Banking Newsletter - Review and Outlook of China’s Banking ... · As of March 31, 2017, the majority of listed banks have already released their 2016 annual results. The newsletter

Banking Newsletter

Review and Outlook ofChina’s Banking Industry in 2016

April 2017

www.pwccn.com

Editor-in-Chief: Vincent Yao

Deputy Editor-in-Chief: Lily Gan, Jeff Deng

Members of the editorial team:

Cynthia Chen, Jerry Han, Magic Ji, Coco Lv, Susan Meng

( in alphabetical order of last names)

Editorial Team:

Advisory Board:

Jimmy Leung, Margarita Ho, Richard Zhu, Linda Yip

PwC

The Banking Newsletter (the Newsletter), PwC’s analysis of China’s listed banks and the wider industry, is now in its 30th edition. Over the past one year there are a number of IPOs for small-and-medium-sized banks, which increases the universe of listed banks in China.

As of March 31, 2017, the majority of listed banks have already released their 2016 annual results. The newsletter takes that point of time as a cut-off and include a sample of 27 A-share and/or H-share listed banks for the analysis. . These banks are categorised into fours groups as defined by the China Banking Regulatory Commission (CBRC):

Preface

The total assets of these listed banks accounted for 76.40% of the total assets of Chinese commercial banks as of the end of December 2016. Unless otherwise stated, all the information in this newsletter comes from publicly available sources. For more information, please talk to your PwC contacts or any of those listed in the Appendix as Banking and Capital Markets contacts.

Large Commercial Banks (6)

Industrial and Commercial Bank of

China (ICBC)

China Construction Bank (CCB)

Agricultural Bank of China (ABC)

Bank of China (BOC)

Bank of Communications (BoCom)

Postal Savings Bank of China

(PSBC)

Joint-Stock Commercial Banks (7)

China Merchants Bank (CMB)

China CITIC Bank (CITIC)

Minsheng Bank of China (CMBC)

Shanghai Pudong Development

Bank (SPDB)

China Everbright Bank (CEB)

Ping An Bank (PAB)

China Zheshang Bank (CZB)

City Commercial Banks (9)

Bank of Jiangsu (Jiangsu)

Shengjing Bank (Shengjing)

Huishang Bank (Huishang)

Bank of Tianjin (Tianjin)

Bank of Jinzhou (Jinzhou)

Harbin Bank (Harbin)

Bank of Chongqing (Chongqing)

Zhengzhou Bank (Zhengzhou)

Bank of Qingdao (Qingdao)

Rural Commercial Banks (5)

Chongqing Rural Commercial Bank (CQRCB)

Jiutai Rural Commercial Bank (JTRCB)

Changshu Rural Commercial Bank (CSRCB)

Wuxi Rural Commercial Bank (WXRCB)

Jiangyin Rural Commercial Bank (JYRCB)

April 2017Banking Newsletter

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Contents

Macro Environment Overview

ResultsAnalysis ofListed Banks

Features Outlook

05 11

33 43

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Macro Environment Overview

• Steady development of China’s economy among domestic challenges and rising global uncertainties

• Investors’ wait-and-see approach gathers pace as demonstrated by a widening gap between M1 and M2 growth

• Personal housing loan growth accelerates, leading to tightening measures imposed by local authorities

• Cross-border direct investment records a deficit for the first time, reflecting a growing demand of overseas assets


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Steady development of China’s economy among domestic challenges and rising global uncertainties

In 2016, the global economy experienced a sluggish recovery amid a series of unexpected events such as the Brexit. The International Monetary Fund (IMF) predicted that year-on-year global economic growth to be 3.10% in 2016, the lowest pace since the global financial crisis.

Despite a more complex and fast changing global environment, China’s economy faced challenges of its own, such as structural imbalances, as well as rising asset bubbles in some regions.

Over the past year, the central government has deepened the supply-side structural reform, focusing on reducing excess capacity, decreasing inventory, deleveraging, reducing costs and strengthening weak economic links. The “One Belt, One Road” initiative continued to make progress. The Shenzhen-Hong Kong Stock Connect, a scheme further integrates mainland and Hong Kong stock markets, was launched. These moves all contributed to the authority’s effort to improve economic vitality through further opening up.

Thanks to a series of reform measures and strategies, China’s economy performed steadily and continued to be the key driving force of global economic recovery. In 2016, China’s gross domestic product (GDP) showed a year-on-year growth rate of 6.70% (Figure 1).

In 2016 domestic Consumer Price Index (CPI) rose modestly, while Producer Price Index (PPI) ended its 54 consecutive months of negative growth in September and continue to rise (Figure 2). According to the National Bureau of Statistics, there are two reasons for the PPI’s turnaround: 1) the result of exchange rate fluctuations, as rising prices of imported commodities pushed up the prices for several manufacturing raw materials; 2) both industrial output and market demand increased steadily, due to the effective reduction of excess capacity and inventory, driving by the government’s policies to rebalance supply and demand. This trend also continued into 2017 Q1.

Figure 1 Changes in China’s GDP growth

12.20%

2016 Q4,

6.70%

0%

2%

4%

6%

8%

10%

12%

14%

Source: National Bureau of Statistics

GDP Growth

Note: The growth rate in the figure shows the situation at the end

of each quarter; for example, 2013 Q2 represents the growth

rate for Q1–2 of 2013.

Figure 2 Changes in CPI and PPI

2.10%

5.50%

-6%

-4%

-2%

0%

2%

4%

6%

201

4.0

1

201

4.0

3

201

4.0

5

201

4.0

7

201

4.0

9

201

4.1

1

201

5.0

1

201

5.0

3

201

5.0

5

201

5.0

7

201

5.0

9

201

5.1

1

201

6.0

1

201

6.0

3

201

6.0

5

201

6.0

7

201

6.0

9

201

6.1

1

Consumer Price Index (CPI)

Producer Price Index (PPI)


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Investors’ wait-and-see approach gathers pace as demonstrated by a widening gap between M1 and M2 growth

In 2016, the People’s Bank of China (PBoC) maintained its prudent monetary policy. While the benchmark lending and deposit interest remainedunchanged, The PBoC primarily took quantitative tools (eg. cutting reserve requirement ratio) and open market operations, as well as innovative ways (eg. Standing Lending Facility or SLF, Medium-term Lending Facility or MLF) to maintain sufficient liquidity in money markets.

At the end of 2016, the broad money supply (M2) showed a year-on-year growth of 11.30%, lower than that of 13.30% in 2015 and the 2016 growth target of 13.00%. The reasons for a slower M2 growth, as interpreted by the markets, include: 1) slowdown of the economic growth leads to a lower credit demand; 2) reduction of the funds outstanding for foreign exchange restrained the growth of monetary base; 3) the PBoC injected a significant amount of liquidity in 2015 in attempt to stabilise the stock market, causing the base to be

relatively high; and 4) tightening of regulations on off-balance-sheet financing activities.

Growth of the narrow money supply (M1) accelerated since 2015 and the trend has strengthened in 2016, reaching a rate of 21.40%. As a result the growth rate gap between M2 and M1 expanded further (Figure 3).

Generally speaking, acceleration of M1 growth means that businesses are moving funds from timedeposits to current deposits, a sign of willingness to invest and the economic vitality are expected to rise. Nevertheless, the market widely expected that this sharp rise in M1 growth was due to a decrease in investment return in the real economy, causing a decrease in businesses cost of holding cash, a sign of weak investment appetite (Figure 4). In other words, investors have taken a wait-and-see approach.

Figure 3 Comparison of growth rates of M1 and M2

21.40%

11.30%

0%

5%

10%

15%

20%

25%

30%

35%

M1 Growth M2 Growth

Source: National Bureau of Statistics and the PBoC

Year-on-year growth

Figure 4 Fixed-asset investment growth

7.91%

0%

5%

10%

15%

20%

25%

30%

35%


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Personal housing loan growth accelerates, leading to tightening measures imposed by local authorities

While businesses’ investment appetite was low, the year-on-year growth in RMB loans reached 13.46% in 2016. One of the reasons for the fast growth was the effort to reduce excess housing inventory, leading to a surge in personal housing loans.

Statistics showed that in 2016, the year-on-year growth in the sales area for residential housing was noticeably faster than it was during the previous two years, reaching as high as 34.80%. Sales volume increased dramatically from RMB 8.73 tn in 2015 to RMB 11.76 tn (Figure 5).

As of the end of 2016, personal housing loans reached RMB 19.14 tn, a year-on-year increase of 34.98%, with growth accelerating at the end of each quarter. The growth exceeded 30% at the end of June and September and peaked at the end of December (Figure 6).

The acceleration of housing loans growth was largely due to the policy of decreasing excess housing inventory, fuelled by banks’ generous lending approach in attempt to meet consumers’ demand in housing. It also reflected Chinese retail investors’ preference for real estate as a asset class. This contributed to a surge in housing sales and prices, which in turn boosted the mortgage demand, creating an upward spiral of risks in real-estate markets.

In order to curb the bubble in the real-estate market, PBoC and the local authorities implemented new measures to tighten mortgages in Q4 2016, such as differentiating lending rates, regulating based on different cities and regions, raising the minimum down payment and tightening the restraints on house purchase. As of the end of March 2017, more than 40 cities had implemented purchasing restrictions.

Figure 6 Personal housing loans balance and growth rate

2015.12, 14.18

2016.12, 19.14

0%

5%

10%

15%

20%

25%

30%

35%

40%

-

2

4

6

8

10

12

14

16

18

20

Growth volume (In RMB trillions) Quarter-end y-o-y growth

Source: the PBoC

8.73

11.76

14.40%

34.80%

-10%

0%

10%

20%

30%

40%

50%

-2

0

2

4

6

8

10

12

x 1

0000

Residential housing salesResidential housing sales growth


Y-o-y growthSales (In RMB trillions)

Figure 5 Residential housing sales volume and growth

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Cross-border direct investment records a deficit for the first time, reflecting a growing demand of overseas assets

The Federal Reserve’s acceleration of rate hike and the strengthening dollar has driven RMB exchange rates downwards, even though the PBoC repeatedly emphasised that there is “no basis for a persistent depreciation”. At the end of 2016, the daily reference exchange rate of RMB against the USD was 6.9370, representing an annual depreciation of 6.39%. The CFETS RMB exchange rate index, which is pegged to a basket of currencies, also fell by 6.06% to 94.83.

