as effective in measuring management capabilities as they were. They also feel that the overall professionalism of bankers is diminishing. When it comes to barriers to career development, there are growing concerns about a lack of training and learning from peers. Inadequate performance review mechanisms, unattractive incentives and a lack of autonomy are other issues raised. While 59.5% of senior executives are not planning to resign, that still means that there are more than a third who are willing to pursue careers in other banking institutions should opportunities arise.

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3 Since 2015, Chinese leadership has re-emphasised the importance of Communist Party’s role in corporate governance. This attempt

to embed the Party’s presence in addition to the board of directors, the board of supervisors and the management is usually referred

to as “party building” in China.


Positive views of regulatory restructuring

As part of the financial reform process, the restructuring of the financial regulatory framework was concluded in 2018. Most Chinese bankers recognise the effectiveness of these changes and believe the merger of the banking and insurance regulators will help prevent and mitigate systemic financial risks. Under the “new normal” of tougher regulation and stricter sanctions, more than half of respondents are positive. They welcome the progress made by introducing tough measures on financial violations and deleveraging, although they see growing pressure on compliance and capital adequacy ratios. Chinese bankers are also aware of the pressure on non-performing loan ratios. They are concerned that the deterioration of asset quality could present a potential risk for banks’ operations and might even trigger a systemic crisis. Respondents call for more measures to identify and intervene in high-risk institutions at an early stage.

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

Upbeat about the future

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

The Central Economic Work Conference in 2018 concluded that China is, and will continue to be, in a period of strategic development opportunities. To seize these opportunities the country will need to build momentum and accelerate structural reforms and the upgrading of value chains. According to the survey, China will also need to adhere to structural deleveraging to ensure quality growth and prevent unnecessary turbulence and chain effects in financial markets. For banks, sustainable growth is expected to require stricter self-regulation and risk controls. Despite respondents’ optimism about the next three years, including higher provision coverage ratios, Chinese banks will have to improve their credit asset quality.

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

Participating Banks

1. Policy banks (3)

China Development Bank

The Export-Import Bank of China

Agricultural Development Bank of China

2. Large commercial banks (6)

Bank of China

Agricultural Bank of China

Industrial and Commercial Bank of China

China Construction Bank

Bank of Communications

Postal Savings Bank of China

3. Joint-stock commercial banks (12)

China CITIC Bank

China Everbright Bank

Huaxia Bank

China Minsheng Bank

China Merchants Bank

Industrial Bank

China Guangfa Bank

Ping An Bank

Shanghai Pudong Development Bank

Hengfeng Bank

China Zheshang Bank

China Bohai Bank

4. Foreign banks (21)

Australia and New Zealand Banking Group (China)

Chong Hing Bank

United Overseas Bank (China)

Deutsche Bank (China)

Bank of East Asia (China)

BNP Paribas (China)

Fubon Bank (China)

Korea Development Bank

Hana Bank (China)

Hang Seng Bank (China)

Citibank (China)

OCBC Wing Hang Bank (China)

HSBC Bank (China)

Scotiabank

Nanyang Commercial Bank (China)

Bank of Tokyo-Mitsubishi UFJ (China)

DBS Bank (China)

Bank SinoPac (China)

Woori Bank (China)

E.SUN Bank

Standard Chartered China

5. City commercial and private banks (65)

Baoshang Bank

Bank of Beijing

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Bank of Benxi

Bank of Chaoyang

Bank of Chongqing

Bank of Changsha

Bank of Dazhou

Bank of Dalian

Bank of Dandong

Ordos Bank

Bank of Fushun

Bank of Fuxin

Guangxi Beibu Gulf Bank

Bank of Guangzhou

Bank of Guizhou

Guilin Bank

Harbin Bank

Bank of Hainan

Bank of Handan

Hankou Bank

Bank of Hangzhou

Bank of Hebei

Huishang Bank

Yillion Bank

Bank of Jilin

Bank of Jiangsu

Jiangxi Bank

Bank of China Travel Service Jiaozuo

Bank of Jinzhou

Jincheng Bank

Jinshang Bank

Bank of Jiujiang

Bank of Kunlun

Bank of Lanzhou

Bank of Liaoyang

Longjiang Bank

Luzhou City Commercial Bank

Mianyang City Commercial Bank

Bank of Nanjing

Bank of Inner Mongolia

Bank of Ningbo

Panzhihua City Commercial Bank

Bank of Panjin

Bank of Pingdingshan

Qilu Bank

Qishang Bank

Bank of Shanghai

Bank of Shangrao

Bank of Shaoxing

WeBank

Shengjing Bank

Suining Bank

Bank of Taizhou

Bank of Tianjin

Bank of Tieling

Bank of Wenzhou

Bank of Wuhai

Bank of Urumqi

XW Bank

Bank of Yingkou

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Zhejiang Chouzhou Commercial Bank

Zhejiang Mintai Commercial Bank

Zhejiang Tailong Commercial Bank

Bank of Zhengzhou

China Resources Bank of Zhuhai

6. Rural financial institutions (20)

Guangdong Rural Credit Union

Guizhou Rural Credit Union

Gansu Rural Credit Union

Henan Rural Credit Union

Hubei Rural Credit Union

Hunan Rural Credit Union

Hainan Rural Credit Union

Jiangsu Rural Credit Union

Jiangxi Rural Credit Union

Liaoning Rural Credit Union

Sichuan Rural Credit Union

Shanxi Rural Credit Union

Shannxi Rural Credit Union

Yunnan Rural Credit Union

Zhejiang Rural Credit Union

Inner Mongolia Rural Credit Cooperative

Guangxi Rural Credit Union

Beijing Rural Commercial Bank

Shenzhen Rural Commercial Bank

Tianjin Rural Commercial Bank

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Financial Services

Matthew Phillips Jimmy Leung Florence Yip

Hong Kong and mainland China Financial Services Leader

China Financial Services LeaderHong Kong and mainland China Financial Services Tax Leader

+852 2289 2303 +86 (21) 2323 3355 +852 2289 1833

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

Banking & Capital Markets

Margarita Ho Peter PT Li Richard Zhu

China Banking & Capital Markets Leader

Hong Kong Banking & Capital Markets Leader

North China Financial Services Leader

+86 (10) 6533 2368 +852 2289 2982 +86 (10) 6533 2236


Linda Yip Michael Hu Vincent Yao

China Financial Services Partner China Financial Services Partner China Financial Services Partner

+86 (10) 6533 2300 +86 (21) 2323 2718 +86 (755) 8261 8293


James Chang Chris Chan

China Financial Services Consulting Leader

Transactions and Deals Partner

+86 (10) 6533 2755 +852 2289 2824

[email protected] [email protected]

William Gee Jianping Wang

China Fintech Partner China Fintech Partner

+86 (10) 6533 2269 +86 (21) 2323 5682

[email protected] [email protected]

PwC Contacts

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Chinese Bankers Survey 2018...Chinese Bankers Survey 2018 We would like to take this opportunity to thank all those who participated in the survey. They spared time to complete questionnaires