China’s banking sector is facing a cloudy outlook this year amid worsening asset quality and other challenges ranging from macroeconomic slowdown and value-added tax, Ernst & Young (EY) said on Tuesday.
“We can see that the growth [in profit] is normal before provisions [for bad debts] … the most important variable is the condition of non-performing loans,” said Kelvin Leung, partner for financial services at EY.
“We do not rule out the possibility that some banks will in 2015 have very low or even zero growth in net profit. It mainly depends on how fast their non-performing loans grow,” he said.
Net profit of 21 listed Chinese banks covered in EY’s latest report on the sector grew by 7.87 percent to 1.28 trillion yuan (US$206.2 billion) in 2014, compared with a 12.93 percent growth in 2013.
However, growth in operating profit before asset impairment actually rose by 16.44 percent in 2014 compared with a growth of 13 percent in the previous year, showing that banks’ increased provisions to address increasing non-performing loans are dragging on their profits.
Non-performing loans (NPL) of the listed banks have increased for three consecutive years since early 2012, and the NPL ratio has risen over the past two years.
In the first quarter of 2015, net profit of 16 A-share listed banks grew by 3.25 percent year on year, a 8.59 percentage point decline compared with the same period last year.
Jack Chan, managing partner for financial services of Greater China, also said many overdue loans and special-mention loans are on the brink of maturity.
“If the downward pressure on the economy does not lessen and the situation continues, these loans will most probably become non-performing loans, which will further result in more provisions and more pressure on the overall profit,” he said.
The banking sector will also be affected by the tax reform in China, which will replace the business tax with value-added tax.
This will be a big challenge for banks as they only have short time to prepare for the tax reform before it is implemented as early as next month or as late as early next year, Chan said.
From the operational point of view, banks will have to revise contracts with clients and upgrade their technological systems, he said.
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