Uncertainties on the RMB caused an increase of demand on overseas asset for Chinese investors. Statistics from the State Administration of Foreign Exchange (SAFE) showed that in 2016, the Overseas Direct Investment (ODI) exceeded the Foreign Direct Investment (FDI) for the first time (Figure 7), with a deficit of USD 46.6 bn.

In additional to ODIs, other types of overseas assets, such as securities, deposits, loans, and trade credits saw an increase in demand, too. These

purchases, along with ODIs, made Chinese investors’ total holding of overseas assets to increase to USD 661.1 bn in 2016 (Figure 8), nearly doubled from the level in 2015.

The SAFE believed that the rapid growth in ODI was an inevitable result of economic development. China has become providers of capital rather than receivers. The country's role in international trade markets has also shifted from commodity exporters to commodity and capital exporters. The changes also reflect the demand for a diversified asset allocation expectations of domestic entities. That said, there are still several issues worth noting, such as irrational investments in certain areas, investments in offshore targets with assets size larger than the acquirers, or some projects that have very short investment periods. These risks must be taken seriously.

Figure 7 Comparison between FDI and ODI Figure 8 Breakdown of increases in Chinese ODI in 2016

0

50

100

150

200

250

300

Direct Investment - Inflows (Foreign Direct Investments)

Direct Investment - Outflows (Overseas Direct Investments)

In USD billions

Source: the PBoC, State Administration of Foreign Exchange

Other

Investments*51.51%

Direct

Investments32.85%

Securities

Investments15.64%

*Other investments, including other stock equities, currencies and

deposits, loans, trade credits, insurance and pensions, etc.

Source: State Administration of Foreign Exchange

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Results analysis of listed banks

Profitability:

• Net profits continue to grow, but the momentum for all banks were challenged

• Narrowing net interest margins (NIM) and increasing asset impairment charges pose double pressures on net profits

• Expansion in assets and increase in intermediary income were two drivers of profit growth

Asset-liability structure:

• Assets: the proportion of investment assets increases

• Liabilities: interbank certificate of deposits rise in proportion

Credit assets quality:

• Non-performing loan (NPL) ratios continue to rise

• Special mention and overdue loan ratios presentes a mixed picture

• Banks mitigate credit risk through a variety of methods

• Provision coverage ratios fall, with some banks’ reading below or close to regulatory “red line”

Capital adequacy:

• Capital adequacy ratios (CAR) for all banks remain broadly stable

• While LCBs and RCBs maintain relatively high level of CAR, JSCBs and CCBs face pressure on capital

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Profitability:-Net profits continue to grow, but the momentum for all banks were challenged

Net profits continue to grow

In 2016, the overall net profit growth of Chinese listed banks enjoyed a slight rebound compared to the previous year. While some banks experienced a decrease in net profits compared to the previous year, the majority of banks’ net profits were increased.

With narrowing interest margins and significant increases in provisions for credit asset impairment losses, banks remained stable earnings through increasing the proportion of interest-generating assets, increasing income from intermediary business, and reducing business expenses.

LCBs

74.68%

JSCBs

20.41%

CCBs

3.92%

RCBs

0.99%

Figure 10 Changes in net profit growth rates

Net profit in

2016

(RMB billion)

Year-on-

year

growth

Comparison

of growth rate with

2015 (percentage

points)

27 listed banks 1,321.65 3.20% +0.91

Six LCBs 987.03 1.92% +1.01

Seven JSCBs 269.76 5.26% +0.35

Nine CCBs 51.83 16.13% −4.56

Five RCBs 13.02 15.79% +11.79

1.92%

5.26%

16.13%

15.79%

0%

5%

10%

15%

20%

25%

30%

2012 2013 2014 2015 2016

Six LCBs Seven JSCBs Nine CCBs Five RCBs

Table 1 Overview of net profits in 2016

Figure 9 Net profits breakdown

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LCBs: challenges to growth are mounting

Even though the net profit growth in 2016 was greater for many LCBs than in 2015, pressures on profit did not substantially reduce.

Out of the six LCBs, three experienced negative growth in pre-tax profit, two had almost-zero growth, and the other had a growth rate slower than in 2015. Operating profit performance before asset impairment losses also showed a similar trend.

Investments in Treasury bonds, local government bonds, and rail bonds benefited from tax deduction and exemption, reducing the LCBs income taxes in 2016 by 11.85% or RMB 33.55 bn year-on-year, temporarily relieving the profit pressure. Nevertheless, the net interest income of this group generally had negative growth. There is also weak growth in income from fees, whose internal growth momentum has run into a bottleneck.

0.50%

1.53%

1.82%

2.58%

1.23%

14.11%

0.52%

0.28%

0.70%

1.25%

1.21%

7.03%

ICBC

CCB

ABC

BOC

BoCom

PSBC

2016 2015

Figure 12 Changes in pre-tax profit growth of LCBs

Figure 11 Changes in net profit growth of LCBs

Figure 13 Changes in pre-provision operating profit growth of

LCBs

0.01%

-1.10%

-1.83%

-3.96%

0.11%

3.72%

0.45%

-0.20%

-0.60%

0.04%

1.28%

5.21%

ICBC

CCB

ABC

BOC

BoCom

PSBC

2016 2015

0.38%

-1.06%

-1.89%

6.71%

0.82%

-10.73%

7.25%

8.51%

6.06%

3.71%

7.42%

12.17%

ICBC

CCB

ABC

BOC

BoCom

PSBC

2016 2015

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7.52%

0.11%

3.73%

5.26%

2.74%

3.36%

44.00%

3.51%

0.69%

3.19%

7.68%

2.24%

10.42%

38.37%

CMB

CITIC

CMBC

SPDB

CEB

PAB

CZB

2016 2015

Figure 14 Changes in net profit growth of JSCBs

7.52%

0.11%

3.73%

5.26%

2.74%

3.36%

44.00%

7.76%

12.93%

6.83%

13.26%

4.89%

28.49%

40.28%

CMB

CITIC

CMBC

SPDB

CEB

PAB

CZB

Net profits Pre-provision operating profit

JSCBs: the impact of provisions on profit growth is clear

The net profit growth rate for JSCBs in 2016 was higher than in 2015. However, profit pressures remained significantly, which was strongly affected by the provisions.

When comparing the net profit growth rate with the operating profit growth rate before asset impairment losses, there were significant differences between many of the JSCBs. Several banks had pre-provision operating profits with double-digit growth, whereas net profit growth was very slow or almost-zero.

JSCBs have seen sluggish net interest income growth as the LCBs, but they have still been able to quickly increase their fee and other non-interest income. Nevertheless, they are still experiencing asset impairment losses during periods of rapid growth, which will be an important factor that constrains profitability.

Figure 15 Comparison between net profit and

pre-provision operating profit growth of JSCBs

26.43 38.22

46.11 61.45

130.48

232.53

289.66

0

50

100

150

200

250

300

2010 2011 2012 2013 2014 2015 2016

In RMB billion

Figure 16 Changes in asset impairment charges of JSCBs

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CCBs: growth is slowing

In 2016, there was a pronounced slowdown in the net profit growth rate of CCBs. Some banks even suffered negative growth.

As with JSCBs, CCBs were also at a stage where it required large provisions for asset impairment losses, so there was a large gap between its net profit and pre-provision operating profit growth rates.

11.91%

10.52%

12.62%

-8.40%

67.06%

10.04%

10.60%

20.53%

15.15%

9.26%

14.75%

9.44%

11.36%

131.17%

17.41%

12.13%

36.24%

21.29%

Jiangsu

Shengjing

Huishang

Tianjin

Jinzhou

Harbin

Chongqing

Zhengzhou

Qingdao

2016 2015

Figure 18 Comparison between net profit and

pre-provision operating profit growth of CCBs

Figure 17 Changes in net profit growth rate of CCBs

11.91%

10.52%

12.62%

-8.40%

67.06%

10.04%

10.60%

20.53%

15.15%

19.25%

22.33%

31.31%

-0.71%

55.31%

33.87%

30.86%

34.51%

29.92%

Jiangsu

Shengjing

Huishang

Tianjin

Jinzhou

Harbin

Chongqing

Zhengzhou

Qingdao

Net profits Pre-provision operating profit

3.31

5.50 6.07 6.30

11.08

19.79

32.24

0

5

10

15

20

25

30

35

2010 2011 2012 2013 2014 2015 2016

In RMB billions

Figure 19 Changes in increases of asset impairment losses

of CCBs

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10.70%

65.16%

7.34%

7.88%

-5.83%

6.09%

13.93%

-1.79%

-10.76%

-4.28%

CQRCB

JTRCB

CSRCB

WXRCB

JYRCB

2016 2015

RCBs: growth varies

In 2016, the net profit growth rate of RCBs experienced a marked increase, mainly because of the influence of recently-listed Jiutai Rural Commercial Bank.

This category of banks presented significant differences in net profit and reflected the effects of regional disparities among RCBs on earnings. Some went from decreasing to increasing, and some suffered negative growth for the second consecutive year. This also demonstrated that their business results are quite volatile.

Figure 20 Changes in net profit growth rate of RCBs

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1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

2014 2015 2016

LCBs JSCBs CCBs RCBs

In addition to the significant increase in asset impairment losses mentioned above, the downward trend in net interest margin (NIM) and net interest spread (NIS) is an important element exerting pressure on the earnings of listed banks.

Having been affected by the repricing of loans as they reached maturity after the central bank’s multiple interest rate reductions in 2015 and the marketisation of interest rates, all of the listed banks’ NIS and NIM maintained downward trends.

Looking back over the past three years, RCBs saw the most marked NIS and NIM decreases. LCBs have the lowest NIS of all of the bank categories.

NIM

Year-on-year

change

(basis points)

NIS

Year-on-year

change

(basis points)

27 listed banks 2.12% −36 1.71% −25

LCBs 2.10% −38 1.60% −26

JSCBs 2.12% -35 1.98% −30

CCBs 2.19% −20 2.02% −17

RCBs 2.79% −36 2.61% −40

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

2014 2015 2016


Table 2 Overview of NIM and NIS in 2016

Figure 22 Changes in NIS Figure 21 Changes in NIM

Profitability: -Narrowing net interest margins and increasing asset

impairment charges pose double pressures on net profits

April 2017

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The decrease in the return on interest-generating assets for LCBs, JSCBs, and CCBs is relatively small.

