Deloitte 2012 China Banking Industry Top Ten Trends and Outlook Enhancing Capital Management, Meeting New Challenges Deloitte China Financial Services Industry Center of Excellence
2012 China Banking Industry Top Ten Trends and Outlook Enhancing Capital Management, Meeting New Challenges Deloitte China Financial Services Industry Center of Excellence 2012 年中国银行业十大趋势与展望 - 提升资本管理 迎接新的挑战 德勤中国金融服务业卓越中心 2012 年中国银行业 十大趋势与展望 提升资本管理 迎接新的挑战
Table of contents Risks for local government financing platforms are controllable but banks' non-performing loan ratios on the rise ll. Direction of the real estate market requires that banks proactively Ill. Commercial banks actively engaged in finding a solution to IV. Rural financial system reform accelerates from the promotion of rural-related financial services V. Chinese banks are focusing on efforts to expand their VI. Mobile banking in China is easing into an era of mobile financial services VIl. Private banking is a strategic emerging market niche for commercial banks VIll. Foreign banks continue to move into the China market IX. Shadow banking system poses a powerful challenge to industry rules and supervision/regulation X. Supervisory and regulatory institutions are actively strengthening nternational financial guidelines and banking industry supervision and regulati Conclusions
B Table of Contents Introduction 1 I. Risks for local government financing platforms are controllable but banks’ non-performing loan ratios on the rise 2 II. Direction of the real estate market requires that banks proactively respond to potential credit risks 4 III. Commercial banks actively engaged in finding a solution to financing problems for small and medium enterprises 6 IV. Rural financial system reform accelerates from the promotion of rural-related financial services 8 V. Chinese banks are focusing on efforts to expand their international footprint 10 VI. Mobile banking in China is easing into an era of mobile financial services 13 VII. Private banking is a strategic emerging market niche for commercial banks 16 VIII. Foreign banks continue to move into the China market 19 IX. Shadow banking system poses a powerful challenge to industry rules and supervision/regulation 22 X. Supervisory and regulatory institutions are actively strengthening international financial guidelines and banking industry supervision and regulation 24 Conclusions 26 Contacts 27 Acknowledgements 27
Introduction Profits in the Chinese banking industry were considerable in 2011 The industry performed well despite the performance of the Chinese economy overall, which is mired in a downturn. The China Banking Regulatory Commission( CBRC) reported that banking industry assets reached 113. 28 trillion yuan by year-end 2011, a 19 percent increase compared to the prior year. In 2011, annual net profits for Chinese commercial banks were 1,041.20 billion yuan, a 36 percent increase compared to 2010. Net interest income for 2011 was 2. 15 trillion yuan, up 29 percent compared to the same period the previous year Although bank profits are high, the capital market performance of Chinese commercial banks has suffered. Share prices and valuations have been low for some time, reflecting global uncertainty with the continued deterioration of the European debt crisis as well as the pressure brought on the quality of bank assets associated with local financing platforms and real estate loans. unstable Risk in the European banking system may further shrink deposits and curtail lending in the regon y Looking forward to 2012, the domestic and overseas macroeconomic and financial environments remain highly International rating agencies have already downgraded the ratings of many European banks, and the banking industry in Europe is in a recession. In the United States, a sustained loss of investor confidence in the banking system following the onset of the 2008 financial crisis has led to financing difficulties At the national working conference in January 2012, the CBRC reported that banks in China are"still at an important stage of strategic opportunity"for reform and development. The complicated operating environment and intense competition will continue, forcing the industry to shore up key controls and mitigate credit, liquidity and other risks Close to two trillion yuan of local debt will mature in 2012. With real estate regulation and control policies in place banks will need to understand the risks this debt retirement will have on the industry. In addition, multiple factors will threaten the quality of bank assets, such as the impact of tightened monetary policy on liquidity and operating risk from private loans and shadow banking. Local government financing platform loans further affect risks that must be anaged effectively to support ongoing growth In this research report, Deloitte China financial services industry and banking industry experts discuss the top 10 most influential topics facing the Chinese banking system in the next two to three years. The report discusses the risk of local government financing platforms; real estate credit risk; commercial bank financing for small and medium enterprises; rural financial system reform; the globalization of Chinese banks: mobile banking and mobile financial services; emerging private banking businesses; competition and cooperation with foreign banks; shadow banking and private loans; and the influence of Basel ll and the International Financial Reporting Standard 9-Financial Instruments on the banking industry In this analysis of the Chinese banking industry, we have collected and processed large volumes of data and refer to the opinions of relevant experts. At the same time, we provide an outlook of developmental trends in the banking ndustry. We hope this report will serve as the starting point for further dialogue both within and outside the banking dustry, and among all who must work together to respond to the challenges and risks in the financial markets and overall economic environment 2012 China Banking Industry Top Ten Trends and Outlook--Enhancing Capital Management, Meeting New Challenges 1
