Accroding to the latest figures from the CBRC (China Banking Regulatory Commission), Chinese banks’ asset quality deteriorated as the balance of bad loans continued rising from RMB 492.9 billion in 2012 to RMB 592.1 billion in 2013. However, as banks wrote off significant amounts of bad loans in 2013, the bad loans ratio grew only slightly from 0.95% to 1%, leaving the asset quality in relatively good shape. The largest outstanding bad loans are from the big five banks, who have hit a 10 year peak of bad loans - in total, they have written off RMB 59 billion up significantly from 2012. 

The large amount of write-offs prevent the bad loan ratio from growing fast. In addition, Chinese banks have a relatively higher provision coverage ratio, so they are able to write off more. As China is in the middle of an economic transistion, we estimate that banks’ bad loans will continue rising as exports continue to slow and industry shifts excess capacity. Further 2014 write-offs will be supported by the CBRC’s latest guidance.

20140410 BadLoanWriteoff

Special 'Bad Loan Development Zone' in the Yangtze?

Written by Fiona Zhao || April 07 2014

Once known for its economic development zone, the rich Yangtze river delta now has become a hotbed for something else: non-performing loans. 

The latest data from big five banks’ 2013 annual report shows that the cumulative profits in 2013 were RMB 870.3 Billion, accounting for approximately 60% of the banking industry. However, comparing with previous years’ performance, the net Chinese banks' profit growth rate of 2013 has slowed with the exception of BOC, which increased slightly. This decreased profitability is mainly due to narrowed net interest margin. Last year, in the context of interest rate reform and the influence from money funds, banks have been facing challenge and forced to transform. This will likely continue to become more pronounced in the future as banks are heavily reliant on interest income rather than fee income. 

China Big Five Bank Profits Continue to struggle

How should China's Online Finance platforms be regulated?

Written by Zennon Kapron || March 24 2014

This past weekend Alibaba and Baidu met with the People's Bank of China (PBOC) in a closed door session to discuss the ongoing challenges with Chinese online finance regulation. The fact that the regulators are consulting with the industry is a great sign that the regulations will (hopefully) be built on consultation and discussion, and as both Baidu and Alibaba have intentions of setting up their own private banks, it's likely in their best interest to sit down with the regulators as well.

Chinese banks start to push back against money funds

Written by Kapronasia || March 17 2014

Over the past week news headlines have been awash with how Chinese banks are pushing back against Alibaba's Yuebao and Laicitong as the online finance products have rapidly grown their AUM at the expense of bank deposits. The banks now are expanding their push though and are challenging money funds' market share in China.

RMB/USD spot fluctuation range increase to ±2%

Written by Kapronasia || March 17 2014

On March 15, 2014, the PBOC announced that the daily RMB/USD exchange rate float range in the Chinese interbank market would increase to ±2%, which will be implemented on March 17. The chart below shows the expansion of fluctuation range for RMB/USD spot, which is meaningful to Chinese FX market.

Analysts from Kapronasia believe that it is an important step towards fully internationalization of RMB. The data below also illustrate that Chinese government is accelerating the process of internationalization of RMB. We are looking forward to further FX market reform, in the Shanghai Pilot Free Trade Zone, or in the whole country in 2014.  

 

RMB interbank spot rate

In another foray from the Internet giant into high finance, Alibaba recently announced that one million virtual credit cards will be issued next week. 

File under: 'another bank losing out to money funds', but numbers from Ping An Bank show just how difficult things are getting for banks in China.

China's smartphone market might be maturing

Written by Kapronasia || March 07 2014

An interesting graphic from IDC and WSJ looks at the declining growth rate in smartphone sales in China. China's smartphone market is maturing.

Money funds in China have been around for a long time with the first launched just over a decade ago in 2003. For the most part, these funds existed in relative harmony with the banking industry and occupied a small niche in the investment market. However, the emergence of Yuebao in 2013 started to change that. Money funds have now grown significantly in prominence and present an increasing threat to traditional banking services.

