Banks looking to intermediary business

Chinese listed banks are expected to seize opportunities in the increasing intermediary business as a growth driver for revenues in 2014, against the backdrop of slowing lending, rising bad debts amid a slacken economy, accounting firm Ernst & Young (EY) said in a press conference on Thursday.

Fees and commission income derived from intermediary businesses accounted for 22 percent of banks' total revenues in the first quarter of this year, up 2 percentage points from the end of 2013, according to EY's latest annual report on Chinese listed banks.

The 7th annual report is based on the financial disclosures of 19 listed banks in the mainland and Hong Kong, including Big Five State-owned banks, eight joint stock banks and five city-level commercial banks and one rural commercial bank.

"Banks are pressured to develop their intermediary business under the impact of interest rate liberalization," Steven Xu, a partner of EY financial services, told the Global Times on Thursday.

"As household wealth grows, a greater demand for wealth management is expected to continuously prop up the development of asset management services of commercial banks such as wealth management, private banking and custodian business," said Geoffrey Choi, the assurance leader of EY financial services in China.

Interest income contributed less to bank revenues in 2013 as a result of rising financing cost under interest rate liberalization, slower lending, and deteriorating asset quality, according to him.

Affected by the rising financing cost under interest rate liberalization, the net interest margin for the 19 listed banks declined from 2.78 percent to 2.61 percent in 2013.

Banks' new lending slowed down given the increasing difficulty of attracting bank deposits from the public to fund lending as Internet finance service providers provided an alternative by offering depositors higher yield investment products than banks.

Meanwhile, non-performing loans (NPLs) and the NPL ratio continued to elevate, according to EY's report.

Among a slowing economy and China's hastened effort to rein in overcapacity and cut pollution, the bankruptcy of poorly performing trading firms and heavy polluting manufacturers led to the rise of NPLs.

The NPL ratio of the listed Chinese banks rose to 0.97 percent by end of 2013 from 0.92 percent in 2012, meanwhile the banks wrote off 83.5 billion yuan ($13.4 billion) worth of bad debts in 2013, more than double the amount compared with a year earlier, according to EY's calculations based on the banks' disclosed information.

To counter the downside risks of narrower interest margin, slowdown of interest income, the listed banks tried every effort to expand intermediary businesses.

Fees and commission income accounted for 23 percent of the listed banks' total revenues in 2013, from 12 percent in 2012, according EY.

Looking ahead, the banking sector will face more challenges of interest rate liberalization, Internet finance, economic restructuring and tougher regulations, Xu said.

A cooling property market may lead to further bad debts of banks this year, but it is hard to estimate the overall impact on the banking system, according to Choi.

In early 2014, the Ministry of Finance issued a new set of rules, lifting some restrictions on the write-off of NPLs for financial institutions.

This new set of rules will enable banks to self-manage and help banks to clean up bad debts, accounting firm PricewaterhouseCoopers wrote in a report e-mailed to the Global Times on Thursday.