2012 China Banking Industry Top Ten Trends and Outlook—Enhancing Capital Management, Meeting New Challenges 1 Profits in the Chinese banking industry were considerable in 2011. The industry performed well despite the performance of the Chinese economy overall, which is mired in a downturn. The China Banking Regulatory Commission (CBRC) reported that banking industry assets reached 113.28 trillion yuan by year-end 2011, a 19 percent increase compared to the prior year. In 2011, annual net profits for Chinese commercial banks were 1,041.20 billion yuan, a 36 percent increase compared to 2010. Net interest income for 2011 was 2.15 trillion yuan, up 29 percent compared to the same period the previous year. Although bank profits are high, the capital market performance of Chinese commercial banks has suffered. Share prices and valuations have been low for some time, reflecting global uncertainty with the continued deterioration of the European debt crisis as well as the pressure brought on the quality of bank assets associated with local financing platforms and real estate loans. Looking forward to 2012, the domestic and overseas macroeconomic and financial environments remain highly unstable. Risk in the European banking system may further shrink deposits and curtail lending in the region. International rating agencies have already downgraded the ratings of many European banks, and the banking industry in Europe is in a recession. In the United States, a sustained loss of investor confidence in the banking system following the onset of the 2008 financial crisis has led to financing difficulties. At the national working conference in January 2012, the CBRC reported that banks in China are “still at an important stage of strategic opportunity” for reform and development. The complicated operating environment and intense competition will continue, forcing the industry to shore up key controls and mitigate credit, liquidity and other risks. Close to two trillion yuan of local debt will mature in 2012. With real estate regulation and control policies in place, banks will need to understand the risks this debt retirement will have on the industry. In addition, multiple factors will threaten the quality of bank assets, such as the impact of tightened monetary policy on liquidity and operating risk from private loans and shadow banking. Local government financing platform loans further affect risks that must be managed effectively to support ongoing growth. In this research report, Deloitte China financial services industry and banking industry experts discuss the top 10 most influential topics facing the Chinese banking system in the next two to three years. The report discusses the risk of local government financing platforms; real estate credit risk; commercial bank financing for small and medium enterprises; rural financial system reform; the globalization of Chinese banks; mobile banking and mobile financial services; emerging private banking businesses; competition and cooperation with foreign banks; shadow banking and private loans; and the influence of Basel III and the International Financial Reporting Standard 9 – Financial Instruments on the banking industry. In this analysis of the Chinese banking industry, we have collected and processed large volumes of data and refer to the opinions of relevant experts. At the same time, we provide an outlook of developmental trends in the banking industry. We hope this report will serve as the starting point for further dialogue both within and outside the banking industry, and among all who must work together to respond to the challenges and risks in the financial markets and overall economic environment. Introduction
I. Risks for local government financing platforms are controllable but banks non-performing loan ratios on e rise Local governments raise financing through a variety (PBOC)released a report which found that since 20 of approaches including platforms, and have achieved government financing platforms throughout China, in positive results in promoting economic and social regard to the specific investigations made into the loans, development from these financial platforms, particularly state-owned commercial banks and policy-orient in public infrastructure construction. An estimated banks are the major suppliers for this type of specialized 80 percent of the debt held by local government lending. The loans issued for local government financing investment and financing platforms in China was platforms are primarily mortgages and pledges originally obtained as bank credit. Despite management and other