Profitability and solidity of China’s largest banks stable even as credit risk grows

A third-quarter reviews of China’s biggest banks show that profits at each of the country’s four giant banks grew by 5–6 % from 3Q 2018. While the return on equity (ROE) in the banking industry declined slightly overall, annualised returns held steady at just over 10 % at the big banks. The ROE of the banking sector overall in 2015 still exceeded 20 %.

Over half of earnings at the big banks was generated by interest margins, i.e. differences between rates on deposits and lending. Other earnings mostly came from fees. The revenues from securities and forex-related businesses were still a relatively small for banks operating in China.

The total assets of the four biggest banks grew by 5–10 % y-o-y (about the same pace as the nominal GDP). In terms of assets and liabilities, the largest of the four big banks was Industrial and Commercial Bank of China, with total assets about 30.4 trillion yuan (3.9 trillion euros) at the end of September. The other big banks had total asset of just over 20 trillion yuan.

China’s big banks appear to be quite solvent. At the end of September, the Common Equity Tier 1 (CET1) readings for all big banks were unchanged from a year earlier. (CET1 is the highest quality of regulatory capital, such as common shares and retained earnings). Readings ranged from 11.2 % to 14.0 %. The international standard Basel III regulatory framework requires a level of 4.5 % at minimum, if other capital requirements are not included.

Bank profits have been dragged down by the growth in non-performing loans (NPLs), which now total 2.2 trillion yuan for the sector. The situation is the worst in 15 years. International observers claim that the amount of NPLs is actually much larger. The future of the NPL situation is highly dependent on macroeconomic trends in China.

Despite China’s implementation of a deposit insurance scheme in 2015, bank runs have been seen in some smaller banks this year, with depositors emptying their accounts at banks they no longer trust. The latest runs hit the Yichuan Rural Commercial Bank and Yingkou Coastal Bank.