From 2016 to 2020, we released the ranking list of value creation of China’s top 40 banks for five consecutive years. This series of reports continued to attract extensive attention from many financial institutions in China. We are very grateful to readers for their support. At the same time, we have also received many valuable suggestions worthy of discussion. This year, we continue to release the sixth issue of the series, the ranking list of China’s top 40 banks’ value creation (2021), review the value creation of China’s top 40 banks in 2020 and the first half of 2021, and give a series of action suggestions on how banks can overcome uncertainty in the post epidemic era.
Since 2020, Bank Of China Limited(601988) business environment has undergone a series of changes. First, with the normalization of epidemic prevention and control and the continuous recovery of macro economy, China’s GDP increased by 9.8% year-on-year in the first three quarters of 2021 and an average growth of 5.2% in two years. The banking industry has ushered in new opportunities for development after the epidemic, and the value creation ability of most banks has been close to or restored to the level before the epidemic. Secondly, the regulatory authorities continued to rectify the chaos of banking operation, new rules on risk classification, systemically important bank evaluation methods were successively issued, and the macro Prudential evaluation system was further improved, all of which put forward higher requirements for bank credit risk management. In addition, under the epidemic situation, supervision and guidance strengthened the disposal of stock risk. Affected by this, the non-performing loan ratio of commercial banks has decreased from a high of 1.96% in September 2020 to 1.75% in June 2021. Although the bank’s performance is damaged in the short term, if the bank can comprehensively improve the asset quality, it may provide effective guarantee for long-term performance.
In addition, we mentioned in our first report in 2016 that the marketization of interest rate will affect Bank Of China Limited(601988) . We have observed that the net interest margin of commercial banks has decreased by 48 basis points since 2015. In the same period, the risk adjusted average return on capital (RAROC) of the top 40 banks continued to decline, down 4.56 percentage points in the past six and a half years. We believe that under the circumstances of gradually narrowing the interest margin and declining the traditional net interest earning capacity of banks, commercial banks are still facing the following five challenges: first, with the change of macroeconomic environment, the asset side of banks is facing structural adjustment, and banks need to explore innovative cooperation modes with emerging industries to realize the common growth of banks and enterprises; 2、 After years of development, the competition of intermediary business carrying the new driving force of bank growth has become intense. How to break through the encirclement through digital empowerment has become an important topic; 3、 The traditional business model and channels are challenged. How to promote financial innovation and realize scale is worth thinking by bank managers; 4、 The change of economic structure in the post epidemic era puts forward new requirements for risk control, and the efficiency of risk management and the quality of risk decision-making of banks are facing a major test; 5、 At this stage Bank Of China Limited(601988) the resource input and production efficiency management needs to start. It is necessary to improve the refinement ability of resource allocation and input-output efficiency.
At the same time, we also find that in the leading regional banks in the Asian interest rate liberalization market, the fierce market competition has reduced the net interest rate per unit asset of banks to only about 1%, but they can still create certain economic profits. By comparing these leading regional banks with Industrial And Commercial Bank Of China Limited(601398) with the largest asset scale in China, China Merchants Bank Co.Ltd(600036) with the leading retail business development and Bank Of Ningbo Co.Ltd(002142) with the operating characteristics of small and medium-sized enterprises, we find that:
I The narrowing trend of net interest margin will continue for some time. The profitability cannot be improved only by asset scale. Banks should transform to high-yield asset business. Due to interest rate liberalization and long-term fierce competition, the net interest rate per unit asset of a three leading regional banks was only about 1% in 2020. However, their value creation ability still ranked among the top three in the region, because these three regional leading banks tried their best to expand high-yield retail consumer loans under the market condition of continuously narrowing interest margin The asset scale of credit card and corporate supply chain finance has increased the interest income of banks.
II The ability of banks to create revenue is becoming more and more important to economic profits. We observed that the three representative leading banks in China – Industrial And Commercial Bank Of China Limited(601398) , China Merchants Bank Co.Ltd(600036) and Bank Of Ningbo Co.Ltd(002142) , like the three leading regional banks in Asia, have excellent performance in revenue creation. In particular, China Merchants Bank Co.Ltd(600036) and leading regional banks with strong retail wealth management have both achieved an intermediate business return of more than 1% per unit asset, pushing the pre tax profit margins of the two banks to rank first in their respective markets. We can see the importance of intermediate business income for overall value creation. We suggest that Chinese banks increase resource investment and continue to optimize the business model of China collection business.
III Excellent risk management ability is the core competitiveness of asset business. We found that leading regional banks focus more on risk management ability in the environment of low interest rate, and the overdue assets of these banks are maintained at a very low level, so as to achieve a high level of shareholder return. In the post epidemic era and the new normal environment, Chinese banks need to invest more resources in risk management to form the core competitiveness of banks, so as to achieve stable and sustainable profit growth and improve efficiency.