risks, much can be done to control loan risks Among these loans, more than fifty percent are invested of local government platforms in China, including highways and municipal infrastructure promoting the reformation of the national and local debt management system; clarifying financial allocations On June 27, 2011, the National Audit Office of among various levels of government; improving the local China released a comprehensive audit report on local finance and taxation system; and actively expanding government debts, which further clarified the scale and financing channels. classification of such debts. The Audit Office reported local government debt of Renminbi(RMB)10.7 he volume of loans on local government financing trillion Of that amount, RMB 8.5 trillion yuan latforms is massive, and the peak period for maturity 79 percent-consisted of bank loans. Based on the falls between 2011 and 2013. Local investment and average platform repayment period of 2 to 5 years, the financing platforms may expand financing channels peak period for debt repayment of financing platforms that support funds for central rill fall between 2011 and bout 5.6 trillion projects by issuing corporate bonds or medium-term close to 53 percent of local debt, will mature within notes On June 1, 2011, the peoples Bank of China his three-year period (see Figure 1) Figure 1. Annual Distribution of debts due by local governements as of the end of 2010 3.5Unit: Trillion Yuan 3.2 a Debts payable by local governments Debts guaranteed by local overnments 1.8 a Other relevant local 1.0 0.8 2016 and later Data Source nal Audit office Announcement No 35. June 27. 201 Although risk surrounding local government financing In recent years, nationwide fiscal revenue has also platform loans is controllable, non-performing loan ratios grown at a high rate. Nationwide, fiscal revenue in 2010 at banks are expected to rise in 2012; non-performing increased by 21.3 percent compared to the same period loans are not, however, expected to develop into large the previous year. At the same time, among the large balances of bad debts. The smooth, stable and rapic volumes of ownership rights formed by expenditures of development of Chinas economy remains unchanged, local governments in China, many belong to effective and local fiscal revenue is stable on the whole, which assets and are cashable to a certain degree. Collectively, both provide support for loan repayment. The ability of these factors reflect improvements in conditions for debt various levels of government in China to meet mid-to repayment. According to the CBrC, the non-performing nnouncement No 35 of loan ratio of commercial banks has risen somewhat At 2011,June27.2011 long-term debt repayment will continue to improve hrough their onomic development efforts and year-end 2011, the balance of non-performing loans at Wind Information commercial banks was 427.90 billion yuan, and was up
2 2 一、地方政府融资平台风险可控， 但银行的不良贷款率将温和上升 1 2 国家审计署，2011年第35 号公告，2011年6月27日 国家统计局，Wind资讯 地方政府通过平台等多种方式融资，在推动经 济与社会发展特别是公共基础建设方面取得了 积极成果。据测算，在我国地方政府投融资平 台的负债中，80% 都是通过银行信贷获得资 金。由于地方政府融资平台存在管理不规范不 审慎、监督机制缺失等问题，也埋下了一些风 险隐患。但整体来说，我国地方政府平台贷款 风险基本可控；可是要真正化解地方政府性债 务风险，还得深入推进国家和地方债务管理体 制改革，进一步理顺各级政府间的财政分配关 系，健全地方财税体系，并积极拓宽融资渠道。 地方政府融资平台贷款规模巨大，2011 至 2013 年迎来到期高峰期。地方投融资平台可 以通过发行企业债券、中期票据等方式，拓宽 中央政府投资项目的配套资金融资渠道。中国 人民银行在 2011 年 6 月 1 日发布的报告中对 2008 年以来全国各地区政府融资平台贷款情 况的专项调查显示，国有商业银行和政策性银 行是贷款的供给主力。当前对地方政府融资平 台发放的贷款以抵、质押方式为主，约五成以 上地方政府融资平台贷款投向公路与市政基础 设施。2011 年 6 月 27 日，中国国家审计署发 布了对地方政府债务的全面审计报告，进一步 明晰了此类负债的规模和分类。审计署将地方 政府债务总额评估为人民币 10.7 万亿元，其 中人民币 8.5 万亿元为银行贷款。由于地方政 府建设性债务暴涨出现在2008年下半年之后， 因此，以 2 到 5 年的平台平均还款期计算， 融资平台真正的还债高峰将出现在 2011 年至 2013 年。根据国家审计署报告的披露，约 5.6 万亿，近 53% 的地方债务将在这段时期到期 1 （见图 1）。 资料来源：国家审计署，2011年第35号公告，2011年6月27日 预计 2012 年，地方政府融资平台贷款风险基 本可控，但银行的不良贷款率将有所上升。地 方政府融资平台贷款虽然存在着潜在风险，但 并不会演化成大规模的坏账。从偿债条件看， 我国经济平稳较快发展的总体趋势未变，地 方财政收入总体稳定。从中长期来看，我国各 级政府通过自身的经济发展和财力增长，偿债 图1 2010年底全国地方政府性债务偿债年度分布 能力不断提高。近年来，全国财政收入继续保 持高速增长，2010 年全国财政收入同比增长 21.3%2 。同时，我国地方政府支出所形成的大 量权属中，有许多属于有效资产，具有一定的 变现能力。这些都有利于改善偿债条件。根据 银监会数据显示，商业银行的不良贷款率有所 上升。2011 年末，商业银行不良贷款率余额 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2011年 2012年 2013年 2014年 2015年 2016年及以后 单位：万亿元 3.2 0.8 1.0 1.2 1.8 2.6 政府负有偿还责任的债务 政府负有担保责任的债务 其他相关债务 I. Risks for local government financing platforms are controllable but banks’ non-performing loan ratios on the rise Local governments raise financing through a variety of approaches including platforms, and have achieved positive results in promoting economic and social development from these financial platforms, particularly in public infrastructure construction. An estimated 80 percent of the debt held by local government investment and financing platforms in China was originally obtained as bank credit. Despite management and other risks, much can be done to control loan risks of local government platforms in China, including: promoting the reformation of the national and local debt management system; clarifying financial allocations among various levels of government; improving the local finance and taxation system; and actively expanding financing channels. The volume of loans on local government financing platforms is massive, and the peak period for maturity falls between 2011 and 2013. Local investment and financing platforms may expand financing channels that support funds for central government investment projects by