Slow economic growth to put banks under pressure(2)

Interest rate liberalization

Interest rate liberalization caused banks' net interest margins to contract and thus put banks to the test in terms of their direction of development and competitiveness.

Bank of Communications CoLtd's net interest margin dropped 15 basis points from a year earlier to 2.21 percent in the first three quarters of 2014.During the same period, China Merchants Bank Co Ltd's net interest margin fell 36 bps to 2.30 percent.

"Such changes will have a big impact on bank profitability. Most banks' profit growth will drop to single-digit levels in 2015, while the majority of listed joint-equity banks still had double-digit growth from January to September last year," said Wen of China Minsheng Bank.

To make sure that the scale of lending and returns on loans remain at an adequate level, banks will inevitably adjust their customer structure by increasing the number of small and medium-sized clients, he said.

Previously, banks focused on large companies, but now they are being forced by interest rate liberalization to increase their lending to small companies, which had to borrow from private sources at high interest rates when they could not obtain bank loans.

The pressure of reduced earnings also forces banks to increase revenues from intermediary businesses such as financial derivative transactions. Intermediary businesses have huge growth potential and challenge each bank's risk management capability, especially in terms of talent reserves, Wen said.

The non-interest income of China Minsheng Banking Corp Ltd grew 28 percent year-on-year in the first three quarters of 2014. It accounted for 32.5 percent of the bank's operating revenues, up 3.01 percentage points from the previous year.

In the meantime, China Merchants Bank's income from fees and commissions rose nearly 58 percent, accounting for 27.4 percent of its operating income.

Banks are building a platform across diversified financial sectors including the securities, insurance and trust sectors. In the future, banks may cooperate with licensed non-bank financial institutions and regulators are expected to allow capable banks to develop mixed operations, Wen said.

Financial disintermediation

Financial disintermediation will accelerate this year, as more policy changes may arise in the fields of Internet finance and private banks. It will take more lending business away from banks and stimulate banks to make innovations

A huge amount of capital has moved from banks to the capital market, turning from debt capital to equity capital, said WuQing, deputy director of banking research at the Development Research Center of the State Council.

"That is in line with the orientation of our country's financial policy. We hope that our financial system will have a transition from the bank-led model to a market-driven one," Wu said.

From January to November 2014, the bond market grew 20.5 percent year-on-year, with bond issues of 10.2 trillion yuan, said the People's Bank of China in an announcement published on its website.

Different types of online financial businesses also expanded rapidly over the past year.

As of the end of November, the number of peer-to-peer lending companies stood at 1,540, with out-standing loans hitting 89.64 billion yuan, up 20 percent month-on-month. Such outstanding loans probably reached 100 billion yuan by the end of 2014, according to data from wangdaizhijia.com, a Web portal that tracks the industry.

The popularity of crowd funding and online payments is also on the rise. As of Nov 30, China had 122 crowd funding platforms. The 15 leading project-oriented platforms raised 56.65 million yuan for 347 projects in November.

During the first 11 months of last year, the growth of yuan deposits slowed down. Central bank statistics showed that yuan deposits increased by 8.76 trillion yuan year-on-year, lower than the growth of 11.41 trillion yuan a year earlier.

Lian Ping, chief economist at Shanghai-based Bank of Communications Co Ltd, said financial disinter mediation will lead to slower growth of deposits and the loss of high-quality clients.

"Banks should make full use of their comprehensive advantages to provide a package of financial services, so the clients' money will stay with the banks. They should also apply Internet technologies, business philosophies and processes more often to traditional banking services and develop Internet finance led by banks," Lian said.

Many banks are setting up their own Internet finance companies or cooperating with other companies that specialize in this field.

Baoshang Bank Ltd, a joint-equity commercial bank best known for its micro-business finance service, launched an online wealth management platform called Xiaoma Bank in June, offering debt products and money-market funds.

Instead of assessing a client's risk profile at a bank outlet, Xiaoma Bank offers online risk tolerance assessments to its clients and recommends different portfolios of financial products to different clients according to their characteristics.

Industrial Bank Co Ltd, a listed bank based in East China's Fujian province, launched a direct bank in March, offering securities investment funds, money market funds, bank acceptance pledge financing and wealth management products online.

As of the end of November, its customers had exceeded 500,000 and assets reached more than 50 billion yuan.

Yang Zhong, general manager of the electronic banking department at Industrial Bank, said: "Whether or not a bank could ride the wave of Internet development and push forward reforms in a timely manner in terms of standardized financial products and services will decide whether it will succeed amid fierce competition."