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Chinese Bankers’ Survey 2017
Executive summary
January 2018
January 2018 Chinese Bankers Survey 2017
PwC 2
Chinese Bankers Survey 2017 3
Preface
We are pleased to present the Chinese Bankers’ Survey 2017 report, prepared jointly by the China Banking Association (CBA) and PwC. Now in its ninth year, the report tracks developments in the
sector from the perspective of Chinese bankers.
This year’s survey digs deep into the core issues while maintaining a broad scope. Dr. Ba Shusong,
the Project Leader, together with the project team, interviewed 14 senior bankers to get their insights into the sector. Seven of these bankers are at C-suite level (Directors, Vice-presidents, or above). The
interviews complement an online survey covering 31 provinces in mainland China (excluding Hong Kong, Macau and Taiwan). With a total of 1,920 valid responses collected over eight months, the survey sampling process takes into account participants’
geographical regions, grades, types of financial institution, and if their institution is listed on stock exchange(s) or privately held. In addition to an increased sample size, the survey looks into hot topics and challenges facing the sector through
extensive studies. These efforts result in a broad representation of China’s banking sector.
2017 was a critical year in which China continued to push forward its reforms, the 19th National
Congress of the Chinese Communist Party was held and the 13th Five-Year Plan entered its second year. The Report of the 19th Party
Congress highlighted the importance of “improving the financial regulatory framework to forestall systemic financial risks”. Risk management and internal control were two areas focused on in this survey. A
comparison of the survey findings from 2010 to 2017 reveals that “improving the capability of risk management and control” has been put at the heart of the operations and strategies of
Chinese banks over the past eight years. More than 60% of respondents believe that credit risk remains a major risk factor due to the economic downturn in certain regions and industries, as well as slowing disposals of non-
performing loans. At the same time, Chinese bankers are putting more effort into identifying and monitoring risks by strengthening pre-loan reviews, monitoring loans that have been granted, and establishing
firewalls to mitigate risks right from the beginning or to prevent them from spreading. The regulatory environment has also been shifting towards tougher supervision, as well as
stricter compliance and accountability. The China Banking Regulatory Commission (CBRC) has imposed a series of measures to tackle irregularities in the sector by requiring banks to strengthen self- inspections, conduct regulatory
examinations and introduce tougher penalties. According to the survey, over 90% of respondents are strongly or very strongly aware of increasing pressure from the regulators.
The Report of the 19th Party Congress argues
that in order to build a modern economy, emphasis must be placed on developing the real economy. In other words, effort should be made to deepen institutional reforms in the financial
sector in order to better fuel growth. The survey reveals that, as a result of the government’s initiative to carry out national strategies with new thinking and new technologies, small businesses have become a higher priority for
respondents among customer groups. Regarding the opportunities brought by supply side structural reforms, Chinese bankers are most enthusiastic about the new markets created by more advanced manufacturing and the new
demand driven by increased consumption. Supply side structural reforms, carried out mainly through institutional and technological innovation, are essential to create new demand and stimulate the economy, thus driving banks’
growth. Another finding of the survey is that Chinese bankers are very supportive of green industries and the ’Made in China 2025’ strategy. Nearly 80% of respondents believe the
main channel to contribute to the strategy is to provide comprehensive financial services, and to adjust their products and services – as well as their service standards, where necessary. As many as 70% of respondents say they are willing
to extend credit and other support to the manufacturing sector to help it through diversified financial innovations in order to facilitate the sector’s restructure and achieve quality and efficiency gains.
Chinese Bankers Survey 2017 4
The survey also highlights the rapid development of
FinTech as an emerging business model. Powered by technologies such as the Internet, data analytics, cloud computing and artificial intelligence (AI),
FinTech is helping banks to engage in more targeted marketing activities and to optimise customer experience, as well as to improve risk management and compliance capabilities. More specifically, Chinese bankers are keeping a close eye on the
integration between technology and finance, as demonstrated by their increasing commitment to IT investment. Investment preferences vary according to the type of bank. At the same time, most Chinese
bankers well understand the risks that can arise from FinTech, especially technological risk and the risks arising from peer-to-peer (P2P) lending.