Even though, the return on interest-generating assets of RCBs is obviously decreasing, it is still the highest of all the bank categories.

LCBs are still maintaining the lowest interest rate on interest-bearing liabilities, however it is becoming increasingly more obvious that this type of low financing cost presents fewer advantages. With the lowering of benchmark interest rates, the gap between the interest rates paid by JSCBs and RCBs and that paid by LCBs is narrowing.

The interest rates paid by CCBs is the highest among all the bank categories.

1.50%

2.50%

3.50%

4.50%

5.50%

6.50%

7.50%

8.50%

9.50%

2014 2015 2016


1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

2014 2015 2016


Figure 23 Changes in return on interest-generating assets

Figure 24 Changes in interest on interest-bearing liabilities


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Profitability: -Expansion in assets and increase in intermediary income were two drivers of profit growth

In an environment of downward trending interest rates and narrowed NIS, increasing assets is an important driving force for listed banks to maintain stable profits.

At the end of 2016, the total assets of the 27 listed banks had increased by approximately 13.37% since the end of 2015, reflecting overall growth.

Even though all of the banks have actively increased their assets, judging by the trends over the past five years, the banks’ overall asset growth rate this year is being maintained at a stable level.

The growth rate for LCBs is hovering around 10%, whereas the growth rate for JSCBs is between 18% and 20%.

The growth rate for CCBs is coming down from a highpoint and that of RCBs is showing a downward trend amidst fluctuations.

Total assets

(RMB

trillion)

Year-on-

year

growth

Growth rate as

compared to 2015

(percentage points)

27 listed banks 138.81 13.37% +0.58

LCBs 99.49 11.10% +0.57

JSCBs 31.95 18.93% +0.43

CCBs 6.01 25.94% -1.93

RCBs 1.35 15.35% -3.16

Table 3 Asset growth in 2016

Figure 25 Change in asset growth

10.44%11.01%

18.49% 18.93%

27.87%

25.94%

18.51%15.35%

0%

5%

10%

15%

20%

25%

30%

35%

2012 2013 2014 2015 2016



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71.09%76.13%

66.77%70.16%

84.48%86.10%

87.72%

90.69%

18.52%17.63%

28.39%25.77%

13.83%11.47% 9.15% 5.76%10.39% 6.24% 4.84% 4.07% 1.68% 2.43% 3.13% 3.55%

2016 2015 2016 2015 2016 2015 2016 2015


Net interest income Fee and commission income Other non-interest income

In addition to actively increasing the scale of assets, the banks have also been placing increasing importance on intermediary business income.

In 2016, the transaction fee income of all listed banks increased as a proportion of interest and net fee income.

At JSBCs in particular, the proportion of net fee and commission income as well as other non-interest income together comprised nearly a third of operating income.

Figure 26 Changes in income structure

Among different types of transaction fee income, the listed banks have in recent years continued to increase investment into businesses such as banking cards, proxy agency services, and financial products. These businesses currently occupy one of the top three positions at all listed banks in terms of their proportion among transaction fees and commissions.

As the growth of operating income has slowed, the growth of the business and management expenditures of the listed banks has also fallen proportionately. The cost to income ratio of listed banks has remained stable, whereas that of CCBs has fallen.

Bank cards

24.93%

Agency

services16.56%

Wealth management

14.52%

Settlement and

clearing11.93%

Custodian services and

other trustee services11.16%

Consultancy and

investment banking8.76%

Others

6.68%

Guarantees and commitments

5.46%

Figure 27 2016 net fee and commission income structure


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Asset-liability structure:-Assets: the proportion of investment assets increases

10.64%

18.65% 18.94% 18.65%16.33%

30.87%

48.87%

25.16%

-5.26% -6.77%

-23.54%

5.10%


Loan and advances Investments Interbank assets

50.52%

50.63%45.87%

46.05% 33.21%35.23%

38.54%

39.37%

25.77%24.59% 32.50%29.54%46.19%39.07% 31.26%28.81%

6.30% 7.39%8.59% 10.96%

7.83%12.89%

16.19%17.76%

13.73%13.80% 9.42% 10.11% 9.51% 10.50% 11.81%11.80%

3.68% 3.59% 3.62% 3.35% 3.27% 2.31% 2.21% 2.26%

2016 2015 2016 2015 2016 2015 2016 2015


Others Cash and deposits with the central bankInterbank assets InvestmentsLoan and advances

In 2016, with yields from interest-generating assets on an overall downward trend of the listed banks, they continued to apply the strategy from 2015: continued to adjust asset structure, generally expanded securities investment portfolios, and decreased holdings of interbank assets.

A comparison of the growth of different types of asset shows that investments all grew at a much faster rate than loans, and interbank assets experienced either negative or low growth.

At LCBs, JSCBs, and RCBs, loans continued to comprise the largest proportion of the asset structure, and among these the proportion of loans at LCBs and JSCBs was approximately 50% of total assets.

The proportion of loans at RCBs was slightly lower. The loan proportions of CCBs were even lower than investments, ranking the second largest proportion.

The proportion of the banks’ interbank assets was lower than at the end of 2015.

Figure 28 Growth of different types of assets in 2016

Figure 29 Changes in asset structure


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3.44%

10.64%

17.29%

13.97%

30.34%

33.51% 33.27%

10.37%

-10.08%

21.70%

-4.18%

15.37%


Coporate loans Retail loans Discounted bills

Loan investment trend: rapid growth in retail loans

Although loans of the various types of listed banks have not grown as quickly as investment assets, the growth rate was still higher in 2016 than 2015, driven mainly by rapid growth in retail loans.

The retail loan growth exceeded 30% for LCBs, JSCBs, and CCBs, with most of the increase coming from individual housing loans. The growth of corporate loan has been relatively slower.

Performance differs at RCBs, where corporate loans and discounted notes have seen relatively fast growth.

The abovementioned changes have led to obvious shifts in the loan structure of listed banks. In particular, the proportion of retail loans at LCBs and JSCBs has rapidly increased, and the proportion of corporate loans has decreased drastically.

59.88%64.04%

58.88%63.15% 71.86%

72.87% 63.96%63.41%

35.13%29.82% 37.50%33.33%

22.36%19.95%29.09%

29.78%

4.99% 6.14% 3.62% 3.52% 5.78% 7.18% 6.95% 6.80%

2016 2015 2016 2015 2016 2015 2016 2015


Coporate loans Retail loans Discounted bills

Figure 30 Comparison of the growth rate of all types of loans in 2016

Figure 31 Changes in loan structure


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The scale of investment in receivables decreases, and overdue exposure emerges

The investment assets of listed banks saw rapid growth in 2016, but there were differences among the banks in terms of which asset category grew the fastest.

One common characteristic was that the investment in receivable assets decreased or the growth rate slowed for all banks. While this asset category continued to grow relatively quickly at CCBs, reaching 41.60%, this was a large decrease from 2015, with growth of 107.52%.

A comparison of investment structure shows that the proportion of receivable assets in all banks' investment portfolios decreased, particularly at JSCBs and RCBs.

The point that should be kept in mind is that risk has emerged for this asset type, specifically in the form of increases in overdue balances, mainly at JSCBs and CCBs. The listed banks increased the percentages of provision for impairment of assets.

30.88%

124.31%

-37.11%

10.25%

44.66%

72.23%64.29%

184.24%

10.19%

51.38%63.14%

1.33%

-9.52%

8.94%

41.60%

-14.50%


Financial assets measured at fair value and included in the profit or loss of the current period

Financial assets available for sale

Held-to-maturity investment

Investments classified as receivables

6.84% 6.08% 4.58% 2.67% 1.02% 2.41% 5.19% 5.89%

30.81%24.77%

22.52%17.11%

25.75%23.33%

38.13%16.79%

47.91%50.57%

21.84%

18.88%

19.69%17.97%

24.74%

30.56%

14.45%18.57%

51.05%61.33%

53.54%56.29%

31.94%

46.76%

2016 2015 2016 2015 2016 2015 2016 2015


Investments classified as receivables

Held-to-maturity investment

Financial assets available for sale

Financial assets measured at fair value and included in the profit or loss of the current period

Figure 32 Comparison of the growth rate of all types of investments in 2016

Figure 33 Changes in investment structure


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Asset-liability structure:-Liabilities: interbank certificate of deposits rise in proportion

Facing very challenging market environments, the listed banks are proactively adjusting their liabilities structure. Interbank deposit is a new type of liabilities, which has the advantages of higher liquidity in the secondary market and standardisation over traditional fixed banking deposits, so they have been growing rapidly since the second half of 2015.

In 2016, the Ministry of Finance and the State Administration of Taxation designated interbank deposits applicable for “interbank financial transactions," meaning their interest income can be exempted from value-added tax. This also speeded up the issuance by listed banks, making issued debt securities one of the fastest-growing type of liabilities in 2016.

However, due to the market has different understanding on the interbank deposits, and some areas are not covered by supervision, there is still room for arbitrage activities. This has led to capital "spinning its wheels" and not flowing into the real economy, as well as increases instability factors in financial markets.

Recently, CBRC has issued notification that it will put greater effort into managing risk in this type of business and carry out special administrative work to influence the quantity of interbank deposits issued and their circulation in the market.

Figure 34 Growth of different types of liabilities in 2016

Figure 35 Changes in liabilities structure

10.82% 9.67%18.01% 12.84%

-1.91%

18.86%21.64%

-3.02%

29.88%

54.09%

81.99%

94.67%

5.33%

29.46%

4.18% 3.83%


Customer deposits Interbank liabilities Debt securities Others

79.12%

79.26%

61.13%66.39%

59.27%

63.33% 71.87%

73.48%

11.22%12.69%

23.50%23.55%

25.54%26.48%

15.80%18.79%

2.94% 2.51%8.45%

6.53%10.00%

6.93% 7.93%4.70%

2016 2015 2016 2015 2016 2015 2016 2015


Customer deposits Interbank liabilitiesDebt securities Borrowing from the central bankOthers


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Deposit structures showing an increasing current accounts

With regard to the fixed and current deposit structures of all the types of listed banks, the proportion of fixed deposit is on a downward trend while the current proportion is on an upward trend.

