China's five biggest banks released their 2017 financial reports in late March. The largely state-owned banks include Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of China and Bank of Communications. The combined net profit of the Big Five banks rose by over 3 % y-o-y, even if capital yield declined slightly. The net interest margin, which reflects the profitability of traditional banking operations, rose at four of the five banks (BoComm was the exception).
The Big Five control the vast majority of retail deposits, which forces smaller banks to resort to funding mainly from the interbank market. Thus, the big banks can exploit a general rise in interest rates when lending their surplus assets to other banks. Non-performing loans (NPLs) fell to just 1.5–1.8 % of the total credit stock, but many observers believe the actual figures are considerably larger. Last year, banks were required to set aside provisions 150 % of their NPL aggregates, a requirement all the Big Five passed. NPL provisions this year will be decided on a case-by-case basis, with the lower limit for some banks declining to as low as 120 % (BOFIT Weekly 11/2018). Officials want to make sure banks are adequately capitalised as tighter regulation of the shadow banking sector shifts lending back to the balance sheets of mainstream banks.
The China Banking Association (CBA) and financial consultants PwC annually survey a group of nearly 2,000 Chinese bankers. The latest survey found that the surveyed bankers highlighted credit risk as the biggest source of uncertainty facing banking operations. Credit risk has risen as economic conditions have deteriorated in certain geographic areas and business branches. It has also become more difficult for banks to dispose NPLs. Over 90 % of respondents said that regulation of banking operations had become stricter. Nevertheless, the near future looks bright as bankers believe the stock of NPLs should shrink further over the next three years and profits should rise even faster than last year.