Chinese bankers cite insufficient integration of internal data, limited external data and a shortage of talent as the main obstacles to applying technology such as data analytics and AI, although efforts have
been made to integrate traditional risk control with FinTech. On the plus side, Chinese bankers remain positive about FinTech’s development prospects. They accept that opportunities come with
challenges, and believe that under the leadership of the Central Government and the CBRC, broader and deeper applications of FinTech will emerge. These will lead to new solutions for operations, data integration and risk control.
Finally, all Chinese bankers surveyed are confident
about “socialism with Chinese characteristics” and its economic impact. This confidence is built not only on the recent success of China’s banking sector – a robust system without obvious deficiencies when
compared to its western counterparts. It is also due to a vibrant financial eco-system with great potential and emerging business models, many of which are world-leading. Chinese bankers have high hopes for the sector’s future development under “Xi Jinping
Thought on Socialism with Chinese Characteristics
for a New Era”. They believe the sector will play an
ever-greater role in developments such as the Belt and Road Initiative and in Chinese companies’ overseas expansion.
We would like to take this opportunity to thank all those who participated in the survey. They spared time to complete questionnaires and talked to us,
sharing their valuable insights. We hope this report helps you better understand the developments in and prospects for China’s banking sector. Please do not hesitate to give us your feedback, so that we can
continue to improve the report in the future.
For more information or enquiries, please contact
the CBA, PwC or the Project Leader.
PAN Guangwei
Executive Vice President,
China Banking Association
David WU Partner, PwC China
Dr. BA Shusong
Project Leader
December 2017, Beijing
Chinese Bankers Survey 2017 5
A total of 163 Chinese banking institutions participated in the online survey and interviews. A full list of participants is shown below:
1. Policy banks (3)
China Development Bank
The Export-Import Bank of China
Agricultural Development Bank of China
2. Large commercial banks (6)
Bank of China
Agricultural Bank of China
Industrial and Commercial Bank of China
China Construction Bank
Bank of Communications
Postal Savings Bank of China
3. Joint-stock commercial banks (12)
China CITIC Bank
China Everbright Bank
Huaxia Bank
China Minsheng Bank
China Merchants Bank
Industrial Bank
China Guangfa Bank
Ping An Bank
Shanghai Pudong Development Bank
Hengfeng Bank
China Zheshang Bank
China Bohai Bank
4. Foreign (joint venture) banks (15)
Australia and New Zealand Banking Group (China)
Deutsche Bank (China)
First Commercial Bank
Bank of East Asia (China)
Fubon Bank
Taiwan Cooperative Bank
Hang Seng Bank (China)
OCBC Wing Hang Bank (China)
Bank of Tokyo-Mitsubishi UFJ (China)
Land Bank of Taiwan
Allied Commercial Bank
Bank SinoPac (China)
Chang Hwa Bank
Mega International Commercial Bank
CTBC Bank
5. City commercial banks (49)
Baoshang Bank
Bank of Beijing
Bank of Dalian
Bank of Dongguan
Ordos Bank
Bank of Fuxin
FuDian Bank
Guangdong Nanyue Bank
Participating Banks
Chinese Bankers Survey 2017 6
Guangxi Beibu Gulf Bank
Guilin Bank
Harbin Bank
Bank of Handan
Hankou Bank
Bank of Hangzhou
Bank of Hebei
Huarong Xiangjiang Bank
Huishang Bank
Bank of Jining
Bank of Jiangsu
Jiangxi Bank
Bank of China Travel Service Jiaozuo
Jinshang Bank
Bank of Jiujiang
Laishang Bank
Bank of Lanzhou
Bank of Liaoyang
Longjiang Bank
Bank of Luoyang
Bank of Inner Mongolia
Bank of Ningbo
Bank of Panjin
