Chinese Banks Post Rare Drop in Non-interest Earnings


A new report notes that the Chinese banking sector posted a rarely seen decline in non-interest revenues in Q1 2017.

Data released by the Bank of Communications Financial Research Centre indicates that while a cohort of 16 listed Chinese banks saw net profits attributable to parent companies rise by 2.6% year-on-year in Q1 2017, non-interest earnings within the group posted a rarely witnessed year-on-year decline of 0.9%.

This stands in stark contrast to 2016, when non-interest revenue was the primary driver of growth in the net profits of Chinese banks.

BoCom analyst Wu Wen points out that year-on-year declines in non-interest earnings have been rare over the past few years, particularly given efforts by banks to bolster fee revenue as Chinese regulators push forward with liberalisation of rates.

According to Wu the key factor has been easing growth in processing fee revenues, due to the shock of adjustments in fee rates for traditional intermediary operations.

Another key factor has been intensify regulatory action, which has reined in the growth of interbank and wealth management operations that are considered major sources of systemic risk.

The China Banking Regulatory Commission recently announced that it would include wealth management products in its macro prudential assessments of banks for the first time ever, due to concerns about their contribution to the burgeoning shadow banking sector.

The slew of official directives issued by CBRC since March placed emphasis upon the need to better regulate interbank operations and wealth management products, as part of efforts to prevent systemic risk in China’s financial system.

One banking insider told the Guangzhou Daily that the latest regulatory crackdown has been more thorough and intense than anticipated.

In order to deal with this regulatory crackdown many banks are busy shrinking their non-standard assets and interbank operations, as well as redeeming investment that has been “outsourced” to exchange traded funds.

Banks have also become very tepid about any new or innovative operations due to concerns about potential sources of risk.

Growth in wealth management products stalls

Since Q1 growth in wealth management products has fallen following many several years of flourishing expansion.

Figures from CBRC indicate that the WPM balance of Chinese banks was 29.1 trillion yuan by the end of the first quarter, for year-on-year growth of 18.6%.

This rate of increase marks a fall of 34.8 percentage points compared to the same period in 2016.

One source from the asset management department of a major state-owned lender said that all of China’s big four banks are deliberately reining in growth in WMP’s, because of high costs, as well as a lack of quality products and a continuing squeeze on yields.

Data from China’s big four banks indicates that the yields they reap from WMP’s have fallen continuously over the past several years.

Intensify scrutiny from regulators has also put a major roadblock in investment by banks in non-standard assets.

Outsourced investment hindered  

The squeeze on interbank operations and WMP’s has also put curb on outsourced investment.

The main source of funds for outsourced investment by Chinese banks – which refers to investment offloaded to outside funds or vehicles, is off-balance sheet WMP funds as well as interbank funds.

It is estimated that 70 – 80% of interbank funds are used for outsourced investment, to purchase the interbank WMP’s or deposits of other companies.

The squeeze on funds from interbank operations and WMP’s is thus having a major impact on outsourced investment operations, with industry insiders pointing to a marked decline in funds in Q1 and a wave of redemptions by banks.