The Asia Global Payment Summit. Bali, Indonesia. 10-11 October 2019

Deleveraging Drive Boosts Fortunes of Big State-owned Banks

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The central government’s efforts to deleverage and rebalance the Chinese economy have served to bolster the performance of leading state-owned lenders, at the expense of their smaller peers in the sector.

The latest round of third quarter results released by China’s financial concerns point to strong improvements amongst the economy’s biggest banks.

The Industrial and Commercial Bank of China – the world’s biggest bank in terms of assets, reported a year-on-year increase in net profits of 3.4% to 75 billion yuan ($11.3 billion) for the third quarter, as compared to profit growth of 1.85% in the first half.

China Construction Bank, the country’s second-largest lender in terms of assets, also saw strong net profit growth on the back of rising revenues from interest and fees, while Agricultural Bank of China, China’s third largest lender, reported a 4.9% profit increase for the same quarter – the biggest increase in two years.

Chris Wood, strategist at CLSA, points out that as a result of this improving performance ICBC is trading above book value in Hong Kong for the first time in over two years.

The heavy-handed deleveraging drive launched by China’s central government earlier this year has served to tighten liquidity and raise the cost of capital, impeding the performance of smaller banks who are heavily reliant upon the interbank market for access to funds.

Deleveraging has given the big state-owned banks a distinct competitive advantage, however, due to the immense stock of deposits accumulated via their branch networks which they’d previously farmed out to smaller lenders.

“The Big Four banks are faring well as liquidity tightens and funding costs rise given their vast deposit bases,” said Yulia Wan, bank analyst with Moody’s investor Services to Dow Jones.

“But the banks with bigger reliance on the interbank market are under high pressure in net interest margin.”

The deleveraging drive is also improving the quality of bank assets and helping to rebalance loan portfolios.

“The improvement in Chinese banks’ reported asset quality can be seen in the continuing rally in Chinese bank stocks, where a re-rating is now taking place,” said Chris Wood.

Zhu Haibin, chief economist at JPMorgan in Hong Kong, points out that the deleveraging drive has successfully put the brakes on credit growth, with the second quarter seeing an actual decline in debt for the first time since 2011.

Zhu points out that deleveraging is also serving to rebalance the composition of debt, with corporate lending declining and household borrowing increasing.

Banks will benefit from the rebalancing of China’s economy, which will give greater play to household spending and consumption.

Loans to households, and mortgages in particular, are less likely to turn into non-performing assets, while lenders will also be able to levy fees upon retail borrowers.

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