Bank of Pingdingshan
Qilu Bank
Bank of Qinghai
Bank of Rizhao
Xiamen International Bank
Bank of Shanghai
Taian Bank
Bank of Tinajin
Weihai City Commercial Bank
Bank of Weifang
Bank of Wuhai
Yantai Bank
Zaozhuang Bank
Chang’an Bank
Zhejiang Tailong Commercial Bank
Bank of Zhengzhou
Zhongyuan Bank
Bank of Chongqing
6. Rural financial institutions (109)
Lixin Rural Commercial Bank
Ma’anshan Rural Commercial Bank
Qianshan Rural Commercial Bank
Shexian Rural Commercial Bank
Pingba Rural Credit Union
Yaodu Bank
Cangwu shentong county Bank
Cenxi Beibu Gulf County Bank
Chaling SPDB County Bank
Cilihu Rural Commercial County Bank
Danzai Rural Credit Union
Daozhen Rural Credit Union
Duangguan Rural Commercial Bank
Fenggang Rural Credit Union
Chinese Bankers Survey 2017 7
Gansu Rural Credit Union
Ganzhou Rural Commercial Bank
Dabu Rural Commercial Bank
Gaoming Rural Commercial Bank
Gaoyao Rural Commercial Bank
Longmen Rural Commercial Bank
Puning Rural Commercial Bank
Shunde Rural Commercial Bank
Yangchun Rural Commercial Bank
Yangdong Rural Commercial Bank
Yufeng Credit County Bank
Guangxi Rural Credit Union
Guangzhou Rural Commercial Bank
Guiding Rural Credit Union
Guiyang Rural Commercial Bank
Anlong Rural Commercial Bank
Bijie Rural Commercial Bank
Congjiang Rural Commercial Bank
Dafang Rural Commercial Bank
Duyun Rural Commercial Bank
Dushan Rural Commercial Bank
Fuquan Rural Commercial Bank
Huangping Rural Commercial Bank
Liping Rural Commercial Bank
Libo Rural Commercial Bank
Majiang Rural Commercial Bank
Meitan Rural Commercial Bank
Pu’an Rural Commercial Bank
Qingzhen Rural Commercial Bank
Qinglong Rural Commercial Bank
Renhuai Maotai Rural Commercial Bank
Shiqian Rural Credit Union
Songtao Mengxi Rural Credit
Wangmo Rural Commercial Bank
Changshun Malu Rural Commercial Bank
Sinan Rural Commercial Bank
Tianzhu Rural Commercial Bank
Tongzi Rural Commercial Bank
Wudang Rural Commercial Bank
Xing Yi Rural Commercial Bank
Zunyi Rural Commercial Bank
Hefei Science & Technology Rural Commercial Bank
Hezhang Rural Credit Union
Huarong Xinglong County Bank
Taojiang Jianxin County Bank
Xiangtan Xianghuai County Bank
Jishui Rural Commercial Bank
Jiangmen Ronghe Rural Commercial Bank
Xinhui Rural Commercial Bank
Nanfeng Rural Commercial Bank
Shangsu Rural Commercial Bank
Jiangxi Rural Credit Union
Jinping Rural Credit Union
Kaiyang Rural Credit Union
Kunming Rural Credit Union
Liupanshui Rural Commercial Bank
Chinese Bankers Survey 2017 8
Liuzhi Rural Credit Union
Luodian Rural Credit Union
Nanchang Rural Commercial Bank
Panxian Rural Credit Union
Qianxi Rural Commercial Bank
Qujing Rural Credit Union
Xiamen Rural Commercial Bank
Xiamen Xiangan Minsheng County Bank
Shandong Rural Credit Union
Shanxi Rural Credit Union
Shanghai Rural Commercial Bank
Shangrao Rural Commercial Bank
Shenzhen Baoan Guilin County Bank
Shenzhen Longgang Everdynasty Rural Bank
Baosheng County Bank
Shenzhen Rural Commercial Bank
Shenyang Rural Commercial Bank
Shenmen SRCB Rural Bank
Shiqian Rural Credit Union
Shuicheng Rural Credit Union
Suiyang Rural Credit Union
Tongling Rural Commercial Bank
Tongren Rural Commercial Bank
Wuhu Yangzi Rural Commercial Bank
Wuhan Rural Commercial Bank
Wuchuan Rural Credit Union
Xifeng Rural Credit Union
Xiangxi Changhang Village Bank
Xindu Guicheng Rural Bank
Xinjiang Rural Credit Cooperatives
Xinmi Zhengyin Country Bank
Yingtan Rural Commercial Bank
Changshun Rural Credit Union
Duanzhou Rural Commercial Banks
Zhejiang Rural Credit Union
Zhenyuan Rural Credit Union
Zhenan Rural Credit Union
Zhongshan Rural Commercial Bank
Zhuhai Rural Commercial Bank
Chinese Bankers Survey 2017 9
Executive Summary