Get paid to ride Taxis in China

Written by Zennon Kapron || March 04 2014

The Basics

If you haven’t been following Chinese online finance innovation industry, here’s a quick brief: leveraging mainly underlying high-yield interbank deposits as assets, China’s main internet giants including Tencent, Alibaba and Baidu have launched online finance products where users can quickly and easily move money out of their banks accounts onto these platforms. Tencent uses their nearly ubiquitous Wechat app as the main user interface which Alibaba uses their Alipay platform to distribute the products; the underlying funds are managed by an external asset manager.

The typical returns of Chinese online finance innovations are between 5-8% and greatly eclipse traditional bank deposits, which yield less than 1%. With this kind of return, it’s not surprising that consumers are moving assets over to the platforms at an astonishing rate with some funds accumulating over 400 billion RMB (~US$66B) in AUM in less than a year making the asset managers some of the largest in China.

At the same time, taxi booking apps are growing incredibly rapidly in in China’s eastern coastal cities – some with the support of the internet giants as well. Over US$40 million of investment has gone into the taxi booking apps over the past two years and it’s not uncommon to ride in a taxi where the driver will have 3-4 phones all running the apps on his/her dashboard.

Bring it together

A key part of the internet giants’ strategy has been to bring everything together in one platform. Tencent, already with a significant user base through it’s ‘whatsapp on steroids’ Wechat app allows you to invest in their online finance product called Licaitong and they have integrated a taxi booking app called Didi Taxi where you can ‘tip’ taxi drivers a pre-selected extra amount to come and pick you up.

Money for nothing and your taxi for free

So, all of the above is well and good. Where it gets interesting is the level of competition in the marketplace and what companies are doing to gain marketshare. A Chinese friend related her experience:

She initially called a taxi via Didi taxi. Didi is running a promotion where you can get 12 RMB (~US$2) back on your taxi ride when you use the app. Base fare in a taxi is 14 RMB (~US$2.33), so she paid 2 RMB (~US$0.33) for the taxi ride. But wait, there’s more…

The taxi driver then asked if she could pay using Alipay and she said yes. Why? Because Alipay is running a promotion where she could get 13 RMB (~US$2.15) back and the taxi driver then likely also received some reward. The taxi driver then gave her the 14 RMB in cash and she sent him 14 RMB via Alipay.

So let’s do the math:

 

Rider

Taxi Driver

Internet Giant

 

Change

Balance

Change

Balance

Change

Balance

Initial Ride

-14 RMB

-14 RMB

+14 RMB

+14 RMB

0

0

Bonus for using Didi

+12 RMB

-2 RMB

0 RMB

+14 RMB

-12 RMB

-12 RMB

Driver pays rider cash

+14 RMB

+12 RMB

-14 RMB

0 RMB

0 RMB

-12 RMB

Rider pays driver w Alipay

-14 RMB

-2 RMB

+14 RMB

+14 RMB

0 RMB

-12 RMB

Bonus for Using Alipay

+13 RMB

+11 RMB

??

??

-13 RMB

-25 RMB

Net

 

11 RMB

 

14+ RMB

 

-25 RMB

So basically, my friend was paid to ride the taxi. She can then take that 11 RMB and instantly put it on her online finance account where she’ll earn about 6% and the internet giants are out a combined 25 RMB.

Of course in the internet space, we’ve seen plenty of companies providing products or services for free or nearly for free, but the scope with which this is happening in China is amazing. And it’s happening more and more.

Take your lessons to go

Time is compressed here. Group buying developed over years in the US and took another couple to fade away. In China, it was started and finished in less than 3 years. Will taxi booking and online finance be similar?

Although both products are essentially in the middle of a ‘perfect storm’ of a huge potential user base, very tight liquidity (giving high overnight lending / fixed deposit rates) and tremendous mobile and internet penetration and momentum, the winds are shifting in terms of innovation and it has put fear into the financial industry.

