Chinese bankers’ survey 2014 Executive summary - PwC · Chinese Bankers’ Survey. Now in its...

December 2014

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Chinese bankers’ survey 2014Executive summary

2 Chinese bankers’ survey 2014

Chinese bankers’ survey 2014 1

PrefaceWe are pleased to present the 2014 Chinese Bankers’ Survey. Now in its sixth year, the report is prepared jointly by the China Banking Association (CBA) and PwC China (PwC). It looks at developments in the industry from the perspective of Chinese bankers.

The report has the following primary objectives:

• To better understand transformations in the Chinese banking sector and the opportunities and challenges they create.

• To reflect Chinese bankers’ opinions and suggestions for market development and regulation.

• To promote mutual communication and understanding between the Chinese banking industry, the overseas financial sector, regulators and the public.

We would like to take this opportunity to thank all those who have taken time out from their busy schedules to participate in the interviews and survey. The online survey was completed by executives in 31 provincial regions (excluding Hong Kong, Macau and Taiwan). A total of 1,181 responses were received. The survey also includes face-to-face interviews with a number of senior Chinese banking executives (C-suite level and above).

The survey shows that most bankers believe China’s GDP growth will be lower than 7.5% in the next three years, and the impetus for growth will mainly come from domestic consumption and technological innovation. Bankers think that in the next 3-5 years China’s macro-economic growth will be mostly influenced by reform of the financial sector and of the tax system. Interest rate liberalisation is seen as the main focus of financial sector reform. Bankers generally believe that regulation is reasonable and meets the needs of China’s banking sector, but would benefit from greater flexibility. This year the PBOC, CBRC and other primary regulators have released a series of rules to guide and govern inter-bank business. Bankers think that asset growth has been limited by these stricter rules on inter-bank business, but they gave a positive evaluation of the policy in general.

Vigorous growth in internet finance and the rise of private banks have had a tremendous impact and brought significant challenges to the traditional banking industry. They have injected new momentum into an increasingly mature sector. More than half of bankers surveyed feel that internet finance has had a big impact on the traditional banking industry. They are aware of the advantages and disadvantages that it brings and have proposed various responses.


Survey results show that views on business development haven’t changed much in 2013. However, bankers have clearly lowered their expectations for revenue and profit growth over the next three years. Most believe that revenues and profits will grow less than 20% over the next three years and the main driver of profit growth will be fee-based business.

The Chinese banking sector has continued to forge ahead by steadily developing traditional business while making structural adjustments at the same time. More than 80% of bankers report that their banks are undergoing or have completed restructuring. They see the benefits of restructuring but emphasise that this is a long-term process.

Globalisation is another important trend for the industry’s development. Most bankers agree that a globalisation strategy should be implemented steadily through directly establishing branches, subsidiaries and joint ventures. Most international expansion to date has been concentrated in the Asia-Pacific region, with a priority given to Hong Kong, Macau and Taiwan. Bankers also feel strongly that an insufficient pool of talent is hampering their expansion overseas. We hope that this report proves a useful resource for our readers. We look forward to receiving your valuable suggestions and comments, as they will help ensure the continuing relevance of this report in future years.

For further information, please contact the CBA, PwC Financial Services Professionals or the Project Leader.

Yang ZaipingExecutive Vice PresidentChina Banking Association

David WuBeijing Senior Partner PwC China

Ba ShusongProject Leader

November 2014, Beijing


Participating Banks

1) Large-size commercial banks (6)

• Industrial and Commercial Bank of China

• Agricultural Bank of China

• Bank of China

• China Construction Bank

• Bank of Communications

• Postal Savings Bank of China

2) Joint-stock commercial banks (10)

• China Merchants Bank

• China CITIC Bank

• Huaxia Bank

• China Everbright Bank

• China Minsheng Banking Corp., Ltd

• China Guangfa Bank

• Ping An Bank

• China Bohai Bank

• Evergrowing Bank

• China Zheshang Bank

3) City commercial banks (urban credit unions) (27)

