A new report from McKinsey & Company forecasts a significant rise in the risk-adjusted return on capital for Chinese banks following improvements to pricing ability and cost control.
The report sees the combined profits of the 40 biggest Chinese banks exceeding 2.2 trillion yuan (USD$319 billion) in 2018, following analysis of mid-year fiscal reports and their results from 2017.
The risk-adjusted return on capital for those banks will see a 2.1 percentage point YoY increase to reach 19.1%.
John Qu, senior partner at McKinsey, said to the Chinese News Service that the increase was the result of improved pricing power and greater curbs on costs.
The report nonetheless points out that while the assets of the banks grew by 10% and risk-weighted assets by 11% during the period from 2015 to 2017, the growth rate for overall income was just 1.8%.
14 banks will post losses in 2018, as compared to 20 in 2017.
McKinsey points out that three factors have crimped the profits of Chinese banks in recent years, including the ongoing decline of bank interest margins and intermediate incomel dependence upon asset growth and loan issuance, and tightening regulation which has crimped access to capital.
“One of the three major challenges is banks’ declining income, due to lower margins after the liberalisation of interest rates,” said Qu. “Banks need a new driver for their profit growth.”
China Construction Bank is on track to be the most profitable Chinese bank in 2018 with estimated annual profit of around 151 billion yuan, followed by Industrial and Commercial Bank of China, Bank of China, Agricultural Bank of China and China Merchants Bank.