E&Y urges Chinese banks to shift focus

Report suggests room for growth in online, mobile and intermediary operations

Chinese banks should accelerate development of their intermediary and online business, as well as their mobile banking operations, according to a report released on Tuesday by global professional services firm Ernst & Young.

Despite a slowdown in profit growth by the country's listed banks, growth of income from fees and commissions increased by 24 percent in the first three months of 2013 compared with the same period in 2012, a significant improvement on the 17 percent rise between 2011 and 2012, said Geoffrey Choi, financial services partner at Ernst & Young Hua Ming LLP.

"Such income from intermediary business accounted for only 23 percent among Chinese lenders, suggesting huge room for further development if compared with international counterparts," he said.

In 2012, net profit growth of Chinese listed banks was 17 percent, down 12 percentage points from 2011.

In the first quarter of 2013, profit growth fell to 13 percent, compared with 25 percent during the same period last year, Choi said.

Affected by the ongoing interest rate liberalization process, net interest margin - an indicator measuring bank profitability from traditional deposits and lending - continued to fall among listed banks, said the report.

"Banks must continue to optimize their international capital allocation, alter the development mode which seeks profits based on consumption of capital and improve their capacity to accumulate capital," Choi said.

Liu Shiyu, vice-governor of the People's Bank of China, said earlier this month that the major Chinese banks might see a capital shortage of 40.5 billion yuan ($6.4 billion) in 2014 if they kept growth and internal financing at current levels.

The Ernst & Young report found that the listed banks had increased client numbers and online/mobile banking transactions substantially last year.

By the end of 2012, Industrial and Commercial Bank of China Ltd, the biggest lender in China, had 315 million electronic banking customers, who carried out transactions worth 332.6 trillion yuan.

The proportion of its online business to total transactions has reached 75.1 percent, while its mobile banking business has increased 54.5 percent compared with the year earlier, with transaction values jumping by nearly 16 times.

Online transactions at Bank of China Ltd rose by nearly 33 percent year-on-year to 91 trillion yuan at the end of 2012, while numbers of mobile banking clients at China Merchants Bank Co Ltd surged by 115 percent.

The trends were likely to continue, but mistrust of the security of these services could restrain future expansion, said Choi.

"Guaranteeing client data and information security is definitely a big problem that banks should sort out."