This tendency is most apparent at JSCBs. The change is less apparent at CCBs.

A comparison of the trends over the last six years shows that the present tendency toward current accounts started in 2015, and became more obvious in 2016, with the situation referred to as "price scissors" occurring, in which fixed and current proportions are reversed. This is also in accordance with the tendencies in the changes of M1 and M2 shown in the macro-economy section.(see page 8).

The last "price scissors" occurred in 2012, and at the time bank deposits showed a tendency toward fixed accounts.

51.18%

48.37% 48.48%

40.65%38.89%

36.31% 40.20%37.38%

47.19%49.78%44.75%

51.25% 52.52%52.38%

56.82%58.87%

1.63% 1.85% 6.77% 8.11% 8.59% 11.31% 2.97% 3.75%

2016 2015 2016 2015 2016 2015 2016 2015


Demand deposits Time deposits Other deposits

49.87%

48.08% 47.56%45.01%

46.38%

50.13%

46.62%

48.93% 49.25%51.25% 50.23%

47.00%

0%

10%

20%

30%

40%

50%

60%

2011 2012 2013 2014 2015 2016

Demand deposits Time deposits

Figure 36 Comparison of listed bank deposit structures

Figure 37 The changes of listed bank deposit structures


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Credit asset quality: -Non-performing loan (NPL) ratios continue to rise

Along with the economic downturn, the NPL and NPL ratio are both on the rise at listed banks.

However, this is distinct from a continued increase in the NPL ratio, because at LCBs, JSCBs, and RCBs, the proportion of special mention loans has fallen.

Special mention loans continue to increase at CCBs.

NPL balances NPL ratio

End of 2016

(RMB billion)

Year-on-

year

growth

End of

2016

Changes as

compared to

end of 2015

27 listed banks 1,154.111 16.80% 1.67% +0.06

LCBs 855.33 11.85% 1.66% +0.02

JSCBs 263.81 33.51% 1.75% +0.19

CCBs 28.18 41.29% 1.37% +0.22

RCBs 6.79 15.75% 1.25% +0.03

Table 5 Growth in NPLs in 2016

Figure 38 Changes in NPL ratio Figure 39 Changes in special mention loan ratio

3.03%

3.17%

3.23%

2.75%

3.11%

3.29%

2.97%

2.77%


2016 2015

1.66%

1.75%

1.37%

1.25%

1.64%1.55%

1.16% 1.23%


2016 2015

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0.90

1.18

1.34

1.22

0.94

1.29

1.13

1.33


2016 2015

2.12%

2.83%

3.29%

2.29%2.26%

3.29%

2.62%2.49%


2016 2015

The risk of CCBs has yet to be fully exposed, further attention should be paid to

At the end of 2016, the overdue loan status of most listed banks had improved, and the overdue loan ratio was lower than at the end of 2015 for all banks.

However, the overdue loan ratio of CCBs continued to rise.

Along with the implementation of a thorough Macro-Prudential Assessment (MPA) system and tightening regulation, the listed banks have been paying closer attention to overdue ratios and overdue loans of over 90 days ratio versus NPL balances (i.e. the "degree of deviation").

At most listed banks at the end of 2016, the overdue loans of over 90 days ratio versus NPL was lower than at the end of 2015. However, CCBs were an exception.

In terms of both the overdue ratio and the overdue loans of over 90 days ratio versus NPL ratio, the overall credit risk of CCBs is still in the exposure process, and further attention should be paid to the future trends.

Figure 40 Changes in overdue loan ratios

Figure 41 Changes in the ratio of loans overdue 90 days or above to NPLs

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Credit asset quality: -Banks mitigate credit risk through a variety of methods

855.33

263.81

28.18 6.79

311.96

188.90

11.40 3.05

0

100

200

300

400

500

600

700

800

900


NPLs Loan provisions of write-offs and transfers

In RMB billions

In 2016, the overall credit risk of listed banks was under control, and this was mainly because of the reduction in NPL balances through methods such as proactively restructuring, write-offs, and transfers of loan provisions.

In 2016, the restructured loan ratio of listed banks was on an upward trend for all types of banks except LCBs, which experienced a slight decrease.

Figure 42 Changes in restructured loan ratios

0.19%

0.58%

0.70%

0.44%

0.23%

0.37%

0.48%

0.28%


2016 2015

Based on observations of changes in write-off and transfers of loan provisions, it is apparent that at the 27 listed banks, the size of the 2016 write-off and transfers of loan provisions is 515.30 billion RMB, an increase over the same period in 2015 of 26.17%.

Figure 43 NPLs balance, write-offs and transfers of loan provisions

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Credit asset quality - Provision coverage ratios fall, with some banks’ reading below or close to regulatory “red line”

The provision coverage ratio of most listed banks fell in 2016, and of 27 listed banks, 18 saw a decrease. The ratios of many LCBs have already fallen below or are close to the regulatory red line of 150%.

Among the different types of banks, the biggest proportion of decreases in the provision coverage ratio occurred in CCBs. The smallest decrease occurred in RCBs.

Figure 44 Changes in provision coverage ratio

174.37% 175.24%

225.77%248.14%

184.09% 182.09%

268.10%

250.88%


2016 2015

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Capital adequacy: -Capital adequacy ratios (CAR) for all banks remain broadly stable

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

2013 2014 2015 2016


In 2016, the listed banks proactively used methods such as issuing preferred stocks, Tier 2 capital bonds, and increased issuance of common stocks to supplement capital.

The capital adequacy ratio of the six LCBs saw little fluctuation overall in comparison to 2015, and the core Tier 1 capital adequacy ratio remained essentially stable.

The capital adequacy rate of JSCBs resembled that of LCBs, increasing slightly. However, in core Tier 1 capital adequacy ratios, most banks saw some degree of decrease over last year.

However, the capital adequacy ratios of CCBs and RCBs decreased overall, though there were relatively large differences between banks. For banks that took measures such as issuing IPOs and premium placements of A shares and H shares last year, core Tier 1 capital adequacy ratios increased, and for other banks they decreased.

Figure 45 Changes in core Tier 1 capital adequacy ratio Figure 46 Tier 1 capital adequacy ratios

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

2013 2014 2015 2016


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Capital adequacy: -While LCBs and RCBs maintain relatively high level of CAR, JSCBs and CCBs face pressure on capital

Most LCBs maintained capital adequacy ratios at relatively high levels. RCBs were in a similar situation as LCBs, with relatively little capital pressure.

However, there was relatively high pressure on the capital adequacy of JSCBs and CCBs, and the capital adequacy ratio of most banks was between 10% and 12%.

Along with the sustained rapid development of business and the influence of external factors, such as possible future standards regarding use of financial instruments, the pressure to supplement capital remains relatively high.

Figure 47 Capital adequacy ratios

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

2013 2014 2015 2016


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Features

• Facing the challenges of Macro-Prudential Assessment

• Transforming retail banking to capitalise on growing domestic consumption

• Implementation of IFRS 9 by the banking industry: the clock is ticking

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Facing the challenges of Macro-Prudential Assessment

In 2016, the People's Bank of China (PBOC) "upgraded" its differential required reserve ratio adjustment mechanism to a MPA system.

The MPA system focuses on the seven main aspects covering the capital and leverage status, asset and liability status, liquidity, price determination behaviour, asset quality, foreign debt risk, and credit policy implementation, strengthening conversion period adjustment and systematized financial risk prevention through comprehensive assessment. This system’s new assessment criteria mainly include:

1. Includes macro-prudential capital adequacy ratio in the assessment.

The macro-prudential capital adequacy ratio comprehensively considers minimising the capital adequacy ratio, reserve capital, supplementary capital with systemic importance, and the capital conversion buffer, as well as the bank's stability and the implementation of credit policy, etc. Thus, the range of factors is more complete and the requirements are stricter.

2. Shifts the assessment focus from loans to a broader sense of credit.

Broad credit includes loans, bond investments, shareholder rights and other investments, as well as forms of credit at financial institutions such as buying back of assets, deposit of non-deposit funds, etc. MPAs began to officially include off-balance sheet financial products in the broad credit since Q1 2017.

The growth of broad credit is an important assessment criterion for the MPA system, and as it influences assessment of the asset-liability status of banks, it also buffers against the influence upon the macro-prudential capital adequacy ratio throughout the conversion period.

Based on the requirements of the MPA system, the deviation between the growth of broad credit and the target M2 growth should not exceed a certain ratio.

According to the PBoC’s 2016 Q4 China Monetary Policy Report, by the end of 2016, the M2 increased 11.30% year-on-year.

The below figure shows the growth in 2016 of financial report items (not including off-balance sheet financial management) related to broad credit based on the disclosures of the 2016 annual reports of the listed banks. CCBs and JSCBs saw rapid growth in broad credit in 2016; however, due to the relatively large size of LCBs, the broad credit growth was relatively flat.

Note: According to the PBoC’s 2016 Q4 China Monetary Policy Report,

broad credit includes loans, bond investments, equity and other

investments, as well as types of applied capital such as buying back of

assets, deposit of non-deposit funds, etc. (not including buying back of

assets between deposit-type financial institutions).

11%

19%

27%

14%

LCBs JSCBS CCBs RCBs

Figure 48 Growth in credit in the broad sense in 2016

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3. Makes interest rate pricing an important assessment indicator.

Make use of the industry autonomy of financial institutions to set interest rates, build more robust marketised interest rate formulation and control mechanisms, encourage financial institutions to increase their independent price-setting abilities, end unreasonable price-setting behaviour, and maintain order in market competition.

Challenges that the MPA system brings to the banking industry

The MPA system is more nimble and flexible, monitoring and guidance are carried out monthly both in progress and after the fact, assessments of each quarter's data are carried out after the fact, and simultaneously the restraining effects of financial institutions themselves and of autonomous mechanisms are put to greater use in operations. Even so, this system has brought certain challenges to the banking industry. The following four main conclusions may be drawn:

1. Capital-intensive business are to face greater pressure as capital becomes the core constraint.

Whether or not the capital adequacy ratio reaches the standard will directly influence the classification results of banks. Under the MPA system, the macro-prudential capital adequacy ratio assesses a fuller range of factors, incorporating conversion period buffer capital and supplementary capital with systemic importance into assessments, and applying higher standards to the capital adequacy ratios of banks. Under these conditions, businesses with high consumption of banking capital will face relatively high pressure. This also poses challenges for banks' financing abilities, and recently many banks have supplemented their capital through methods such as issuing priority shares.