Both banks and securities firms are feeling the pinch from internet finance. Banks are facing eroding deposits in the face of gradually liberalizing interest rates, while brokers and asset managers are seeing their customers move to relatively high-return products that carry very few fees.

Although the same ‘perfect storm’ may not be happening in the west, paying attention to how things are developing in China is important as more Walmarts and Tescos move into the banking space. Not that banks were ever really known for innovation, but here in China, it's clear that the innovation is certainly not - which is putting them in an increasingly tight position.

China banking net interest margin continuing to increase

Written by Kapronasia || March 03 2014

The latest figures from the China Banking Regulatory Commission (CBRC) shows that China commercial banks’ deposit net interest margin has been increasing from 2.57% in 2013Q1 to 2.68% in 2013Q4, despite of the pressure from the interest rate liberalization.

Bad loans rise in both amount and proportion in China

Written by Kapronasia || February 28 2014

According to the latest figures from the China Banking Regulatory Commission (CBRC), both commercial banks' balance of Chinese bad loans and the ratio of bad loans increased throughout 2013.

The continuing increase of bad loans is an indication of the challenges in China's economy currently. With an economic transition happening and increased lending on bad loans, this is not likely to decrease in 2014 which will pose even more of a challenge for banks as they face increased interest rate liberialization and other financial industry reform. 

China's Bad Loans

Chinese Commercial Bank Profitability continues to struggle

Written by Kapronasia || February 27 2014

According to the latest figures from the China Banking Regulatory Commission (CBRC), Chinese commercial banks’ accumulated net profits reached 1.4 Triliion RMB in 2013, up 179.4 Billion RMB from 2012. However, the growth rate of net profits has been decreasing in recent years. In 2011, profits grew 36.33%, then dropped dramatically to 18.96% in 2012, and again in 2013 to 14.48%.

Research shows that the decreasing trend of Chinese commercial banks’ profitability growth rate seems to be in line with China’ declining GDP growth rate, shown in the chart below. It reflects that with the acceleration of interest rate reform and the influence from internet finance, China’s commercial banks profit margin faces continuing pressure.

Chinese Bank Profitability struggles

Competition for online finance cash increases in China

Written by Zennon Kapron || February 18 2014

Not satisfied with just taking deposits from banks, online finance platforms are facing more competition from each other.

Thank you to everyone who attended the Top-10 China Financial Technology trends webinar just over a week ago.

The sheer size of China's population and geography means that you get some pretty amazing statistics out of it. Couple that with increasing internet and mobile penetration and you have some pretty sizable numbers.

For decades, China has been known as the imitator and not the innovator. The argument goes that the West came up with social networking, mobile payments, group-buying, etc. and China imitated it, sometimes better, sometimes worse. C2C – copy to China. R&D – rob and duplicate. There are numerous terms to describe it. 

China's Tier 2 Banks Expansion Challenges

Written by Fay Zhou || December 17 2013

After 18 years of economic development, China’s Tier 2 Banks, mainly city commercial banks, are growing to fill a gap in-between state-owned banks, and rural commercial banks. As part of their growth, many city commercial banks are attempting to expand their branches in other regions, however, the Chinese Banking Regulatory Committee (CBRC) regulations are, in certain cases, holding them back.

The recent tight regulation regarding supra-regional city commercial banks is largely the result of increasing internal fraud cases in city commercial banks such as Qilu Bank and Hankou Bank. The good news is that the CBRC is not prohibiting city commercial banks from expanding supra-regionally. Instead, the approval process is just longer and the standard of regulatory evaluation indicators such as asset scale, capital adequacy ratio, profit margin, and non-performing loan ratios are higher than before. In this case, if city commercial banks attempt to expand outlets in other regions, they need to enhance their internal control and risk management abilities above the required standard.