• Bank of Beijing

• Chang’an Bank

• Bank of Changsha

• Changzhi Bank

• Bank of Dalian

• Datong Bank

• Bank of Dongguan

• Fudian Bank

• Guilin Bank

• Harbin Bank

• Bank of Hangzhou

• Huarong Xiangjiang Bank

• Huishang Bank

• Bank of Jilin

• Bank of Langfang

• Bank of Nanjing

• Ningbo Donghai Bank

• Bank of Ningbo

• Panjin City Commercial Bank

• Bank of Qinghai

• Qilu Bank

• Bank of Shanghai

• Bank of Shangrao

• Shengjing Bank

• Taian City Commercial Bank

• Bank of Tianjin

• Bank of Xinyang

4) Rural financial institutions (16)

• Beijing Rural Commercial Bank

• TRC Bank (Tianjin Rural Cooperative Bank)

• Shanghai Rural Commercial Bank

• Shenzhen Rural Commercial Bank

• Shanxi Rural Credit Union

• Inner Mongolia Rural Credit Union

• Jiangsu Rural Credit Union

• Zhejiang Rural Credit Union

• Jiangxi Rural Credit Union & Rural Commercial Bank

• Rural Credit Cooperative of Shandong

• Hubei Rural Credit Cooperative

• Hunan Rural Credit Cooperative

• Guangdong Rural Credit Union

• Guangxi Rural Credit Union

• Sichuan Rural Credit Union

• Shaanxi Rural Credit Cooperatives Union

5) Policy Banks (2)

• China Development Bank

• The Export-Import Bank of China

6) Foreign (joint venture) banks (2)

• Australia and New Zealand Banking Group Ltd. (China)

• Bank of Tokyo-Mitsubishi UFJ (China), Ltd.


Since the beginning of 2014, China’s economic growth has shifted down a gear. The economy is experiencing a degree of discomfort as the side effects of previous stimulus policies are being tackled. With these overlapping effects, economic and social development is bracing for a “new normal”. The macro economy faced intense downward pressure for the whole of the first quarter and began to stabilise in the second, thanks to a series of pro-growth policies launched by the government. But demand remained relatively weak and the drag on growth persisted. Growth was also down slightly in the third quarter.

The Chinese banking industry is, of course, not immune to the impact of a fragile global economic recovery and weakening domestic growth. The industry itself also faces many challenges, such as financial disintermediation, interest rate liberalisation and market access relaxation.

Macro EnvironmentChina’s economy entered a “new normal” stage in 2014. The growth rate slowed, price inflation was moderate, job growth was stable and structural changes were in the course of bedding down. About 70% of Chinese bankers believe that China’s GDP growth rate will be lower than 7.5% in the next three years, with the main drivers being domestic consumption (71.9%) and technological innovation (69.5%). In 2014 bankers selected financial system reform (73.5%) and tax reform (68.5%) as the most influential forces for macro-economic growth in the next 3-5 years.

Executive Summary

International StrategyNearly 60% of bankers think China’s banking sector should push ahead with internationalisation strategies in order to: follow clients who are going global (59.3%), learn from international markets (58.4%) and expand the source of profits (56%). The first choice for banks developing an internationalisation strategy is to set up their own overseas branches or subsidiaries (53.9%), while the second is cooperation with overseas institutions. In the next two to three years about half of the bankers surveyed (50.9%) will still opt for Hong Kong, Macau or Taiwan as the starting point for roll-out of their internationalisation strategies. More than 80% of bankers (83.8%) prefer promoting the development of internationalisation through their payments and settlements business. A limited talent pool was identified as the greatest factor restricting commercial banks’ overseas expansion (69.8%). Other major factors include a lack of accurate and detailed information about foreign environments, investment rules and policies (61.1%) and insufficient experience of strategic planning (59%).

Business DevelopmentAs with the previous year’s survey, the agriculture, forestry and fishery sectors (59.2%) remain the most supported by lending business, while real estate (67.9%) remains the least supported. Small- and micro-sized enterprise financing (71.9%) comes top of corporate lending development priorities for the next three years. Half of the bankers surveyed will focus on supply chain finance as one of their significant development areas. In terms of retail business, consumer finance (61.6%) continues to attract the most attention, followed by wealth

Within reform of the financial system, interest rate liberalisation is the bankers’ principal concern (94.2%). More than 75% of bankers expect there to be no increase in either volume or price in the real estate market in the coming year. They continue to hold fairly positive views on the results of the macro-economic policies implemented over the past year. 80.7% believe that targeted monetary easing, which started in the second quarter, has had some positive effects on the real economy.

