“The Central Financial Work Conference in October 2023 offered a clear roadmap for the banking sector’s development,” says James Chang, China Financial Services Leader, PwC China. “This includes optimising credit structure, focussing products and innovation around the needs of customers, and providing high-quality financial services. Over the past year, the sector has been stable, with major financial institutions operating steadily. There has been further strengthening of financial supervision, and risks in key areas have been prevented or resolved.”

Due to slower growth in interest income, net profits of the 38 banks covered in the Newsletter grew by 1.59% year-on-year. Declining loan yields and rising deposit costs meant that net interest margins and net interest spreads continued to narrow. Interest and non-interest income both declined sharply. Fee and commission income also declined after a period of high growth, but there is still growth potential to be tapped.

“This is a critical year for China to realise the goals of the 14th Five-Year Plan,” says James Tam, Banking and Capital Markets Leader, PwC Hong Kong. “China’s growth target is set at around 5%, with the aim of modernising industry and accelerating new quality productive forces. The banking sector will play a key role in this transformation.”

The total assets of the banks surveyed reached RMB 258.48 trillion, representing a year-on-year growth rate of 11.46%. This was in line with the previous year’s growth of 11.59%. The Large Commercial Banks continued to lead, growing at 12.81%. Asset structure across the three categories of bank was largely unchanged.

The overall loan balance stood at RMB 147.94 trillion, an increase of RMB 14.84 trillion (+11.15%) from 2022. Again, the Large Commercial Banks grew fastest, followed by City & Rural Banks and Joint-Stock Commercial Banks. Lending increased support for financial inclusion, small businesses, green development, manufacturing and technological innovation. Retail loans grew steadily – totalling RMB 55.49 trillion for the year (+5.12%), while consumer finance picked up.

Non-performing loan (NPL) and special mention loan ratios both fell in step from the end of the previous year, while the overdue ratio increased slightly. Risk indicators for the Large Commercial Banks were stable, while the overdue ratio for Joint-Stock Commercial and City & Rural banks remained higher than the NPL ratio, requiring continued attention. The quality of corporate loans continued to improve, while the NPL ratio for retail loans grew to 0.94% overall, up 0.07 percentage points from the previous year.

With the continuing decline in NPL ratios, the overall loan provisioning ratio fell 0.07 points to 3.04%. The provision coverage ratio increased 1.17 points from the end of the previous year to 238.41%. In recent years, the proportion of loans with increased credit risk has grown more significantly, so attention should be paid to the subsequent credit risk exposures.

At the end of 2023, the total liabilities of the 38 banks surveyed stood at RMB 237.81 trillion – an increase of RMB 24.92 trillion (+11.71%) from the end of 2022. Customer deposits still accounted for the largest share and were the main source of funding for listed banks. Wealth management product returns rebounded, with wealth management deposits reaching RMB 26.8 trillion and the number of investors increasing to 114 million. Private banking business grew steadily, benefiting from sound operations and a solid client base.

The core tier 1 capital adequacy ratio for the Large Commercial Banks declined to 11.97% due to the expansion in lending and insufficient endogenous capital accumulation as a result of the slowdown in earnings growth. Joint-Stock Commercial and City & Rural banks, meanwhile, saw slower loan growth, so their core tier 1 capital adequacy ratio rebounded to 9.98% from the end of the previous year.

“In order to support the economy, the banking sector needs to continue to implement strategic initiatives,” says Brian Yiu, Financial Services Partner, PwC Hong Kong. “A sustainable business model that meets the demands of business and people’s livelihood needs will help build a strong financial services industry for China.”