Because the asset scale and business model vary based on the local economies in each city, the evaluation regulation will be different. If the investment in other regions is excessive, the CBRC will require a higher capital adequacy ratio; if the risk management does not match the fast growing asset scale, the CBRC will restrict the expansion of these city commercial banks. Thus, regulators support supra-regional expansion if the tier 2 banks meet the entire set of regulatory requirements.

China’s tier two banks are some of the more dynamic banks in China in terms of business models and innovation – they have had to be in order to compete with their larger counterparts that typically have much larger deposit bases and distribution networks.

The tier-2 banks are still focused on expanding their asset base and while supra-regional expansion will help them accomplish this, it is not the ultimate goal of the banks, at least not in the near future. The regulations do serve a valuable purpose to ensure that banks’ expansion is based on quality assets and business practices.  

 

 

As fixed interest rates in China start to loosen up, banks' bottom lines are starting to feel the pressure. According to the latest figures from China major banks’ annual reports, the net profits of China Mingsheng Banking Corp.(Minsheng), Industrial & Commercial Bank of China Ltd.,(ICBC), Bank of China Ltd. (BOC) and Agricultural Bank of China (ABC) in the third quarter 2013 shrank on a YOY base. 

As shown in the graph below, the net profits growth rate of Minsheng, a relatively smaller bank, dropped dramatically almost 25% comparing with the same period last year, likely due to its relatively large interbank business, which was heavily affected by high interest rates in the middle of June. The high interest rates in China also had a big impact on ICBC. The banks' profitability growth rate dropped to around 7.5%.

Chinese Bank Profitability - Q3 2013

 

Observing retail banking behaviour in Asia

Written by Fay Zhou || December 04 2013

With a wide range of channel choices for retail customers, banks need to be aware of the usage and preferences for each channel which can vary for multiple reasons including the purpose of the transaction, complexity and where the person is from.

On the digital channel, customers usually require a fast and convenient service such as simple transaction or checking an account balance, but for branch service, customers, especially affluent customers require tailored personal interactions such as loan servicing, investment advice, and other complex transactions.

In self-service channels, Asian customers not only need a convenient and easy channel, but also a personalized interactive service to increase their loyalty to the bank as competition is rising and switching costs are lowering, especially in the wealth management space.

These wealthier customers produce higher value for banks, and usually they have a wide range of choices on banking services. In Asia, affluent customers show greater loyalty to their banks, while in most European countries and the U.S., affluent customers have relatively lower loyalty to their banks. Thus, maintaining affluent customers is important for banks to generate higher revenues.

Citi, one of the major players in Asia's wealth management space offers tailored services in Singapore. Their Citigold service provides a dedicated center for nonresident Indians. The personalized interaction improved the loyalty from their affluent customers because Citigold satisfied nonresident Indians’ special requirement on banking services.

However, China is showing a significant gap between affluent and mass-market customers on loyalty because the affluent customers receive much better service from their bank than mass-market customers do.

Banks should not only rely on channel innovation but also focus on improving service on the existing channels. Maintaining the existing affluent customers with tailored service is crucial to the bank since the affluent customers will continually show a high loyalty to their banks in Asia, but enhancing a required service or product for mass-market customers through different bank channels will also increase the overall customer loyalty.  

Customer Channel Preferences in Asia

Drivers of Supra-regional expansion in Asia

Written by Zennon Kapron || November 21 2013

To a large extent, Asian banks are in a somewhat enviable position. China is certainly the economic giant of the region, and if China’s economy slows, it does have knock-on effects, yet, the economies of individual countries in Asia, while interdependent, often expand and contract quite independently. This can mean a bank facing slower growth in Indonesia, might look to the Philippines or Malaysia for expansion. 

Event summary: Battle of the Quants Shanghai

Written by Victor Fan || November 18 2013

Kapronasia attended the Battle of Quants Shanghai event on Nov. 13, 2013 in the newly launched Hongkou hedge fund park in Shanghai, China. There were two main topics that we discussed at the event: Chinese traders’ demands for trading platforms and key success factors for China's further economic reform.