issuing corporate bonds or medium-term notes. On June 1, 2011, the People’s Bank of China (PBOC) released a report which found that since 2008 government financing platforms throughout China,in regard to the specific investigations made into the loans, state-owned commercial banks and policy-oriented banks are the major suppliers for this type of specialized lending. The loans issued for local government financing platforms are primarily mortgages and pledges. Among these loans, more than fifty percent are invested in highways and municipal infrastructure. On June 27, 2011, the National Audit Office of China released a comprehensive audit report on local government debts, which further clarified the scale and classification of such debts. The Audit Office reported total local government debt of Renminbi (RMB) 10.7 trillion yuan. Of that amount, RMB 8.5 trillion yuan – or 79 percent – consisted of bank loans. Based on the average platform repayment period of 2 to 5 years, the peak period for debt repayment of financing platforms will fall between 2011 and 2013. About 5.6 trillion yuan, or close to 53 percent of local debt, will mature within this three-year period (see Figure 1).1 1 National Audit Office, Announcement No. 35 of 2011, June 27, 2011 2 National Bureau of Statistics, Wind Information Figure 1. Annual Distribution of debts due by local governements as of the end of 2010 Data Source: National Audit Office, Announcement No. 35, June 27, 2011 n Debts payable by local governments n Debts guaranteed by local governments n Other relevant local government debts 2011 2012 2013 2014 2015 2016 and later Although risk surrounding local government financing platform loans is controllable, non-performing loan ratios at banks are expected to rise in 2012; non-performing loans are not, however, expected to develop into large balances of bad debts. The smooth, stable and rapid development of China’s economy remains unchanged, and local fiscal revenue is stable on the whole, which both provide support for loan repayment. The ability of various levels of government in China to meet mid- to long-term debt repayment will continue to improve through their own economic development efforts and financial growth. In recent years, nationwide fiscal revenue has also grown at a high rate. Nationwide, fiscal revenue in 2010 increased by 21.3 percent compared to the same period the previous year.2 At the same time, among the large volumes of ownership rights formed by expenditures of local governments in China, many belong to effective assets and are cashable to a certain degree. Collectively, these factors reflect improvements in conditions for debt repayment. According to the CBRC, the non-performing loan ratio of commercial banks has risen somewhat. At year-end 2011, the balance of non-performing loans at commercial banks was 427.90 billion yuan, and was up Unit: Trillion Yuan
20. 1 billion yuan compared to non-performing loans the will indubitably face the pressure created by a suddenly prior quarter. The rise in non-performing loans bumped tightened capital chain the non-performing loan ratio slightly to 1.0 percent but it is still below the 1.1 percent ratio the previous year. In addition, a considerable number of platform loans are Doubtful and subordinated credits made up the vast in land mortgages and pledges. Therefore, the majority majority of non-performing loans. Among various types of repayments rely on land assessment revenues, which of commercial banks, the non-performing loan ratios for are depressed and not expected to rebound anytim rural commercial banks and large commercial banks were soon. With less land assessment revenue coming in, the 1.6 percent and 1. 1 percent, respectively, and were both debt repayment ability of such financing platforms will higher than the average level. 3 At the same time, the decrease, and it is probable that the asset quality of the rating agency Moody's evaluated the bank loans in local credits will deteriorate government debts, and predicted that 8 to 12 percent of total loans may become non-performing loans. 4 The minimization of risk in local financing platform loans is a long-term process that is dependent on further There are two main reasons that loans default from local progress being made to government financing platforms. First, local government Promote the reformation of the national and lo revenues and expenditures do not match. In 2010 debt management system Allocate debt among various levels of government 48.9 percent of nationwide fiscal revenue, but assume based on financial capacity, duties and responsibilities: 82.2 percent of nationwide fiscal expenditures. The Improve local finance and taxation systems ocal financial deficit climbed as high as 3, 327. 1 billion Control the actions of local governments in incurring yuan, and national funds accounted for 82 percent of debt and undertaking guarantees ocal fiscal revenue. Because local government financing Monitor and control debts associated with local latform loans generally involve large amounts and long governments terms, and certain difficulties exist in supervising their Clean up and standardize financing platform use, close attention needs to be paid to the risks for companies, credit default Establish open, clear and complete government Second, as disclosed in the PBOC report, 70 percent Design a direct financing mechanism with market of the more than 10,000 financing platforms were restrictions on such basis. 