Structural ReformIn 2014, a number of major commercial banks carried out organisational restructuring and made it a key strategy for transition and development. According to the survey, 52.9% of bankers report that their banks are undergoing restructuring, and 28.9% say they have completed the task. More than 80% of the bankers are positive about the effects of restructuring. 65.2% say they have not met their targets but that this indicates that structural reform is a long-term process and cannot be achieved overnight. The major direction of restructuring is to separate the front, middle and back offices (60.1%), while the primary target is to improve operational and management efficiency (84%). However, the challenge lies in poor integration between new and old structures (66.1%) and conflicting interests between different departments (61.2%).


management (58.1%). Bankers pay less attention to private banking (43.4%), indicating that their retail business priorities have changed. The three key development areas for investment banking are: asset securitisation (44.7%), structured finance (44.2%) and bond underwriting (42.9%).

Supply Chain FinanceThe major commercial banks have all now launched special supply chain financing services or products, as it has become a new forum of competition for customers and businesses. Over 70% of bankers say they will actively promote supply chain finance. Currently it is mainly concentrated in the manufacturing sector (62.9%), with two main types of product: financing (62.9%) and settlement (61.8%). In promoting the development of this new business while managing risk, bankers consider it important to keep a watchful eye on the overall strength of core enterprises (62.4%) and the authenticity of trade origination (62.2%). At the moment, the most prominent problem in this sector is the core enterprises’ lack of effective controls over the choice of their upstream and downstream business partners (67.5%).

Inter-bank BusinessIn 2014, inter-bank business has continued to attract bankers’ attention. As a corporate finance priority, bill discounting has jumped from 11th in 2013 to 4th position in 2014. More than 70% of bankers surveyed are upbeat about the development of inter-bank business. Traditional bill operations (59.6%) and inter-bank placement (58.7%) remain the main focus, but new forms of inter-bank business, such as “entrusted investments” and “returns swap programmes”, are beginning to attract attention. Commercial banks (78.9%) continue to dominate the inter-bank business.

Potential risks arising from the rapid growth of the products in this sector have prompted the PBOC, CBRC and other primary regulators to release a series

of rules to guide and govern inter-bank business. Bankers believe that the biggest impact of the stricter rules is that asset size growth is limited (64.3%), but they give a positive evaluation of the policy in general. They also express their own views on how to strengthen the regulation of inter-bank business: 68.1% think that “in order to prevent off-balance sheet risk from shifting to on-balance sheet risk, liquidity management indicators need to be in place. More than half (51.6%) believe that “an upper limit for investment in high risk assets should be established”. Banks are also keen to “improve internal control systems and reform business processes, including maturity and credit authorisation management” (64.5%)

Asset ManagementIn the context of interest rate liberalisation, asset management has become one of the core businesses and drivers of profit growth after many years of explosive development. Over 80% of bankers hold the view that a strategic position for their asset management business is the key to promoting business transformation and profit growth. Nearly 70% of bankers think the focal point of future development should be the management of wealth management products. The main investment direction should include the money markets (67.4%), including domestic placement, repurchase agreements and deposits with banks and financial institutions, along with domestic assets (59.5%) such as corporate bonds, medium-term notes, short-term financing bonds and private placement bonds. 62.4% of bankers suggest the major internal problem facing the asset management business’s development is a lack of talent. But the main external risks to this business lie in credit risk from underlying assets and default by counterparties (56.8%), as well as liquidity risk from maturity mismatch (55.4%). Bankers feel that the asset management business should strengthen supervision of operating models (49.8%), disclosure (48.6%) and control over new licenses and types of services under the licence (44.6%).

Risk Management and Internal ControlAccording to listed banks’ results for the first half of 2014, banks have experienced an increase in both non-performing loan (NPL) ratios and NPL balances, indicating an obvious downward trend in credit asset quality. The overdue ratio has increased at a faster rate than the NPL ratio, implying that credit asset quality will further worsen. Bankers suggest that the main reasons for rising NPLs in 2014 include: overall decline in the growth of the macro economy (47.4%), enterprises or regions involved in private lending or guarantee circles (44.7%) and some enterprises losing control of their expansion, resulting in a liquidity crisis (43.9%). Bankers are particularly concerned by risks from real estate market overcapacity. Bankers believe high NPL ratios in 2014 and the next three years would likely arise from the following industry sectors: “polluting, energy-intensive and resource-dependent” industries (73.7%) and real estate (65.8%). Bankers are of the view that the most important measures to prevent NPL rebound are strengthening pre-lending due diligence, effectively identifying high risk areas, industries and enterprises (65.8%), and strengthening continuous post-lending monitoring (62.4%).