Development of Retail Banking in Asia

Written by Fay Zhou || November 12 2013

The Asian Retail banking business has developed rapidly in the past two decades as both economies and businesses have increased in sophistication and wealth. Japan is still the largest retail banking market in Asia, however, China will surpass Japan to be the largest in Asia in 2015.

The Role of Online Banking in Asia

Written by Fay Zhou || November 08 2013

Over the past 3 years, online banking in Asia has been growing rapidly. A recent survey indicates that the usage of Internet banking has increased by 28% across Asia in the past five years, and the frequency of online banking usage actually surpassed branch banking in 2012, meaning that people in Asia access their account more online today than they do in person.

In China, there are over 650 million registered online banking customers in the 11 listed Chinese banks, and the combined online transaction volume represents over 60% of total transactions. Systems have matured to keep pace; not only do they provide scalability to deal with the increased transaction volume, but offer increased functionality for online banking in China customers.

In the densely populated areas like Singapore, Taiwan, and India, internet banking makes doing your banking less time consuming. Ten years ago, you may have had to wait hours in your bank to do simple transactions; today, customers can pay bills, transfer money, and even purchase investment products online rather than waiting in a crowded line.

China's Online Banking Customers

 

Source: Cebnet, 2013

Although internet banking usage in Asia is high overall, individual countries have varied levels of online banking development. Among all the Asian countries, online banking penetration is particularly low in Indonesia, the Philippines, and Vietnam, although there are signs of growth.

Online banking usage has started to grow rapidly in Indonesia since 2010, yet, of the 55 million Internet users, about 25% of the population, only 7% of these internet users actually do online banking, which indicates online banking is still relatively underdeveloped in Indonesia. Enhancements in the mobile online banking platforms including better security and ease of use, may help the industry attract more users and increase market penetration.

With the rapid modernization of companies, infrastructure and overall economies in Asia, Online banking in Asiawill continually show a steady growing trend in the next few years because it plays an important role by sharing the operational burden from branches, and provides more efficient service for customers. The current growing trend also predicts that online banking is slowly making branches less important, and its popularity will increase dramatically in the near future in Asia.

Chinese ATM Manufacturers continue to gain domestically

Written by Kapronasia || November 01 2013

According to the latest figures from the People's Bank of China, the aggregate number of ATMs sold by top five international suppliers, including GRG, Hitachi, NCR, Yihua and Diebold, increased dramatically from 46,800 ATMs sold in 2010 to 73,090 sold in 2012, a roughly 56% growth.

What is interesting though is that the sales performance of Chinese ATM manufacturers including GRG and Yihua, has also been robust as well and in fact taking a larger percentage of overall ATM sales in mainland China. With a 20%+ increase year by year, Chinese ATM manufacturers have increased sales from 20,800 ATMs in 2010 significantly to 34,370 ATMs in 2012, a nearly 65% increase in 2 years. This is also reflected in the % of domestic ATMs sold as compared to the whole, which went from 44.44% in 2010 to 47.02% in 2012.

As the Chinese government starts encouraging the purchase of domestic ATMs, GRG and Yihua will likely continue to gain market share in the next few years to the detriment of the international players.  

Domestic players' ATM sales continue to rise in China

Should international banks move into The Pilot Shanghai FTZ?

Written by Zennon Kapron || October 30 2013

Over the past few weeks, the Shanghai Free Trade Zone (FTZ) has captured business headlines here in China and abroad as discussion continues about the impact that the zone will have on reform in China. As of October 30th, 208 companies have registered in the zone in just under one month, notably 36 in the asset management sector.

One of the early announcments was the commitment from Citibank and DBS to enter the zone. When we initially heard that these banks were so committed, we were a bit skeptical. Often foreign companies in China support government programs to better their relationship with the government. However, in the past couple of weeks, we have changed our view.

