Chinese banks need to focus on creating shareholder value, a report released by global management consulting firm McKinsey & Company showed Wednesday.
The research found that of the 40 banks analyzed, four have not created any shareholder value at all, including Postal Savings Bank of China, Guangfa Bank, Bohai Bank and Bank of Hangzhou. In addition, the corporate lending portfolios of the 40 banks studied have not created economic value.
The report was made based on data for the 2015 financial year, and analyzed the value creation of 40 of the most representative banks, including the top five banks, the postal savings bank, 12 national joint-stock banks, 17 key urban commercial banks and five major rural commercial banks.
The banks accounted for 72 percent of the net profits in the industry in 2015.
Over the past few years, China's banking sector said goodbye to its previous profit-making model, in which profit was generated by multiplying the net interest margin by banks' fast-growing asset base, the report said.
Narrowing interest spreads and increased volatility in asset growth characterize the "new normal" among Chinese banks.
Chinese banks have had a significant drop in profitability, and with the rapid surge in nonperforming loan (NPL) assets, the banks face substantial challenges to their operating model. Concerns are growing among shareholders over whether Chinese banks can create value, and not destroy it, and whether they can effectively manage capital.
Chinese banks are also suffering from deteriorating asset quality. According to the report, under one scenario in which NPLs rise by 20 percent, 11 banks would have a negative economic profit, and the average return on equity of the 40 banks in the study would decline by 1.5 percent to 2.5 percent.
The report recommends banks should actively apply risk management best practices such as limit management, capital management and early warnings into their day-to-day business decisions.