5 scattered among county-level governments, which have the tightest financial resources among all levels In 2012, we expect to see banks supporting management of government. Under relatively high liquidity restraints efforts by local financing platforms to minimize risks. For at present, Tier-1 credit loans put into the county level example, loans for completed projects (including railways, by banks will be greatly tightened, the space for the highways and infrastructure) should immediately enter borrowing money to pay debt operating model the period for principal repayment to accurately reflect practiced by the financing platforms of county-level exposure. Prior to approval, efforts should be taken to governments with tight financial resources will become scrutinize any new construction projects and minimize increasingly restricted, and by that time, such platforms the occurrence of non-performing loans Operation Report (2011). China Banking Regulatory oody,s, "Gradually Debt burd Poses Challenge to Chinese Banks", July 12, 2011 14,2011,http://news.hexun com2011-12.14136311609 2012 China Banking Industry Top Ten Trends and Outlook--Enhancing Capital Management, Meeting New Challenges
2012 China Banking Industry Top Ten Trends and Outlook—Enhancing Capital Management, Meeting New Challenges 3 20.1 billion yuan compared to non-performing loans the prior quarter. The rise in non-performing loans bumped up the non-performing loan ratio slightly to 1.0 percent, but it is still below the 1.1 percent ratio the previous year. Doubtful and subordinated credits made up the vast majority of non-performing loans. Among various types of commercial banks, the non-performing loan ratios for rural commercial banks and large commercial banks were 1.6 percent and 1.1 percent, respectively, and were both higher than the average level.3 At the same time, the rating agency Moody’s evaluated the bank loans in local government debts, and predicted that 8 to 12 percent of total loans may become non-performing loans.4 There are two main reasons that loans default from local government financing platforms. First, local government revenues and expenditures do not match. In 2010, fiscal revenues of local governments accounted for 48.9 percent of nationwide fiscal revenue, but assumed 82.2 percent of nationwide fiscal expenditures. The local financial deficit climbed as high as 3,327.1 billion yuan, and national funds accounted for 82 percent of local fiscal revenue. Because local government financing platform loans generally involve large amounts and long terms, and certain difficulties exist in supervising their use, close attention needs to be paid to the risks for credit default. Second, as disclosed in the PBOC report, 70 percent of the more than 10,000 financing platforms were scattered among county-level governments, which have the tightest financial resources among all levels of government. Under relatively high liquidity restraints at present, Tier-1 credit loans put into the county level by banks will be greatly tightened, the space for the “borrowing money to pay debt” operating model practiced by the financing platforms of county-level governments with tight financial resources will become increasingly restricted, and by that time, such platforms will indubitably face the pressure created by a suddenly tightened capital chain. In addition, a considerable number of platform loans are in land mortgages and pledges. Therefore, the majority of repayments rely on land assessment revenues, which are depressed and not expected to rebound anytime soon. With less land assessment revenue coming in, the debt repayment ability of such financing platforms will decrease, and it is probable that the asset quality of the credits will deteriorate. The minimization of risk in local financing platform loans is a long-term process that is dependent on further progress being made to: • Promote the reformation of the national and local debt management system; • Allocate debt among various levels of government based on financial capacity, duties and responsibilities; • Improve local finance and taxation systems; • Control the actions of local governments in incurring debt and undertaking guarantees; • Monitor and control debts associated with local governments; • Clean up and standardize financing platform companies; • Establish open, clear and complete government balance sheets; and, • Design a direct financing mechanism with market restrictions on such basis.5 In 2012, we expect to see banks supporting management efforts by local financing platforms to minimize risks. For example, loans for completed projects (including railways, highways and infrastructure) should immediately enter the period for principal repayment to accurately reflect exposure. Prior to approval, efforts should be taken to scrutinize any new construction projects and minimize the occurrence of non-performing loans. 3 China Banking Industry Operation Report (2011), China Banking Regulatory Commission. 4 Moody’s, “Gradually Intensified Local Government Debt Burden Poses Challenge to Chinese Banks”, July 12, 2011. 5 hexun.com, “Basic Financing Mode of Local Governments”, December 14, 2011, http://news.hexun. com/2011-12-14/136311609. html