BOFIT Viikkokatsaus / BOFIT Weekly 2017/14

The Big Four, China's giant, largely state-owned commercial banks (Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China) have all released their 2016 financial statements. The rapid growth of China's banking sector continued and it surpassed the euro zone last year to become the world's largest banking sector. However, bank net interest margins shrank and operating incomes contracted from 2015 (except for Bank of China, which saw its income rise on one-time transactions). Banks report that competition in the market has stiffened and bank regulation has become tighter. Banks responded to the fall in income with cost-cutting measures. Additionally, the shift from the business tax to VAT-based taxation appears to have significantly reduced the tax burden on banks. Thanks to lowered costs, all large banks saw slight increases in their profits.

There has been little change in nonperforming loan (NPL) ratios of large banks. All report low NPL ratios relative to overall lending (1.5–2.4 %). It also appears that the share of special mention loans destined for NPL status fell in 4Q16, even if they still were nearly 4 % of the credit stock. Banks are required to hold allowances equivalent to 150 % of their NPLs. The ICBC's allowance (137 %) is well below the requirement and CCB barely meets the 150 % requirement. If banks were to change the status of special mention loans to nonperforming, their allowances would be completely inadequate. The situation of some small and mid-sized banks is even worse.

During June-December 2016, the China Banking Association and the PwC international consulting group surveyed nearly 2,000 Chinese bankers. The survey found that bankers expect a weaker business environment in coming years as the economy slows, structural reforms proceed and a variety of mobile and internet-based competitors vie for banking business. Most expect the NPL problem to worsen and see top priority of banks in coming years is to improve NPL-related debt collection and writing down of NPL losses.