2. The assessment of credit growth in the broad sense may constrain the asset allocation models of “mega-asset managers“.

Under a model of assessing credit in the broad sense and a system of everyday monitoring, banks' asset transfers are subject to major restrictions, the feasibility of asset transfers such as entrusted holding, investment in the banking industry, and SPV investment decreases, and the asset allocation model of "asset management" also faces constraints.

There may be a division in the banking industry in the future. Large commercial banks have ample capital and their scope of operations is relatively large, and thus the pressures they face under the MPA system are relatively controllable. However, due to the recent rapid development in joint-stock commercial banks and city commercial banks, their credit growth in the broad sense is relatively large, and they face certain pressures in terms of capital adequacy ratios as well.

3. The banking industry may face profitability challenges in the future.

Along with the promotion of interest rate marketisation reforms, the cost of the banking industry's liabilities faces a certain rigidity. The MPA system incorporates the price-setting behaviour of banks into assessments as a main assessment criterion, and banking asset yields are facing a certain amount of pressure. Under these conditions, banking industry interest margins may show a downward trend in the future.

4. The assessment indicator on interbank liabilities will constrain banks’ funding model driven by interbank source.

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Transforming retail banking to capitalise on growing domestic consumption

Figure 49 Changes in the structure of the partial pre-tax profits

Recently there has been sustained growth in Chinese citizens’ income, and upgrading of consumption will become an important driver of future economic development. To seize this opportunity, banks are pro-actively strengthening their retail banking businesses.

In 2016, in an environment of weak demand for corporate credit, listed banks' retail businesses experienced rapid development, mainly in terms of rapid growth in pre-tax profits, and the corresponding proportion increased markedly.

At joint-stock commercial banks in particular, the growth of pre-tax profits from retail banking exceeded 50.00%, and in terms of the proportion of overall pre-tax profits as well, there was a marked increase of over 10.00 percentage points.

There was vigorous development in the retail business of listed banks in 2016, driven mainly by the domestic "excess inventory reduction"

effect and the increased scale of individual residential loans.

However, we have also observed that along with this "rise of the East," there has been rapid development in the individual deposit businesses and financial management businesses of most listed banks as well, and many banks have already begun building personal banking businesses with mid-to-high-level clients as the strategic targets.

Simultaneously, due to the development of Internet information technologies, the construction of electronic banking business channels by the listed banks is reaching a more mature phase each day, and the number of banking cards issued is increasing. Many listed banks are collaborating with Internet companies in order to have greater strength behind the development of their Internet financial businesses. Listed banks' operating websites have seen a marked intelligentisation development trend.

41.87%

41.77%43.26%

52.07%

43.48%

47.88%

28.63%

24.92%

35.77%

33.33%

33.21%23.97%

11.66%10.37%

25.95%

27.26%

18.70%23.26% 20.86%

20.76%

43.63%

40.93%44.28%

46.39%

2016 2015 2016 2015 2016 2015 2016 2015


Corporate banking Retail banking Treasury Others

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The retail banking business is facing challenges

The vigorous development of domestic retail banks in the past year shows the enormous latent domestic purchasing power. However, listed banks continue to face a series of challenges. For instance, the "2017 Worldwide Financial Technology Investigation" recently published by PricewaterhouseCoopers states that retail banking is the area of financial services most likely to be overturned by financial technology in the next five years.

Specifically, the challenges faced by the retail banking industry include:

1. Rising customer expectations

Along with the increase in citizens' income, the savings-oriented concepts of the people are gradually transforming to concepts of financial management, raising their expectations concerning yield rates and service experiences.

Changes in the attitudes of citizens toward consumption have increased demand for retail financial services. Along with the gradual heightening of people's expectations toward lifestyle quality, people are familiarising themselves with the concept of "consumption on borrowed money," leading to an increase in loan balances and expectations of timeliness. In particular, given the hot real estate market in recent years, individual residential loan market demand has rapidly increased. As banks strive to fulfil consumers' needs, they face the challenge of comprehending risk.

2. Impact brought by the development of information technology

The spread of the Internet and cellular phones has changed people's lifestyles, and mobile Internet has

become a basic demand people cannot live without. In an age of Internet finance, technological advances have assured clients' security, and more and more clients are willing to obtain financial services through the Internet. Also, the convenience of Internet finance has greatly weakened the functionality of traditional banking websites, and the emergence of e-commerce platforms and third-party payment platforms has threatened the position of the retail banking business. Competition between banks has also reached a new stage, that is, competition on the channel side and rivalry in terms of user experience.

3. Stringent regulatory environment

Because retail banks are geared toward individual customers who are part of the general public, their financial innovation and development of financial products and instruments faces a relatively strict regulatory environment.

How to transform retail banking business?

To maintain their competitiveness amid upsets, and to simultaneously fully seize opportunities for upgrading domestic consumption, the retail banking services of listed banks can begin to upgrade and transform in the following six ways:

1. To develop a customer-centric business model

Retail banks are urgently searching for ways to achieve a completely new customer experience, taking a leap from "product-centric" to "customer-centric." Make sufficient use of big data, by deeply comprehending customers' needs as well as the driving forces behind those needs; consider and define the value of financial services from customers' point of view; search for optimal means of interacting with customer groups and marketing

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products; design financial products and services based on data and client investigation and research; focus on making banking websites smarter; and achieve optimisation of corporate value while seeking to maximise benefits for clients.

2. To optimise distribution channels

When banks combine online and offline services and integrate multiple channels, this leads to a corresponding combination of online convenience and offline experience capabilities, creating a seamless link-up. How to open existing channels, achieve digital integration of retail banks, transform simple product purchases into full-fledged service experiences, integrate products and services, increase consumer value, and transform consumer behaviour into a model of repeatedly taking advantage of services.

3. To streamline business and operating models

Design new simplified technologies, processes and behind-the-scenes operating models, implement product simplification, joint use of service infrastructure, risk management at the customer level rather than the product level, and new processes for regulatory compliance. Upgrade the customer experience through simplification and automation, greatly decreasing cost and operating risk.

4. To promote and nurture innovation

Innovative technologies are emerging one after the next around the world, and new technologies such as mobile Internet, cloud computing, and big data have changed and will continue to change retail banking industry business methods. Changes in retail banking websites, digitisation, and the transition to lightweight methods are inevitable developments, and how to use big data, understand

customers more accurately, and innovate products and service models will be the main focuses of retail banking.

5. To comply with regulations

Banks should respect regulatory requirements and merge them into core business processes, comply with management requirements, establish robust, secure, and fair business models, respect regulatory requirements in the course of daily operations, and ensure that it is possible to continue to effectively comply with regulatory requirements in all activities.

6. To re-think performance assessment mechanism

To satisfy customers in new ways, monitor their needs related to retail banking, and rapidly develop retail banking. Banks should correspondingly improve their assessment methods with regard to retail banking, including improving customer experiences in assessment systems, emphasising aspects such as Internet technology, and cultivating and retaining retail banking staff by correspondingly encouraging initiative among retail banking personnel.

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Implementation of IFRS 9 by the banking industry: the clock is ticking

"International Financial Reporting Standard 9: The date is approaching when Financial Instruments" (IFRS 9), issued in July 2014, will officially take effect (January 1, 2018) and replace the standard currently in place, "International Standard on Auditing 39 - Financial Instruments" (ISA 39). Preparation work by financial institutions in China and abroad is entering the final stages. To conform to international accounting standards, on March 31, 2017, the Ministry of Finance revised and issued new financial instrument-related corporate accounting standards.

With regard to domestic institutions, all companies listed in Hong Kong and all companies employing equity securities or bonds issued on IFRS markets abroad have less than 9 months left to prepare.

As early as the initial issuance date of the standard, the Financial Stability Board (FSB), which is made up of central banks, finance bureaus, supervisory organisations, etc. from more than 20 countries, was already aware of the effects its use would have on the financial system, and promoted a recommended disclosure timetable through the

Enhanced Disclosure Task Force (EDTF).

To make actual, feasible, reliable estimates, the institutions should provide an assessment analysis of the potential effects of the norms of IFRS 9, and disclose it no later than the 2017 annual report.

In accordance with this timetable, this new standard, and the transaction disclosure requirements, the listed banks should:

• Issue a disclosure of norms regarding the effects of IFRS 9 in the 2017 annual report.

• Disclose the quarterly report under the new standards as well as transitional information required by the standards in Q1 2018.

• Disclose transitional information required by the new standards in mid-year 2018.

• Disclose the quarterly report under the new standards in Q3 2018.

• Disclose the complete financial report under the new standards in the 2018 report.

Table 6 The Enhanced Disclosure Task Force recommends disclosing the timetable

FY Recommended disclosure Detailed explanation

2015

Basic concepts, differences with

existing model, and implementation

strategies

• Explanation of the basic concepts of the ECL model

• Description of the methods of the current model and its differences with the

ECL model

• Explanation of implementation strategies, including timetables, main turning points

and related professional responsibilities

2016

Specific principles, risk management

frameworks, and capital planning

effects

• Explanation of implementation measures for key principles and credit risk model

technologies employed

• Explanation of new governance, changes in processes and controls, and their

relation with current governance, processes and controls

• Expected impact on capital plans

2017 Quantitative disclosure• Once it is feasible and can be reliably estimated, the quantitative assessment and

analysis of the potential impact will be provided, and other temporary information

may be disclosed following further consideration.

2018 Complete implementation of IFRS 9

• In the first mid-term report after the implementation of IFRS 9, the transition

information required by IFRS 7 shall be disclosed

• The suggestion of disclosing all information as proposed by the special work group

shall be considered.

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Latest disclosure of Chinese banks

In the 2016 annual reports of listed banks, the quantitative disclosure on the impact of IFRS 9 was not made. The level of details of quantitative disclosure varied. Although most banks believe that the implementation of IFRS 9 will impact the classification of financial instruments, financial asset impairment, and disclosure, only very few banks have mentioned that the implementation of new guidelines will impact their management organizational structures, various functions and processes, budgets and performance appraisal, and information systems, and have described the progress of classification, measurement, impairment, and hedging.