A solid global economic recovery in 2017 created a favorable environment for China's economic growth. The US economy was stable, while Europe, Japan and emerging markets all showed signs of improvement. In the first three quarters of 2017, China's gross domestic product (GDP) grew by 6.9% over the same period the previous year, demonstrating strong ongoing momentum. Supply side structural reforms progressed, but will need further effort to ensure a sustainable growth trajectory. Over the past year, many factors have shaped the operations of the country’s banking sector. Deleveraging, regulatory tightening and the disruption of FinTech have been the most significant. The Chinese Bankers’ Survey report, now in its ninth year, offers a comprehensive overview of the main issues from the perspective of banking practitioners.
Living with ‘L shaped’ growth
In 2017 China’s economy continued to expand under the “new normal” – where the focus of growth has shifted from speed to quality, and where the pace of financial deleveraging has accelerated. Over 80% of the bankers surveyed believe the country's GDP growth will remain between 6.0% and 7.0% over the next three years, whereas over half argue that China's growth will follow an L-shaped pattern. In the context of deleveraging, policies regarding financial regulation (78.4%) were bankers’ top concern among the external factors impacting their daily operations. The prudent and neutral monetary policy adopted by the People's Bank of China (PBoC), aiming at "deleveraging" and "risk prevention" (4.24 points), was still widely approved by the bankers. As many as 90% regard President Donald Trump as a threat to Sino-US trade activities. Nearly half predict that Brexit will increase volatility in foreign exchange markets.
Macro-prudential Assessment (MPA): a more effective approach
Two-thirds (66.5%) of the bankers agree that the MPA is a more effective approach to preventing systemic financial risks. More than half predict that ‘credit’ – under the broader definition of the MPA framework – will grow by between 10% and 20%. Over 70% also believe that the MPA has affected their off-
balance sheet wealth management business. Among the seven key performance indicators (KPIs) under the MPA, 62.8% consider capital and leverage requirements as the most challenging area to comply with. Most respondents believe the MPA will lead to a less level playing field, with City Commercial Banks expecting to be the worst affected (68.4%). Respondents highlight incentives (40.1%) and the transparency of the assessment criteria (36.2%) as two pressing areas to address in order to improve the MPA framework.
Strategies that focus on differentiation
More than half of those surveyed believe the top priority for their strategic transformation is to enhance their risk management and control capabilities. Against a backdrop of slowing economic growth, accelerating financial disintermediation and tightening regulations, 69.2% regard specialisation and differentiation as the best path for future development. Turning to the effects of supply side structural reforms, respondents believe that it is most evident that excess production capacity has been reduced and that mergers and acquisitions have been encouraged to improve efficiency (75.6%). As many as 69.8% of bankers recognise that diversification of financial institutions’ business portfolios has brought challenges for regulators and requires a more integrated supervisory approach to facilitate this diversification. In light of the country’s vision of building and optimising multi-layer capital markets, the top three priorities are: to promote the development of asset securitisation, to advance ‘broad concept’ investment banking and to develop transaction banking.
