20th April 2023 – PwC China has today released its China Banking Newsletter 2022 Review and 2023 Outlook. Last year, with the global economy affected by many unexpected factors, China’s economy faced renewed downward pressure. However, it tends to stabilise and recover with policy support. The banking sector is supporting the real economy, despite increasing credit risk and capital management pressures.

“In 2022, China’s banking sector met the imperatives of economic stability and secure development by focusing on the restoration of stable growth in the real economy,” says James Chang, China Financial Services Leader, PwC China. “The People’s Bank of China supports banks’ lending to key areas such as small businesses, technology and green development by launching multiple types of special loans. Banks, as the main drivers of the financial services industry, have played an important role in stabilizing economic growth.”

In 2022, the overall net profits of the 40 banks covered in the Newsletter increased by 6.96% year-on-year. This was significantly lower than the previous year, due to the slowdown in interest income growth. Profits before provisions decreased by 1.57% and total provisions for credit impairments decreased by 11.15%.

Non-performing loan (NPL) ratios continue to decline amid expectations of an improving economy. The pressure on bank impairment provisions has also alleviated, and credit impairment losses have decreased year-on-year.

“In 2022, banks’ net profits remained stable. The loan prime rate (LPR) downturn has brought pressure on loan repricing. Banks have responded to the state’s call to support the real economy by reducing financing costs, so the interest-bearing return on assets has continued to decline. Competition for deposits means that deposit costs have remained rigid. A decline in customer risk appetite has led to increased time deposits, so the cost of interest-bearing liabilities has risen. Loan yields have declined, while deposit rates are starting to fall at some banks and are stable at others. The overall effect is a narrowing of net interest margins and spreads,” says Brian Yiu, Financial Services Partner, PwC Hong Kong.

The year-on-year growth rate of total assets was 11.63%, up from 7.87% in 2021. The large commercial banks led the way, with asset growth of 12.84%, providing important support for the real economy. The growth rates of joint-stock and city & rural banks were 7.63% and 12.42% respectively.

The balance of NPLs increased by 8.84% to 1.81 trillion yuan compared to the end of the previous year, while the NPL ratio decreased by 0.03 percentage points to 1.33%. The balance of overdue loans increased by 12.59% to 1.88 trillion yuan and the overdue loan ratio increased to 1.38%. The share of ‘special mention’ loans increased to 1.81%, and the balance of Phase II loans increased by 20.09% to 579.3 billion yuan.

The total liabilities of the 40 banks covered in the Newsletter were 216.16 trillion yuan, an increase of 2.388 billion yuan or 12.42% compared to the end of 2021. In terms of debt structure, customer deposits still account for the largest proportion and are the main source of funds. Due to their competitive advantage in low-cost funds, large commercial banks have more than 80% of these deposits.

The Tier One core capital adequacy ratios of the large and joint-stock commercial banks has continued to increase since 2020, reaching 12.25% and 9.75% respectively. The same ratio for city & rural commercial banks declined to 9.80% by the end of 2022.

“In 2023, the road to global economic recovery is still full of difficulties. The recent banking crisis in Europe and the United States is evolving and may impact other financial sectors and emerging markets. This is also the first year since the 20th National Congress of the Communist Party of China, which has signalled the overall direction of China’s path to modernization. The banking sector will focus on this strategy, promoting high-quality economic development and increasing support for key areas,” says Edith Wong, Financial Services Partner, PwC China.