European banking industry survey results

In light of this, based on the IFRS 9 impact assessment report recently released by the European Banking Authority, we have briefly explored the quantitative impact of new guidelines on the banking industry.

The European Banking Authority conducted a survey on 58 banks in almost 20 European Union member states. The total asset size of these banks

ranged from EUR 10 billion to EUR two trillion; 60% of them are important banks in the global system.

As it can be seen, the implementation of IFRS 9 will significantly impact the important indicators of the banking industry, such as the impairment loss, net profit, and capital adequacy.

A number of factors causing advance impairment and will impact multiple financial indicators.

• The impairment of IFRS 9 uses the three-stage estimated credit loss model. Compared with the previous incurred loss model according to historic impairment events, the impairment is advanced. Upon initial confirmation of the financial instruments, 12 months of estimated credit losses shall be accrued; with declining credit quality, estimated credit loss for the entire duration shall be accrued.

• If overdue for more than 90 days, a financial asset shall be considered as default, unless it can be proven that more relaxed default standards are appropriate.

• 75% of banks anticipate that the

new impairment requirements

will increase

profit volatility

• 16% anticipate that the new

impairment requirements will not

increase the volatility of net profit

• 86% of banks expect provisions

to increase by up to 30%

• The average is that the impairment

increases by 18%

• 79% of banks expect the capital

adequacy ratio to decrease by

up to 75 basis points

• The average is 45 basis points

Net profit volatilityImpairment Capital adequacy ratio

Figure 50 European Banking Authority IFRS 9 survey results

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IFRS 9 have provided new guidelines in all four areas, i.e. classification and measurement, impairment losses, hedging accounting, and disclosure.

Classification and measurement

The management has to assess the financial asset classification according to the requirements of the new business model. Thus new model is essentially different from the guidelines of IAS 39, involving a high degree of judgment; the management has to record the reasons behind the assessment results and pay close attention to the sales to ensure whether or not requirements of the new guidelines are met.

Expected credit loss model

The management has to establish a new model to determine the 12 month estimated credit loss and estimated credit loss for the entire duration. This task involves complex judgment (for example, the definition of default, definition of low credit risks, and behavioural cycle of the recycling credit line). In order to satisfy the information required for the new model, the management has to significantly

revise the current credit management and information systems.

Hedge accounting

The newly revised hedging accounting guidelines retain the existing three hedging accounting processing mechanisms in the IAS No. 39. The new guidelines provide more flexibility to various types of transactions meeting the hedging accounting qualifications. Moreover, the effectiveness test has been completely revised and the "economic relationship" principle has been included; it is no longer necessary to conduct the traceability assessment on the hedging effectiveness.

Disclosure requirement

Besides making new guidelines for classification and measurement, impairment, and hedging accounting, another major challenge of IFRS 9 is that the requirements for understanding of various types of information and data as well as the quality of such information and data are very strict; based on such data, banks have to make a lot of detailed disclosure in accordance with requirements of the new guidelines.

Figure 51 Examples of information disclosure required by the new guidelines - impairment loss

• The adjustment schedule from the beginning balance to

the ending balance of impairment provisions includes the

major driving factors causing the changes.

• The adjustment schedule from the beginning balance to

the ending balance of the total book

value includes the major driving factors causing the

changes.

• Total book value listed according to the credit

risk rating

• Write-offs, recovery, and revision

• To estimate the input value, assumption of the estimated

credit loss and the estimate technique

• To determine the significant increase of credit risks, as

well as the input value, assumption, and estimate

technique of default

• To determine the input value, assumption, and technique

of the asset with incurred credit impairment

• Write-off policy, revision policy, and collateral

Quantitative information disclosure Qualitative information disclosure

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Outlook

• Striking a balance between profitability and compliance under the MPA system

• Leveraging FinTech to achieve channel transformation and financial innovation

• Focusing on the core banking business while better reflecting risk profiles in response to regulatory tightening

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Outlook

1) Striking a balance between profitability and compliance under the MPA system

In 2016, the net interest margin continued to narrow, and listed banks successively looked for new profit growth drivers.

On one hand, the market-oriented interest rate reform gave listed banks the flexibility of pricing; listed banks shall further effectively identify and manage risks, and carry out reasonable and accurate pricing according to risk levels. At the same time, they shall broaden the source of income and look for new non-interest income.

On the other hand, the central bank has proposed a MPA system, with 16 indicators across seven major categories, including asset and leverage conditions, information of assets and liabilities, liquidity, pricing practices, asset quality, cross-border financing risks and credit policy execution. The indicators of pricing practices directly assess the banking interest rate pricing levels and pricing practices; generalized credit growth indicators intend to inhibit the entrustment, interbank investment, SPV investment, and other asset manoeuvres.

It can be expected that over the next period, listed companies will adjust operating strategies and look for a balance between profitability and compliance under the MPA system.

2) Leveraging FinTech to achieve channel transformation and financial innovation

As technologies improve, banking channels and innovative ideas have changed significantly.

At the current stage, leading listed banks have made efforts to control the total number of physical branches, strived to optimize the layout of offline channels, created light-weight branches, and promoted branch transformation; with regard to online channels, leading listed banks have integrated IT with financial services and introduced various types of mobile terminal devices and online

banking services with their own features. The electronic channel replacement rates of a lot of banks have reached over 90%. In the long term, electronic channels will replace physical branches in a large scale; the current branches will transform to light-weight or "flagship branches" with the brand image.

FinTech not only reduces the banking expenditures on physical branches, but also improve service efficiency. Besides facilitating the channels transformation, this trend of innovation is also continually extending to financial innovation in other areas.

For example, the blockchain is increasingly being applied to daily operations of banks. The Postal Savings Bank has applied it to the asset custody operating system, which was the first successful experience to apply such technology to the core banking operating system in the banking industry in China. In March 2017, the Hong Kong Monetary Authority officially introduced a trading and financial blockchain platform, to improve efficiency, transparency, and security of the trading and financial industries.

3) Focusing on the core banking business while better reflecting risk profiles in response to regulatory tightening

At the end of the 1Q and beginning of the 2Q of 2017, the China Banking Regulatory Commission released seven monitoring documents. The content includes the improvement of real economic quality and efficiency of banking services, governance of market chaos in the banking industry, risk prevention of the banking industry, closing regulatory gaps, and carrying out special governance for "three types of violations" (law violation, regulation violation, and rule violation), "three types of arbitrage" (regulatory arbitrage, idle arbitrage, and related-party arbitrage"), and "four types of inappropriateness" (inappropriate innovation, inappropriate trading, inappropriate incentives, and inappropriate charges).

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The phenomena revealed in these documents covers most existing issues of the banking industry. A lot of documents target interbank businesses, including interbank arbitrage and interbank business expansion.

For example, the notice on carrying out the “Special Governance of Inappropriate Innovation, Inappropriate Trading, Inappropriate Incentives, and Inappropriate Charges of the Banking Industry” (No. 53 Document), which is related to the special governance of the "four types of inappropriateness" of the banking industry, requires that a bank shall conduct internal audits on interbank businesses; the asset party shall conduct internal audits to verify if the balance of the interbank loans, including the interbank deposits it holds, exceeds 50% of the primary assets of the bank; the liability party shall conduct internal audits to verify if the balance of the interbank borrowings, including the interbank deposits it issues, exceeds one third of the total liabilities of the bank.

The "Instructions on Risk Prevention of the Banking Industry" (No. 6 Document), which puts forth comprehensive risk prevention requirements for banks, has pointed out that the interbank business governance shall be strengthened in the areas of the business increment control, penetration management, inventory risk digestion, and strict non-compliance investigation. Moreover, the No. 6 Document also requires that the risk control of wealth management businesses of banks be strengthened.

All the documents above indicate that the banking regulatory environment will become stricter this year. In the short term, it is estimated that the interbank business scale will decline significantly. At the same time, the scale of various types of channel businesses will also decline.

Besides the governance of current businesses, in the seven documents recently released by the China Banking Regulatory Commission, there was a plan to comprehensively amend and strengthen the current regulatory system. The document focuses on “effectively closing regulatory gaps and improving regulatory efficiency” (No. 7 Document) has listed 26 management methods, guidelines, or regulations to be developed, promoted, and studied, and this systematic project of “projects of closing gaps of banking regulatory systems". The 26 regulations cover credit risks, liquidity risks, interest rate risks, and other major risks faced by commercial banks, as well as off-balance-sheet businesses, wealth management businesses, and asset securitization. It can be seen that 2017 may be a year of banking regulation.

In the long term, monitoring special governance is essentially helpful for banks to focus on the industry and better serve the real economy. The operating transparency of banks will also be improved and risks can be reflected more clearly. We look forward to more healthy growth of the banking industry in China in the new regulatory environment.