More than 80% of banks have established more comprehensive internal control frameworks while strengthening compliance education, executing risk screening on a regular basis and keeping a close eye on lower levels of branch personnel.


Corporate Governance and Human Resource Management

Bankers rate the effectiveness of corporate governance highly in this year’s survey – though not quite as highly as last year. In particular, ownership concentration remains a concern. In the bankers’ opinion, the problems of corporate governance mainly lie in ineffective independent director and external supervisor systems (35.9%) and imperfect structures for shareholder meetings, board of directors, board of supervisors and senior management (34.7%). The most pressing issues to deal with are: strengthening commercial banks’ strategic planning and capital management (61.4%), and introducing effective employee incentive programmes, accountability mechanisms and transparency (61.1%).

Almost 90% of Chinese bankers hold the view that headcount in the industry will continue to increase over the next three years. The main priorities for HR management will be improvements in performance-based management systems (80.5%), education and training (67.4%) and remuneration management programmes (56.6%). The main emphases of staff training will be selling skills (64.2%), management skills (51.7%) and coordination, communication and organisation skills (50.5%). 40.1% of bankers find no difficulty in implementing the newly revised Labour Contract Law and say all the provisions were executed well.

Information TechnologyInformation technology now plays a critical role in supporting the operations of China’s commercial banks, but its level of development can constrain business growth and innovation. 40% of bankers indicate that they will accelerate information system construction and substantially increase investment over the next three years. But the percentage of bankers who feel that banks should “speed up information system construction and substantially increase investment” has been declining year by year since 2011. Meanwhile, more and more bankers believe that banks should “maintain investment and adjust investment priorities according to development needs”. This shows that IT infrastructure investment has started to show some of its early benefits and that the focus will now turn towards more thorough work in specialised fields. The survey indicates that the most closely watched fields of information infrastructure are systems for core trading (62.3%), risk management (48.5%) and credit management (44.6%). As in 2013, the most notable information technologies are mobile internet (75.6%), big data (69%) and cloud computing (40.8%).

Internet FinanceMore than half of bankers believe that internet finance has had a significant impact on the traditional banking industry, especially in terms of funding. 48.2% believe that internet finance leads to diversion of deposits, while 29.9% believe it pushes up the cost of funding. Bankers believe that internet finance firms have advantages in terms of convenience (93.6%) and low cost (90.2%), while traditional financial institutions have the edge in risk management (91.3%) and size of customer base (86.3%). In order to respond to these challenges, bankers are increasing investment in electronic banking channels (86.1%). Secondly, they are seeking or carrying out strategic cooperation with internet companies, including e-commerce businesses, to achieve collaboration and synergy (66%). Bankers feel the major risk for commercial banks who step into internet finance is information technology risk (60.5%). They think it is very important to strengthen regulation of internet finance. 48.6% believe that the PBOC, CSRC, CIRC and CBRC should implement extended regulation by establishing and improving relevant rules and regulations.

Social ResponsibilityIn recent years the Chinese banking industry has consistently increased investments to achieve social responsibility objectives. For 85.4% of bankers in the 2014 survey, “enhancing reputation” is the primary motivation. 76.8% of bankers feel that “increasing financial services for small- and micro-enterprises” is the key way to fulfil social responsibility obligations. In the view of those surveyed, financial product innovation (60%), business process and efficiency (54.7%) and financial consumer protection (50.5%) are the aspects of public financial services that are in greatest need of improvement.

Private BanksBankers generally hold a positive attitude to private capital in the banking sector. Nearly half believe that it helps to guide private capital to support the real economy, to regulate private lending and to lower financial risks. When compared to existing financial institutions, 82.7% of bankers feel the greatest advantage that private banks bring is “a flexible operating model”, while existing banks win in terms of “superior reputation” (57%) and “financial strength” (55.3%). Bankers think that city commercial banks (74.9%) and small and micro lending companies (75.4%) will be hit hardest by the establishment of private banks. The biggest risk for private capital in the banking sector is related party transactions and moral hazard caused by poor corporate governance of private banks (73.2%). Bankers think highly of the current pilot policy for private banks and they believe that the most effective constraints for them come from regulators (84.6%).