Chinese Bankers Survey 2017 10
Rebalancing business portfolios
China’s banking sector has become fiercely competitive as a result of business innovation and diversification, with Joint-stock Commercial Banks gaining a competitive edge on the liabilities side (64.5%), in off-balance sheet activities (45.3%) and intermediary business (44.3%). This is largely due to these banks’ greater innovation and flexibility. Large Commercial Banks, owing to their broad customer base, have maintained solid business on the asset side (63.2%) and continued to dominate the country’s financial system. Influenced by government policy, urban infrastructure (67.6%) has been the most favoured industry in terms of extending credit over the last three years; the metallurgical industry (51.8%) has been the least favoured. SMEs (57%), conglomerates (45.4%) and supply chain finance (44.3%) have been the most valued corporate banking segments, with international settlement and trade finance growing the fastest. Consumer loans (70.3%) continued to be the top priority in personal banking, with wealth management (51.7%) rising rapidly into second place. Interbank business has returned to a reliance on deposits and placements (57%) and interbank investments (35.2%).
Xiong'an New Area: a strategic plan for the
millennium
The strategic plan for Xiong'an New Area (located 100km south-west of Beijing) was announced on 1 April 2017 by the central government. When asked about the project, 76.7% of bankers surveyed suggested that the authorities should introduce innovative policy incentives to support the financial sector in the New Area. 61.6% are committed to setting up second tier branches and cutting fees to support business in the New Area. Over 80% of the bankers regard infrastructure development as the top priority in the New Area.
Debt-for-equity swaps
Guided by government policy, Chinese banks have carried out several market-oriented debt-for-equity swaps. 33.6% of bankers hold a neutral view on such swaps, while 38.4% are cautious. Overall, bankers are taking a prudent and incremental approach to the de-leveraging process. The most important feature of this round of debt-for-equity swaps is that they are market-driven and follow clear legal procedures, leaving banks and businesses with greater autonomy. 62.9% of bankers recognise the importance of the scheme’s commitment to market forces. Targets of the scheme are mainly state-owned enterprises (47.6%), industry leaders (43.0%), companies needing a high level of support (41.7%), and those with the most potential for a return to profitability (41.2%). When it comes to exit routes, most respondents preferred to sell their holdings to a third party (57.5%) when the asset quality of the target company improves.
Managing risks and improving internal controls
Chinese bankers cited credit risk (64.8%), interest rate, foreign exchange rate and stock market volatility (41.9%), and liquidity risk caused by maturity mismatches (40.7%) as the top three risks in 2017. Improving non-performing loan (NPL)
collection, and speeding up the write-off and collateral disposal of NPLs (60.4%) remained the primary measures to mitigate credit risk. With increasing support from the authorities, 44.0% of bankers are considering using NPL securitisation
and debt-for-equity swaps in the near future. In 2017, 69.9% of the bankers ranked lending as the main focus of risk analysis. 56.2% believed that establishing a system of internal controls with clear roles and responsibilities should be the main focus.
Chinese Bankers Survey 2017 11
A shrinking workforce
32.3% of respondents expect their number of employees will remain unchanged or decrease in the next three years. Most of the reduction is expected to come from Large Commercial Banks – 30.9% of these respondents expect a drop in the number of employees over the next three years. Bankers expect a significant increase in the number of professional staff (82.3%) and marketing and sales personnel (84.0%), no change in managerial posts (66.3%), and a significant cut in operational positions (54.3 %).
Higher corporate governance rating
Chinese bankers rated their corporate governance higher than the previous year. The highest rating was for social responsibility (4.71 points), followed by stakeholder protection (4.55 points). The effectiveness of incentives and monitoring systems scored the lowest (4.27 points). Over 80% of bankers believe that employee stock ownership schemes have a positive impact on corporate governance. On related party transactions, 34.3% of the bankers argued that the main deficiencies include: hiding or lack of due diligence to detect such relations, miscalculated credit exposure with improper risk mitigation factors, and reluctance in seeking approval on significant related party transactions.
