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Chinese Commercial Banks Growing At 27.9% CAGR
Aspire, Thought Leaders | 14 September 2015
By: Louis Wong
Articles (12) Profile

Last week I mentioned that China’s state-owned banks reported weak earnings growth in the first half of this year and the outlook for Chinese banking stocks remains challenging. Yet, there are always exceptions—some of China’s city commercial banks are still posting strong earnings growth and stable asset quality. One good example is Shengjing Bank (2066.HK) which was listed in Hong Kong last December.

Headquartered in Shenyang, Liaoning Province, Shengjing Bank is the largest city commercial bank in terms of total assets and net profits in Northeast China. As of 30 June 2015, its total assets amounted to RMB 588.2 billion, representing an increase of 16.9 percent as compared to that at the end of last year.

Shengjing Bank: Interest Income Increased 26% But Margins fell almost 1%

Shengjing Bank operates three principal lines of business: corporate banking, retail banking and treasury business. In the first half 2015, the bank’s interest income increased year-on-year (YOY) by 26.6 percent from RMB 11.8 billion to RMB 15 billion, primarily due to an increase in the volume of loans and advances to customers. As of 30 June 2015, the gross of loans and advances to customers amounted to RMB 188.4 billion, representing a 20.8 percent increase as compared to that at the end of last year.

Its net interest income increased by 21.8 percent to RMB5.62 billion, accounting for 80.5 percent of its operating income. Although its net interest income maintains a rapid growth rate, it is also facing falling margins like other Chinese banks. For the first half of 2015, its net interest margin has decreased by 14 basis points YOY from 2.31 percent to 2.17 percent.

Shengjing Bank’s net profit in the first half of 2015 was RMB 3.2 billion, representing a YOY increase of 27.7 percent. Contrary to the general trend of deteriorating asset quality in the banking industry, its non-performing loan ratio increased to 0.4 percent from 0.44 percent as of 31 December 2014, mainly due to the fact that the bank continues to optimise entrance standards for industries, regions and customers, which improved the quality of new loans.

27.9% CAGR for Chinese City Commercial Banks

China’s banking institutions are generally categorised into six broad categories: large commercial banks, nationwide joint-stock commercial banks, city commercial banks, rural financial institutions, foreign financial institutions and other banking institutions. In 1995, the State Council decided to restructure urban credit cooperatives into city cooperative banks, which had been renamed city commercial banks since 1997.

According to the China Banking Regulatory Committee (CBRC) 2013 annual report, as of 31 December 2013, there were 145 city commercial banks in China. As opposed to large commercial banks and nationwide joint-stock commercial banks, city commercial banks generally focus on providing banking services to institutions and individuals in certain specified geographical areas.

Leveraging their understanding of local markets and relationships with local customers, city commercial banks managed to grow rapidly.  According to the CBRC, the total assets of city commercial banks as a percentage of the total assets of banking institutions in China, increased from 7.2 percent as of 31 December 2009, to 10 percent as of 31 December 2013, representing a compound annual growth rate (CAGR) of 27.9 percent.

Profits of city commercial banks as a percentage of the total profits of banking institutions in China, increased from 7.4 percent as of 31 December 2009, to 9.4 percent as of 31 December 2013, representing a CAGR of 34.8 percent. Despite having comparatively smaller assets and profits than other banks, city commercial banks often serve cities the size of small countries. For example, Bank of Beijing, Bank of Shanghai and Chongqing City Commercial Bank all operate in markets with populations of over 10 million.

While assets and profits grew rapidly, the asset quality of city commercial banks have also shown significant improvement. During the period from 31 December 2009 to 31 December 2013, the overall non-performing loan ratio of city commercial banks decreased from 1.3 percent to 0.9 percent.

Since 2005, the People’s Bank of China and the CBRC have issued a series of policies and measures to promote financing to SMEs, in particular to small and micro enterprises.  City commercial banks are considered to have a key role in financing the SME segment of the economy, which is considered an important factor in China’s development.  The emergence of more and more small and micro enterprises will continue to fuel the rapid growth of city commercial banks.

Still worried about when and how much would the US Federal Reserve hike interest rates? Do you have burning questions that you want to ask regarding the China economic slowdown and SHCOMP nosedive in June? Are you confused if any of the external factors from other countries in Asia will affect your Singapore stocks portfolio?

Catch renowned investors and speakers with rich experience in the stock markets, who have had witnessed multiple stock market crashes and global recessions over the years at Shares Investment Conference 2015!

Speaker profiles

1. Dr Chan Yan Chong, a renowned investor with more than 25 years of experience and the MBA programme director & associate professor of business school at the City University of Hong Kong.

2. Kevin Gin (CFA), the Founder and Principal of Alpha Capital. He was the former COO for CITIC Securities, Head of Singapore and Regional Real Estate Research for Kleinwort Benson Securities Asia (now part of Credit Suisse) and Head of Greater China Property Research with Yuanta Securities (Hong Kong)

3. Louis Wong, one of the most experienced fund managers in Hong Kong. He has over 25-years of solid experience and track record in the financial market. He was awarded Best Financial Analyst for 3 years by the Putonghua Channel of Radio Television Hong Kong and is also a part-time instructor of several investment courses in various Hong Kong universities.

4. Daniel Loh, an investment coach that specialises in equities and derivatives trading, he appears regularly on local TV financial programmes like “Good morning Singapore” and “Hello Singapore”.

Louis is one of the most experienced fund managers in Hong Kong and has more than 25 years of solid experience in the financial markets. He employs a strict criteria for choosing his stocks, which is deeply insistent on having a thoughtful and sophisticated analysis of the company before making any investment decision.

Please click here for more information about this author.

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