Regulatory EvaluationBankers believe that key regulatory indicators are scientific, reasonable and relevant to the Chinese banking industry. However, they indicate that there is room for improvement in terms of regulatory flexibility. Regarding individual indicators, bankers give “capital adequacy ratio” the highest score and “loan-to-deposit ratio” the lowest evaluation.

Regulators launched Rules Governing Liquidity Risk Management of Commercial Banks after the two liquidity crunches in 2013. Liquidity coverage ratio (64.7%) and liquidity ratio (59.7%) in the Rules get the highest recognition from bankers. “Improving the market liquidity risk pre-warning and emergency response mechanism” is recommended by 70.8% of bankers to improve the liquidity regulation of commercial banks.

With the official implementation of the Measures of Capital Management of Commercial Banks (Trial) in its second year, regulators also introduced a number of supporting measures which most bankers think “are able to ease capital pressure faced by banks through various channels” (70.3%). They also believe that these measures are effective in “guiding banks to adjust business structure and adopt a less capital-intensive business model” (63%).

Quality of BankersSurvey results for professional competencies indicate that Chinese bankers possess sound social and administrative skills but they lack international vision and innovation. With regard to job satisfaction, Chinese bankers are most satisfied with their sense of accomplishment, work environment and social status. In terms of life satisfaction, bankers give a high score to family/marriage, social interaction and happiness. 49.4% of bankers believe that “Chinese bank managers are in the process of specialisation and that professional management has been achieved in some banks”. The biggest obstacle to development is a lack of effective incentive and constraint mechanisms (30.7%). 38.4% of bankers feel the most effective incentive method is employee stock options. Good corporate culture (57.6%) is the biggest attraction for bankers to work in another bank.

OutlookApproximately 80% of bankers expect that the growth rate of revenues and profits for the Chinese banking industry over the next three years will be lower than 20%. About 30% expect the revenue growth rate to be lower than 10%, and 40% or so expect the profit growth rate to be lower than 10%. Fee-based business development (26.9%) beats interest-bearing assets (26.5%) as the strongest driver of future profit growth. Bankers put more emphasis on asset quality improvement (21.8%) and are even more worried about future asset quality. Although more than 60% of bankers believe their own bank’s NPL ratio will remain under 1% over the coming three years, the percentage of bankers who think the ratio will be within 1-3% is about 30%. The capital adequacy of China’s banking industry is in good shape, with more than 80% of Chinese bankers believing that the capital adequacy ratio of their own banks will exceed 10.5%, and more than 70% of these believing that it will exceed 11.5%. In terms of China’s banking industry’s loan provision, nearly all (96.9%) are of the view that the provision ratio for their own banks will exceed 150% by the end of 2014, and 75.2% think the ratio will go beyond 250%.


PwC Contacts

Financial ServicesMatthew PhillipsHong Kong/China Financial Industry Leader+852 2289 [email protected]

Raymond YungChina Financial Services Industry Leader +86 (10) 6533 [email protected]

Florence YipHong Kong/China Financial Services Tax Leader+852 2289 [email protected]

Banking & Capital MarketsJimmy LeungShanghai/Assurance +86 (21) 2323 [email protected]

Richard ZhuBeijing/Assurance +86 (10) 6533 [email protected]

Peter LiHong Kong/Assurance +852 2289 [email protected]

James ChangBeijing/Consulting +86 (10) 6533 [email protected]

William YungShanghai/Regulatory Consulting +86 (21) 2323 [email protected]

Chris ChanHong Kong/Transactions and Deals +852 2289 [email protected]

William GeeBeijing/Risk and Controls +86 (10) 6533 [email protected]

Capital Markets and Accounting Advisory ServicesAddison EverettBeijing/Assurance +86 (10) 6533 [email protected]

InsuranceXing ZhouBeijing/Assurance +86 (10) 6533 [email protected]

Lars NielsenHong Kong/Assurance +852 2289 [email protected]

Shuyen LiuBeijing/Actuarial +86 (10) 6533 [email protected]

Xiaorong HuangShanghai/Consulting+86 (21) 2323 [email protected]

Jeffrey BoyleHong Kong/Consulting+852 2289 [email protected]

Asset ManagementAlex WongShanghai/Assurance+86 (21) 2323 [email protected]

Marie-Anne KongHong Kong/Assurance +852 2289 [email protected]

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