Bankers as a community
China’s economic growth was higher than expected in 2017, with banks’ profitability and asset quality remaining stable. This has led to higher satisfaction with work and life among Chinese bankers. Thanks to the sector’s ongoing market-oriented reforms, most bankers reported improvements in overall professionalism (56.0%), with management capabilities better reflected in banks’ KPIs (45.4%). Senior management turnover is stable, with 64.5% of respondents committed to staying with their current institutions.
Bankers feel stricter regulation
Chinese bankers' feedback on key regulatory indicators improved in 2017, suggesting that they better understand the rationale for compliance with these indicators. Most (74.4%) support the establishment of the Financial Stability and Development Commission (FSDC), recognising that it will help coordinate financial regulatory and development priorities, and prevent and mitigate risks. Over 90% say they have felt the effects of tightening regulations. 69.4% believe increased enforcement will help to improve banks’ compliance and internal controls.
Unifying supervision of the asset management sector
Asset management has been growing rapidly in China in recent years. But the sector faces many challenges due to inconsistent regulatory standards, improper business practice, multi-layered products and regulatory arbitrage and evasion. 47.3% of bankers believe the most pressing issue for the asset management business is the implicit guarantee backing investment products – a perception that needs to be removed. 45.4% of bankers argue that capital pooling, which is still being commonly used, inevitably leads to liquidity risk. As a result, respondents cite increasing regulation (71.9%), strengthening regulatory coordination (55.9%) and improving financial data (54%) as the top three priorities. In the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (Draft for Comment) announced by the PBoC in late November 2017, most of these issues have been met with clear regulatory requirements. Regarding the impact of this unified regulation, 52.4% predict their business will shrink, while 67.3% believe it will help the business to return to basics and reduce systemic risks. Overall, bankers believe that the benefits will outweigh the disadvantages. 73.0% of respondents are committed to strengthening their asset management business – mainly through wealth management (46.4%) and private banking (40.1%) products.
Chinese Bankers Survey 2017 12
Responding to FinTech disruption
FinTech has prompted new ways of thinking
among China’s bankers. Data analytics (76.3%) is the technology of greatest interest to our respondents, particularly in terms of customer identification (64.6%) and risk management
(59.2%). Mobile technology has been widely developed and applied (58.7%). Respondents believe the most practical uses for artificial intelligence (AI) include risk control (70.6%), customer services (64.6%) and investment advisory
(52.1%). Real uses for Blockchain, however, still need to be identified (83.6%). For cloud computing, Chinese bankers preferred to build private clouds (64.2%).
IFRS 9: in active preparation
The International Financial Reporting Standards No.9 (IFRS 9: Financial Instruments) will take
effect on 1 January 2018. Chinese banks have been preparing for its implementation, but only a few banks had entered modelling (11.5%) and testing (11.2%) stages by the end of August 2017. Overall, listed banks’ preparedness was better than that of
non-listed. Most bankers believe IFRS 9 will have a significant impact on risk asset rating (64.4%) and financial data disclosure (64.2%). The selection of valuation methods and consistency before and after implementation (59.0%) are seen as
particular challenges.
Outlook
A steadily improving economy in 2017 has led Chinese bankers to be upbeat about the sector’s growth over the next three years. The proportion of bankers who expect revenue and after-tax profit
growth in the 5-10% range is higher than last year. Over 70% of bankers predict NPL ratios will fall steadily to less than 2.0% over the next three years, indicating confidence in the country’s future growth
prospects. Nearly 40% of bankers expect the provision coverage ratio of the sector will remain above 150% by the end of 2017. More than 60% of bankers believe the capital adequacy ratio for the sector will stand above 11.5% by the end of 2017.
Chinese Bankers Survey 2017 13
PwC Contacts
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[email protected] [email protected] [email protected]
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China Banking & Capital Markets
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Leader
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Consulting Leader
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William Gee Jianping Wang
China Fintech Partner China Fintech Partner
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[email protected] [email protected]
Capital Markets and Accounting Advisory Services
Addison Everett
Capital Markets and Accounting Advisory Services Leader
+86 (10) 6533 7319
Chinese Bankers Survey 2017
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