The FTZ itself, although the future reforms are somewhat unclear, will open up a number of immediate near-term opportunities for international banks in the shanghai free trade zone. These opportunities primarily revolve around non-reform related products and services:

Chinese Yuan / RMB fungibility – One of the key aspects of the zone will be what happens to Chinese Yuan (also known as RMB) fungibility or the ability to exchange RMB freely for other foreign currencies. Although it is a bit unclear exactly what exchange will be possible, the feeling is that some reforms to help open up convertibility will happen. At a minimum, a RMB system somewhat similar to the Hong Kong CNH where the RMB currency is held offshore and is essentially treated as a completely separate currency – although still limited by exchange restrictions.

Trade – Interestingly, although this is a fairly obvious one, as the Shanghai Pilot FTZ is currently setup somewhat like a mini-HK or offshore port, trade services for companies setup in the FTZ will either need to come from international banks within the FTZ or overseas banks. So if you think about this, currently, if you are a manufacturer in China, you would likely either be using a domestic bank or the domestic branch of a foreign bank for LCs, Loans, Bank Guarantees, etc.. If you are a manufacturer in the free trade zone however, you will need to have a bank either also in the free trade zone or overseas as the FTZ is essentially an offshore market.

Interest rate exposure – As a few industry experts have pointed out, interest rates in the FTZ do not have to necessarily be the same as those outside of the zone. While this may bring some somewhat challenging issues for corporates who are setting up in the zone to manage interest rate risk both in the zone and outside, it does offer banks an opportunity to provide interest rate related services and risk management tools to the corporates they serve in the zone. It will take some time before we can really determine what these might be, but certainly will be an opportunity.

Experience with reforms – Finally, by being in the zone, banks will learn through first hand experience how any reforms will change their industry. Although there is some debate as to how lined up the Chinese government is behind real reform, especially with the November plenary on the near horizon, but certainly any of the near-term reform will happen in the Shanghai FTZ at least as a test and then for further roll-out through-out the country. Banks that are there now will be able to test and try reform.

Good relations and good opportunities

So overall, it would be remiss to say that banks and companies like Microsoft, Citi and DBS are not entering the zone to better their relationships with the government, there certainly is some of that involved in their decision-making process. It is also clear that first movers will likely have better advantages in the long-term. What the examples above do show as well is that there are additional product and service opportunities for banks in what will be a relatively open and uncompetitive market – at least in the short term. 

Shanghai’s Free Trade Zone: What should your strategy be?

Written by Zennon Kapron || October 28 2013

Few initiatives in the past couple of years have captured the attention of China’s financial services community more than the recently opened Shanghai Free Trade Zone. Situated in the eastern part of Shanghai and encompassing 29km2 of land which, like the rest of Pudong, was all farmland as little as ten years ago.

Opportunities for Foreign Banks in China

Written by Kapronasia || October 24 2013

In a heavily regulated market like China, it’s easy to point out what can’t be done, but sometimes difficult to identify what can be. Many banks look at the market and see it as being too difficult or as you might say in Chinese ‘mafan’ or troublesome. It is easy to look at any industry in China being like this, but what’s critical in the market is to find a unique opportunity and take advantage of it. For western banks, that could be the slow but steady internationalization of the RMB.

According to the figures from Chinese Academy of Social Sciences’ ‘Chinese financial industry supervision report’, the official figures show the shadow banking industry reached an AUM at the end of 2012 of about CNY14.6tn, but other research shows that the actual market is much larger, about CNY20.5tn. The number is so large that it even takes 40% of GDP according to the numbers and 2013 is expected to be even higher.

The shadow banking system in China is not sufficiently regulated and often many of the products created are carry high risks which are not explained clearly to the investors. In general, a more regulated shadow banking system should be beneficial to the banks and investors in long-run. If the current issues were not solved effectively, then the dramatic volume increase could be a financial time bomb that might severely damage the Chinese economy and financial stability.   

Year 2012

Scale of Chinese shadow banking (CNYtn)

Proportion of GDP

Proportion of total asset of banking industry

Official data

14.6

29%

11%

Actual Market

20.5

40%

16%

 

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