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Appendix

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• Financial highlights of listed banks

• Banking and capital market contacts

PwC

Financial highlights of listed banks (I) -Large Commercial Banks

2016 ( In RMB millions) ICBC CCB ABC BOC BoCom PSBC* Total

Operating Results (January-December)

Operating income 675,891 605,090 506,016 483,630 193,129 189,602 2,653,358

Net interest income 471,846 417,799 398,104 306,048 134,871 157,586 1,886,254

Net fee & commission income 144,973 118,509 90,935 88,664 36,795 11,498 491,374

Other non-interest income 59,072 68,782 16,977 88,918 21,463 20,518 275,730

Operating expenses (315,576) (312,701) (281,421) (263,619) (107,779) (146,674) (1,427,770)

Business tax and surcharges (17,319) (17,473) (11,449) (9,810) (5,962) (3,794) (65,807)

Business & administration expenses (175,156) (152,820) (175,013) (135,820) (60,289) (125,978) (825,076)

Allowance for impairment losses (87,894) (93,204) (86,446) (89,072) (30,212) (16,902) (403,730)

Other business expenses (35,207) (49,204) (8,513) (28,917) (11,316) 0 (133,157)

Operating profit 360,315 292,389 224,595 220,011 85,350 42,928 1,225,588

Profit before tax 363,279 295,210 226,624 222,412 86,110 42,928 1,236,563

Income tax expense (84,173) (62,821) (42,564) (38,361) (18,459) (3,152) (249,530)

Net profit 279,106 232,389 184,060 184,051 67,651 39,776 987,033

Non-controlling interests 857 929 119 19,473 441 (25) 21,794

Profit attributable to shareholders 278,249 231,460 183,941 164,578 67,210 39,801 965,239

Financial Position, as of 31 December

Total assets 24,137,265 20,963,705 19,570,061 18,148,889 8,403,166 8,265,622 99,488,708

Loans and advances, net 12,767,334 11,488,355 9,319,364 9,735,646 4,009,046 2,939,217 50,258,962

Loans and advances 13,056,846 11,757,032 9,719,639 9,973,362 4,102,959 3,010,648 51,620,486

Less: Allowance for impairment losses (289,512) (268,677) (400,275) (237,716) (93,913) (71,431) (1,361,524)

Investments 5,481,174 5,068,584 5,333,535 3,972,884 2,314,445 3,463,841 25,634,463

Interbank assets 1,553,100 858,462 1,526,665 1,176,482 715,787 442,194 6,272,690

Cash & deposits with central bank 3,350,788 2,849,261 2,811,653 2,349,188 991,435 1,310,273 13,662,598

Others assets 984,869 699,043 578,844 914,689 372,453 110,097 3,659,995

Total liabilities 22,156,102 19,374,051 18,248,459 16,661,797 7,770,767 7,918,734 92,129,910

Deposits from customers 17,825,302 15,402,915 15,038,001 12,611,840 4,728,589 7,286,311 72,892,958

Interbank liabilities 2,606,105 2,126,121 1,663,897 1,723,319 1,787,463 425,634 10,332,539

Debt securities issued 576,364 451,554 388,204 690,226 548,465 54,943 2,709,756

Due to central bank 545 439,339 291,052 867,094 443,597 0 2,041,627

Other liabilities 1,147,786 954,122 867,305 769,318 262,653 151,846 4,153,030

Total owners’ equity 1,981,163 1,589,654 1,321,591 1,487,092 632,407 346,888 7,358,795

Non-controlling interests 11,412 13,154 3,398 75,410 3,265 358 106,997

Total equity attributable to shareholders 1,969,751 1,576,500 1,318,193 1,411,682 629,142 346,530 7,251,798

Financial Ratios for 2016

Profitability (January-December)

Return on average total assets (ROA) 1.20% 1.18% 0.99% 1.05% 0.87% 0.51%

Return on weighted average equity (ROE) 15.24% 15.44% 15.14% 12.58% 12.22% 12.88%

Net Interest Spread (NIS) 2.02% 2.06% 2.10% 2.35% 1.75% 2.34%

Net Interest Margin (NIM) 2.16% 2.20% 2.25% 1.83% 1.88% 2.24%

Cost to income ratio 25.91% 25.26% 34.59% 28.08% 31.22% 66.44%

Asset quality (as of 31 December)

Non-performing loan ratio 1.62% 1.52% 2.37% 1.46% 1.52% 0.87%

Overdue loan ratio 2.65% 1.51% 2.83% 2.15% 2.64% 0.96%

Allowance to total loans ratio 2.22% 2.29% 4.12% 2.38% 2.29% 2.37%

Provision coverage ratio 136.69% 150.36% 173.40% 163.59% 150.50% 271.69%

Capital adequacy (as of 31 December)

Common Equity Tier 1 capital adequacy ratio 12.87% 12.98% 10.38% 11.37% 11.00% 8.63%

Tier 1 capital adequacy ratio 13.42% 13.15% 11.06% 12.28% 12.16% 8.63%

Capital adequacy ratio 14.61% 14.94% 13.04% 14.28% 14.02% 11.13%

Leverage ratio 7.55% 7.03% 6.27% 7.06% 6.86% 4.05%

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*Listed in H-share market only with financial data prepared under IFRS.

PwC

Financial highlights of listed banks (II) -Joint-Stock Commercial Banks

2016 ( In RMB millions) CMB CITIC CMBC SPDB CEB PAB CZB* Total


Operating income 209,025 153,781 155,211 160,792 94,037 107,715 33,653 914,214

Net interest income 134,595 106,138 94,684 108,120 65,288 76,411 25,229 610,465

Net fee & commission income 60,865 42,280 52,261 40,692 28,112 27,859 7,475 259,544

Other non-interest income 13,565 5,363 8,266 11,980 637 3,445 950 44,206

Operating expenses (131,307) (99,152) (95,045) (91,132) (54,100) (77,936) (20,262) (568,934)

Business tax and surcharges (6,362) (4,487) (4,338) (4,444) (2,885) (3,445) (658) (26,619)

Business & administration expenses (58,538) (42,377) (48,086) (37,238) (27,057) (27,973) (9,325) (250,594)

Allowance for impairment losses (66,159) (52,288) (41,378) (49,104) (23,931) (46,518) (10,278) (289,656)

Other business expenses (248) 0 (1,243) (346) (227) 0 0 (2,064)

Operating profit 77,718 54,629 60,166 69,660 39,937 29,779 13,392 345,281

Profit before tax 78,963 54,608 60,249 69,975 40,180 29,935 13,392 347,302

Income tax expense (16,583) (12,822) (11,471) (16,297) (9,792) (7,336) (3,238) (77,539)

Net profit 62,380 41,786 48,778 53,678 30,388 22,599 10,153 269,762

Non-controlling interests 299 157 935 579 59 0 0 2,029

Profit attributable to shareholders 62,081 41,629 47,843 53,099 30,329 22,599 10,153 267,733


Total assets 5,942,311 5,931,050 5,895,877 5,857,263 4,020,042 2,953,434 1,354,855 31,954,832

Loans and advances, net 3,151,649 2,802,384 2,397,192 2,674,557 1,751,644 1,435,869 443,669 14,656,964

Loans and advances 3,261,681 2,877,927 2,461,586 2,762,806 1,795,278 1,475,801 459,493 15,094,572

Less: Allowance for impairment losses (110,032) (75,543) (64,394) (88,249) (43,634) (39,932) (15,824) (437,608)

Investments 1,450,922 1,852,670 2,206,909 2,135,088 1,318,143 759,438 663,168 10,386,338

Interbank assets 581,963 546,653 461,837 356,116 425,935 273,208 98,442 2,744,154

Cash & deposits with central bank 597,529 553,328 524,239 517,230 381,620 311,258 124,269 3,009,473

Others assets 160,248 176,015 305,700 174,272 142,700 173,661 25,307 1,157,903

Total liabilities 5,538,949 5,546,554 5,543,850 5,484,329 3,768,974 2,751,263 1,287,379 29,921,298

Deposits from customers 3,802,049 3,639,290 3,069,450 3,002,015 2,120,887 1,921,835 736,244 18,291,770

Interbank liabilities 967,425 1,185,511 1,521,274 1,532,295 967,050 463,878 394,109 7,031,542

Debt securities issued 275,082 386,946 411,168 664,683 412,500 263,464 114,595 2,528,438

Due to central bank 330,108 184,050 315,438 147,622 187,000 19,137 0 1,183,355

Other liabilities 164,285 150,757 226,520 137,714 81,537 82,949 42,431 886,193

Total owners’ equity 403,362 384,496 352,027 372,934 251,068 202,171 67,475 2,033,533

Non-controlling interests 1,012 5,272 9,437 4,987 613 0 0 21,321

Total equity attributable to shareholders 402,350 379,224 342,590 367,947 250,455 202,171 67,475 2,012,212



Return on average total assets (ROA) 1.09% 0.76% 0.94% 0.98% 0.85% 0.83% 0.85%

Return on weighted average equity (ROE) 16.27% 12.58% 15.13% 16.35% 13.80% 13.18% 0.00%

Net Interest Spread (NIS) 2.37% 1.89% 1.74% 1.89% 1.59% 2.60% 1.89%

Net Interest Margin (NIM) 2.50% 2.00% 1.86% 2.03% 1.78% 2.75% 2.07%

Cost to income ratio 28.01% 27.56% 30.98% 23.16% 28.77% 25.97% 27.71%


Non-performing loan ratio 1.87% 1.69% 1.68% 1.89% 1.60% 1.74% 1.33%

Overdue loan ratio 2.14% 3.26% 3.50% 2.98% 2.87% 3.89% 1.20%

Allowance to total loans ratio 3.37% 2.62% 2.62% 3.19% 2.43% 2.71% 3.44%

Provision coverage ratio 180.02% 155.50% 155.41% 169.13% 152.02% 155.26% 259.33%


Common Equity Tier 1 capital adequacy ratio 11.54% 8.64% 8.95% 8.53% 8.21% 8.36% 9.28%

Tier 1 capital adequacy ratio 11.54% 9.65% 9.22% 9.30% 9.34% 9.34% 9.28%

Capital adequacy ratio 13.33% 11.98% 11.73% 11.65% 10.80% 11.53% 11.79%

Leverage ratio 5.75% 5.47% 5.19% 5.47% 5.44% 5.49% 4.22%

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Financial highlights of listed banks (III) -City Commercial Banks

2016 ( In RMB millions) Jiangsu Shengjing Huishang Tianjin Jinzhou Harbin Chongqing Zhengzhou Qingdao Total


Operating income 31,359 16,064 20,918 11,815 20,918 14,172 9,607 9,980 5,996 136,325

Net interest income 25,245 13,218 18,340 10,359 18,340 11,573 7,677 8,300 5,008 115,168

Net fee & commission income 5,822 1,914 2,491 1,402 2,491 2,393 1,926 1,214 888 18,860

Other non-interest income 292 932 88 53 88 205 4 466 100 2,296

Operating expenses (17,890) (7,406) (12,250) (6,121) (12,250) (7,817) (4,948) (4,781) (3,322) (70,078)

Business tax and surcharges (948) (619) (650) (517) (650) (468) (260) (212) (132) (4,135)

Business & administration expenses (9,161) (3,112) (5,113) (3,251) (5,113) (4,054) (2,278) (2,222) (2,081) (33,701)

Allowance for impairment losses (7,779) (3,675) (6,487) (2,353) (6,487) (3,295) (2,411) (2,346) (1,109) (32,240)

Other business expenses (2) 0 0 0 0 0 0 0 (2)

