Apr 24, 2019 08:03 PM

Opinion: Are Chinese Banks Earning Too Much?

Photo: IC
Photo: IC

In recent years, commercial banks’ high profits have attracted public attention, and they have been accused of earning these profits by increasing the burden on the real economy. This leads to the question of how we understand banks’ profits.

Chinese banks’ return on equity (ROE) is above average, compared with other industries, while their return on assets (ROA) is much lower. According to financial services platform Wind, the industries that had the highest ROEs in the first nine months of 2018 were domestic appliances, cement manufacturing, beverage manufacturing and food processing, with the banking industry ranking 12th. The average ROA among all state-owned enterprises stood at 2.7% in 2016, while that of all banks was only 0.98%. Among listed companies, the highest ROA can reach more than 50%, while large and midsize banks’ ROA stands at more than 1% at most, as banks are highly leveraged.

Banks’ net profit growth has been slower than the growth rate of China’s gross domestic product (GDP) since 2015, and their ROA and ROE have continued to decline. The ratio of banks’ noninterest income to their total revenue also declined in 2017 and 2018 after peaking at 23.8% in 2016. The sluggish performances are affected by China’s slowing economic growth and financial regulators’ policy to encourage banks to lower their fees and support the real economy.

The high profits seen in China’s banking industry are due to the huge volume of assets they hold. China is the second-largest economy in the world, but Chinese banks’ assets are worth more than that of the U.S., Japan, and Germany combined, which are the world’s first, third and fourth largest economies respectively. A low cost-to-income ratio also contributes to Chinese banks’ high profit. For instance, revenues of the top four banks in the U.S. were 1.1 times of those of China’s top four banks in 2018, while the U.S. banks’ profits were only 74.2% of their Chinese counterparts. This is because U.S. banks have larger expenditure in areas like labor, research and development, and operation. Chinese banks have been trying for decades to lower costs and improve efficiency and their application of technology is leading the globe.

However, Chinese banks’ price-to-book (P/B) ratios are among the lowest of any listed companies in China. Listed banks’ average P/B ratio has been below the average P/B ratio of A-share companies since 2006. The sector’s ratio was 0.88 in the first quarter of 2019, the lowest across all industries.

Chinese banks’ huge asset size and high profits are caused by China’s growth model, which is highly dependent on credit expansion. China’s economic achievements since reform and opening-up began are the result of policy loosening and large capital inputs. China’s financial system is dominated by banks, and they have played a pivotal role in converting savings to investment and supporting the real economy. However, as China’s leverage ratio increases, banks have expanded their assets as well as accumulating risks. More debt means more interest income, but if borrowers have troubles paying off their debt, the debt will become nonperforming loans (NPLs) and even cause losses. An International Monetary Fund study found that if the private sector’s debt is higher than the country’s GDP, the financial sector will start to have a negative influence on economic growth. China has a high leverage ratio, and the leverage should be reduced at a steady pace. The banking sector needs to support the real economy, but the real economy should also be less dependent on borrowing and large-scale expansion to develop.

China’s banking sector faces a lot of challenges. At the end of 2018, banks’ NPL ratio reached 1.83%, 0.09 percentage points higher than end-2017. The reading came after the banks wrote off 998 billion yuan ($148 billion) worth of NPLs, 259 billion yuan more than the previous year. Personal loans, especially home mortgages, usually have a lower NPL ratio, but recently, the household leverage ratio has been increasing. The low NPL ratio for mortgages is dependent on the steady increase in personal income and stable home prices. Moreover, at the end of 2018, the default rate in the bond market reached 1.26%, up 73 basis points from a year earlier, while the banking and insurance sectors held more than 80% of the bonds in the market. The NPL ratio of bank’s nonloan assets may also rise. In addition, the banking sector’s services fees are constrained, and wealth management operations are slow due to new asset management rules.

In general, if policymakers focus on banks’ seemingly high profits now and try to bring them down, they won’t help solve the fundamental problems in China’s economy, and could even damage banks’ future development.

Zhou Qiong is general manager at the strategic development department of Postal Savings Bank of China.

Translated by Liu Jiefei (

You've accessed an article available only to subscribers
Share this article
Open WeChat and scan the QR code