What is impact of the ‘new normal' on the banking sector?
The Chinese banking sector has developed steadily during the past few years and generally performed well according to most operational and risk indicators. Major sectoral reform and opening up took place in 2014, with private capital making new inroads, the four reforms of banking business governance advancing smoothly, fresh headway made in policy bank reform and the banking sector opening wider to the rest of the world.
Moreover, the sector has served the real economy effectively, and supported steady and brisk growth of the national economy through improved financial services, lower financing costs and more efficient funding. Efforts to open up and service the real economy have been coupled with risk mitigation in key areas - banks have defended their profitability amid the absence of systemic and regional risks.
Under ‘new normal' economic conditions, the banking sector has needed to embrace the re-stabilisation of loan growth, a narrowed spread between the deposit and lending rates, the evolving model of social financing and a rebound of non-performing loans. As a result, the banking sector had accelerated its adjustment strategy, transformed its profit model, boosted innovative capacity, averted and mitigated risks, and operated in a legal and compliant manner.
How can banks transform their profit models against a backdrop of a long-term narrowing of spreads?
First, they can seek profit from more sophisticated management, re-engineered business processes and reduced operating costs; second, they can enhance capabilities for pricing products and managing interest rate risks to ensure attainable profits, manageable risks and sustainable business; third, they can seek profit from risk control, with effective measures taken to improve asset quality; and fourth, they can benefit from service, with proactive efforts made to improve service quality, transform service models, segment markets, speed up service upgrades, and provide clients with more customised, professional and comprehensive financial services, so clients will be more sticky and the real economy can be more effectively served.
What challenges does the evolving social financing model present to banks?
The social financing model is changing remarkably, with competition in the financing market becoming ever greater. The banking sector needs to redouble its efforts to keep pace with mass entrepreneurship, drive its growth using innovation as a new engine, secure benefits from diversified financing and ensure the sector's development lies in its own hands. First, it needs to utilise information technology to promote business innovation - leveraging the internet, big data, cloud computing and other technologies, develop digital platforms for financial services, broaden and consolidate operating channels and expand its operating capabilities. Second, it must explore innovation in non-credit businesses, steadily developing wealth management, asset custody and other high-value-added business. Third, it needs to press ahead with innovation in the liability area, raising funds through a variety of means, such as financial bonds and certificates of deposit, and improving active liability management capabilities. Finally, it has to step up innovation in the credit business and open up new sources of profit.
What should banks do to respond to rising levels of non-performing loans?
In recent years, pressure to maintain economic growth has been reflected in the quality of bank lending, mainly through the rise of both the size and rate of growth of non-performing loans (NPL). Although the NPL rates of commercial banks largely remain low and generally controllable, we need to soberly realise more problems will manifest themselves in the performance of the banking sector in the period to come. In response, banking institutions need to make timely NPL write-offs, appropriately use the eased conditions for bad debt write-offs and other policies, make more voluntary bad debt write-offs without closing the cases or losing the recourse for the bad debts written off, and avoid the co-existence of both high provisions and high NPLs.
It is essential to revitalise the NPLs, and sell them to viable and willing investors via asset securitisation and asset transfer through legitimate channels. Furthermore, NPL restructuring can be attempted, so that for the projects compatible with policies and products related to core competitiveness, banks should try to help borrowers overcome their difficulties by relending, extending and renewing debt, as well as pushing restructuring and mergers and acquisitions. To liquidise the NPLs, it is advisable to make use of financial asset management companies and other channels, and look for effective mechanisms to dispose of NPLs in a wholesale and market-based manner.
What should be done to address the complex economic conditions and financial risks?
Deepening reform inevitably is the way to cope with the challenges posed by complex economic conditions and financial risks. As for next steps, the first is to support the introduction of private capital into various types of banking institutions through diverse channels, by expanding the scope of the pilots of private banks and consumer finance companies, extensively enrolling eligible private capital, allowing higher private stakes in village banks, and extending the scope for private capital to participate in institutional restructuring. The second is to push reform of banking management, to ensure banks operate in a more specialised fashion by deepening the migration towards business unit systems, pressing ahead with department specialisation and exploring the conversion of certain units and lines of business into subsidiaries. The third is to vigorously advance banking regulatory reform by further simplifying regulation, delegating powers, optimising regulatory processes and regulatory resources allocation, tightening the regulation during and after incidents and improving on-site inspections. The fourth is to solidify the five core systems, that is, the sectoral product registration, asset transfer, liquidity mutual-assistance, client risk and fraud information, and information publication systems, and speed up the development of financial infrastructure.