Operating profit 13,469 8,657 8,668 5,694 8,668 6,355 4,659 5,200 2,674 66,247

Profit before tax 13,524 8,708 8,813 5,710 8,813 6,446 4,662 5,257 2,674 66,664

Income tax expense (2,887) (1,830) (1,816) (1,192) (1,816) (1,483) (1,156) (1,212) (585) (14,834)

Net profit 10,637 6,878 6,996 4,518 6,996 4,962 3,506 4,045 2,089 51,830

Non-controlling interests 26 14 126 (4) 126 86 0 46 0 363

Profit attributable to shareholders 10,611 6,865 6,870 4,522 6,870 4,877 3,506 3,999 2,089 51,467


Total assets 1,598,292 905,483 754,774 657,310 539,060 539,016 373,104 366,148 277,988 6,011,175

Loans and advances, net 632,555 228,881 269,336 207,855 121,931 196,488 146,789 107,633 84,865 1,996,333

Loans and advances 649,380 235,417 277,371 214,001 126,800 201,628 151,021 111,092 87,168 2,053,877

Less: Allowance for impairment losses (16,825) (6,536) (8,035) (6,146) (4,869) (5,140) (4,232) (3,459) (2,303) (57,544)

Investments 688,743 463,366 338,149 310,737 326,901 192,157 120,313 183,144 152,928 2,776,438

Interbank assets 96,248 127,967 30,797 73,175 8,674 48,539 55,706 18,293 10,998 470,396

Cash & deposits with central bank 135,122 71,376 88,059 58,108 43,667 67,010 42,813 42,586 22,698 571,440

Others assets 45,624 13,893 28,433 7,436 37,887 34,822 7,482 14,492 6,499 196,568

Total liabilities 1,514,085 859,108 701,591 615,555 496,165 501,681 349,292 344,287 260,352 5,642,116

Deposits from customers 907,412 415,246 462,014 365,471 262,969 343,151 229,594 216,390 141,605 3,343,852

Interbank liabilities 406,333 222,605 131,188 196,689 170,059 106,590 60,351 78,165 68,987 1,440,967

Debt securities issued 131,743 87,289 91,505 40,632 30,223 41,883 54,598 44,660 41,786 564,321

Due to central bank 38,030 118,800 5 0 507 0 77 3,432 160,851

Other liabilities 30,566 15,168 16,878 12,764 32,914 9,550 4,749 4,994 4,542 132,125

Total owners’ equity 84,207 46,375 53,183 41,755 42,894 37,335 23,811 21,296 17,636 368,493

Non-controlling interests 1,542 580 1,312 45 3,859 827 0 0 0 8,165

Total equity attributable to shareholders 82,665 45,794 51,871 41,710 39,035 36,508 23,811 21,296 17,636 360,328



Return on average total assets (ROA) 0.74% 0.86% 1.01% 0.74% 1.82% 1.01% 1.01% 1.28% 0.90%

Return on weighted average equity (ROE) 14.47% No data No data No data No data No data No data No data No data

Net Interest Spread (NIS) 1.56% 1.65% 2.42% 1.43% 3.41% 2.47% 2.23% 2.52% 2.05%

Net Interest Margin (NIM) 1.70% 1.75% 2.59% 1.76% 3.67% 2.65% 2.38% 2.69% 2.23%

Cost to income ratio 29.21% 19.31% 27.55% 27.52% 14.83% 28.60% 23.72% 22.26% 34.71%


Non-performing loan ratio 1.45% 1.74% 1.12% 1.48% 1.14% 1.53% 0.96% 1.31% 1.36%

Overdue loan ratio 2.28% 2.62% 2.19% 2.50% 4.03% 3.61% 3.70% 4.59% 4.05%

Allowance to total loans ratio 2.59% 2.78% 2.90% 2.87% 3.84% 2.55% 2.80% 3.11% 2.64%

Provision coverage ratio 180.56% 159.17% 270.80% 193.56% 336.30% 166.76% 293.35% 237.39% 194.01%


Common Equity Tier 1 capital adequacy ratio 9.01% 9.10% 8.79% 9.48% 9.79% 9.34% 9.82% 8.79% 10.08%

Tier 1 capital adequacy ratio 9.02% 9.10% 9.94% 9.48% 9.80% 9.35% 9.82% 8.80% 10.08%

Capital adequacy ratio 11.51% 11.99% 12.99% 11.88% 11.62% 11.97% 11.79% 11.76% 12.00%

Leverage ratio 4.68% 4.38% 6.25% 5.80% No data No data 5.93% 5.16%% 5.82%

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Except Jiangsu, all other city commercial banks are listed in H-share market only with financial data prepared under IFRS.

PwC

Financial highlights of listed banks (IV) -Rural Commercial Banks

2016 ( In RMB millions) CQRCB* JTRCB* CSRCB WXRCB JYRCB Total


Operating income 21,662 5,954 4,475 2,522 2,469 37,082

Net interest income 19,405 4,533 4,014 2,314 2,262 32,528

Net fee & commission income 2,118 748 298 180 50 3,394

Other non-interest income 139 673 163 28 158 1,160

Operating expenses (11,128) (2,991) (3,188) (1,426) (1,655) (20,388)

Business tax and surcharges (663) (130) (71) (63) (48) (975)

Business & administration expenses (7,788) (2,478) (1,674) (817) (888) (13,644)

Allowance for impairment losses (2,677) (383) (1,444) (544) (714) (5,761)

Other business expenses 0 0 0 (2) (5) (7)

Operating profit 10,534 2,963 1,287 1,096 814 16,695

Profit before tax 10,645 2,973 1,312 1,094 833 16,857

Income tax expense (2,644) (657) (257) (210) (66) (3,834)

Net profit 8,001 2,316 1,055 884 767 13,023

Non-controlling interests 57 429 14 (9) (11) 480

Profit attributable to shareholders 7,945 1,887 1,041 893 778 12,543


Total assets 803,158 191,471 129,982 124,633 104,085 1,353,328

Loans and advances, net 288,116 60,286 64,229 58,570 50,372 521,574

Loans and advances 300,421 62,101 66,419 60,257 52,526 541,725

Less: Allowance for impairment losses (12,305) (1,814) (2,191) (1,687) (2,154) (20,151)

Investments 263,657 38,753 41,243 41,376 37,987 423,015

Interbank assets 150,854 52,965 6,684 6,448 2,103 219,053

Cash & deposits with central bank 85,836 32,984 14,240 15,530 11,176 159,767

Others assets 14,695 6,484 3,586 2,708 2,447 29,919

Total liabilities 748,968 177,748 119,551 115,760 95,072 1,257,099

Deposits from customers 518,186 127,409 88,810 95,461 73,641 903,507

Interbank liabilities 134,003 22,283 19,280 8,805 14,211 198,584

Debt securities issued 58,487 23,396 6,991 6,687 4,105 99,666

Due to central bank 24,955 1,823 1,303 200 407 28,688

Other liabilities 13,337 2,837 3,166 4,606 2,707 26,654

Total owners’ equity 54,190 13,723 10,431 8,873 9,013 96,229

Non-controlling interests 1,597 3,593 577 100 261 6,127

Total equity attributable to shareholders 52,593 10,131 9,854 8,772 8,752 90,102



Return on average total assets (ROA) 1.05% 1.39% 0.88% 0.74% 0.79%

Return on weighted average equity (ROE) 15.99% No data 11.91% 11.52% 9.92%

Net Interest Spread (NIS) 2.57% 2.53% 3.04% 1.75% 2.07%

Net Interest Margin (NIM) 2.74% 2.67% 3.22% 1.96% 2.34%

Cost to income ratio 35.95% 41.61% 37.40% 32.45% 35.96%


Non-performing loan ratio 0.96% 1.41% 0.71% 1.39% 2.41%

Overdue loan ratio 1.53% 3.63% 1.61% 1.64% 3.03%

Allowance to total loans ratio 4.10% 2.92% 3.30% 2.80% 4.10%

Provision coverage ratio 428.37% 206.57% 234.83% 200.77% 170.14%


Common Equity Tier 1 capital adequacy ratio 9.85% 10.35% 10.90% 10.28% 13.08%

Tier 1 capital adequacy ratio 9.86% 10.52% 10.93% 10.28% 13.08%

Capital adequacy ratio 12.70% 13.79% 13.22% 12.65% 14.18%

Leverage ratio 6.41% No data 6.94% 6.72% 8.10%


April 2017

52

Banking Newsletter

PwC

Banking and capital market contacts

Assurance Advisory Tax

Jimmy Leung – Shanghai James Chang – Beijing Oliver Kang – Beijing

Tel: +86 (21) 2323 3355 Tel: +86 (10) 6533 2755 Tel: +86 (10) 6533 3012

[email protected] [email protected] [email protected]

Margarita Ho – Beijing Addison Everett – Beijing Matthew Wong – Shanghai

Tel: +86 (10) 6533 2368 Tel: +86 (10) 6533 2345 Tel: +86 (21) 2323 3052


Richard Zhu – Beijing William Gee – Beijing Florence Yip – Hong Kong

Tel: +86 (10) 6533 2236 Tel: +86 (10) 6533 2269 Tel: +852 2289 1833


Linda Yip – Beijing William Yung – Shanghai

Tel:+86 (10) 6533 2300 Tel: +86 (21) 2323 1984

[email protected] [email protected]

Michael Hu - Shanghai Matthew Phillips – Hong Kong Assurance – Risk & Quality

Tel: +86 (21) 2323 2718 Tel: +852 2289 2303

[email protected] [email protected] Tracy Chen – Shanghai

Tel: +86 (21) 2323 3070

Shirley Yeung – Guangzhou Chris Chan – Hong Kong [email protected]

Tel: +86 (20) 3819 2218 Tel: +852 2289 2303

[email protected] [email protected] Nigel Dealy – Hong Kong

Tel: +852 2289 1221

Vincent Yao – Shenzhen [email protected]

Tel: +86 (755) 8261 8293

[email protected]

April 2017

53

Banking Newsletter

This content is only for general information purposes only, and should not be as a substitute for consultation with professional

advisors.

© 2017 PricewaterhouseCoopers Zhong Tian LLP. All rights reserved. PwC refers to the China member firm, and may sometimes

refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

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Documents

Banking Newsletter - Review and Outlook of China’s Banking ... · As of March 31, 2017, the majority of listed banks have already released their 2016 annual results. The newsletter