THESE WOULD APPEAR TO BE GOOD TIMES TO BE
A Chinese banker. Mainland banks are among the
worlds biggest and most profitable lenders. In the first
six months of 2012, Chinas so-called Big Four commercial
banks Industrial and Commercial Bank of China, Bank of
China, China Construction Banking Corp. and Agricultural Bank
of China amassed profits of $61 billion, more than
twice as much as the four biggest U.S. lenders. ICBC,
Chinas biggest bank, alone reported profits of
$19.7 billion, greater than those of JPMorgan Chase &
Co. and Wells Fargo & Co. combined.
Those profits, however, have been produced in a benevolent
environment of government controls and implicit support that
provides Chinas banks with sizable interest margins, a
captive deposit base to fund operations and limited competition
from nonbank financial companies. Its a system that has
regularly required banks to ignore moral hazard and finance
government-backed investments. Those conditions may now be
changing, though. As Chinas economy slows and loans start
to sour, banks are having to use more of their earnings to
settle bad debts.
Chinas commercial lenders also are facing fresh
competitive challenges as Beijing introduces market reforms and
tightens oversight of banking activities. In recent months
Chinas banking regulators have cracked down on the fees
banks charge their customers and taken the first steps toward
liberalizing interest rates. The government is introducing
rules and capital requirements that are pushing domestic banks
to properly recognize their own balance-sheet risks, including
accounting for a growing pile of doubtful loans.
As a result of these twin pressures, Chinese bank profits
are certain to get squeezed, says Dong Tao, chief Asia
economist for Credit Suisse in Hong Kong. The heyday of
Chinas banking sector is behind us, he says.
The monopolistic profits and high margins that banks have
enjoyed over the last decade are entirely
The health of Chinas banks is crucial because of their
size and the role they play in the countrys economy.
Beijing has used the big state-controlled banks as effective
policy levers; much of the governments 4 trillion
yuan ($635 billion) stimulus program that revived the
economy in 2009 was conducted through bank lending.
On paper, at least, the banks appear stronger and better
capitalized than at any time in the past three decades. Many of
these firms are reporting profitability margins and capital
levels that rival or outstrip most of their Western
counterparts. The countrys ten biggest banks showed an
average core capital adequacy ratio of 9.5 percent at the end
of June and a return on assets of 1.28 percent, according to
PricewaterhouseCoopers estimates. U.S. banks had an
average tier-1 ratio of 13.21 percent at the end of June;
return on assets in the third quarter stood at 0.06 percent at
Bank of America Corp., 0.11 percent at Citigroup, 0.99 percent
at JPMorgan Chase and 1.49 percent at Wells Fargo.