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Eleven Chinese banks that have listed on the mainland or Hong Kong, or both, account for over 55 percent of the country's banking industry in terms of asset size, according to a study carried out by professional services firm Ernst & Young.

 

"The extent to which the nation's banking assets are now public is truly a remarkable feat and underscores the commitment to reform in the Chinese banking sector," said Alfred Yeung, global financial services partner at Ernst & Young.

 

"The crucial question faced by these banks is what steps they need to take to ensure continued progress in light of the competitive pressures," Yeung said.

 

Ernst & Young is the auditor of five of the listed banks and has provided advisory services to a number of others.

 

By comparing the banks' operating results over time, the study shows that the banks achieved significant improvement in the areas of capital adequacy, asset quality, asset mix, revenue growth and cost control.

 

It shows that the overall capital adequacy ratio and overall core capital adequacy ratio of the banks rose from 10 percent and 7.58 percent respectively in 2004 to 12.34 percent and 10.11 percent in 2006.

 

The study said that raising capital funds through initial public offerings (IPOs), private placements and the issuance of subordinated bonds are the key measures that the banks have taken to improve capital adequacy.

 

The banks made improvements in asset quality by continually reducing non-performing loan (NPL) ratios and increasing provision coverage over the years.

 

According to the study, NPL ratios of this group of banks have decreased to 4 percent or lower, while some of them have fallen to below 2 percent. At the same time, the provision coverage has exceeded 70 percent. "This represents an improvement in asset quality and a more healthy financial position among the banks," said Mike Shi, partner of global financial services of Ernst & Young.

 

The study pointed out that more listed banks are diversifying their loan exposure into other investments. However, the key challenge to listed banks is that most of these investments are in government or quasi-government bonds, which have lower risk but generate a lower yield.

 

Fee and commission income growth is an obvious answer to the banks' revenue growth, the study pointed out, although some banks' fee and commission income already accounts for 10 percent of their total income, there is still a lot of room for further growth, especially when compared to the revenue mix of international commercial banks.

 

The study shows that clearing and settlement fees and bank card fees are two of the most important sources of fee income, based on 2006 financial results.

 

However, banks will experience strong growth in other areas, such as wealth management, investment banking, custodian business and correspondent banking, it said.

 

(China Daily June 22, 2007)