Banking Newsletter - PwC · 2017-10-13 · PwC The Banking Newsletter, PwC’s analysis of...

Banking Newsletter

Review and Outlook of China’s Banking Industry for the First Half of 2017

September 2017

www.pwccn.com

Editorial Team

Editor-in-Chief：Vivian Ma

Deputy Editor-in-Chief：Haiping Tang, Carly Guan

Members of the editorial team：

Cynthia Chen, Jeff Deng, Carly Guan, Tina Lu, Haiping Tang

(in alphabetical order of last names)

Advisory Board

Jimmy Leung, Margarita Ho, Richard Zhu, David Wu, Yuqing Guo, Jianping Wang, William Yung, Mary Wong, Michael Hu, James Tam, Raymond Poon

PwC

The Banking Newsletter, PwC’s analysis of China’s listed banks and the wider industry, is now in its 32ndedition. Over the past one year there have been several IPOs for small-and-medium-sized banks, increasing the universe of listed banks in China. This analysis covers 39 A-share and/or H-share listed banks that have released their 2017 first half results. Those banks are categorized into four groups as defined by the China Banking Regulatory Commission (CBRC):

About this newsletter

The total assets of these banks, as of 30 June 2017, accounted for 85.16% of the total assets of China’s commercial banking sector. Unless otherwise stated, all the information in this newsletter comes from publicly available sources. For more information, please talk to your PwC contacts or any of those listed in the Appendix as Banking and Capital Markets Contacts.

Large Commercial

Banks (6)

Industrial and Commercial

Bank of China (ICBC)

China Construction Bank

(CCB)

Agricultural Bank of China

(ABC)

Bank of China (BOC)

Bank of Communications

(BOCOM)

Postal Savings Bank of China

(PSBC)

Joint-Stock Commercial

Banks (9)

China Industrial Bank (CIB)

China Merchants Bank (CMB)

SPD Bank (SPDB)

China Minsheng Bank Corporation

(CMBC)

China CITIC Bank (CITIC)

China Everbright Bank (CEB)

Ping An Bank (PAB)

Huaxia Bank (HXB)

China Zheshang Bank (CZB)

City Commercial Banks

(16)

Bank of Beijing (Beijing)

Bank of Shanghai (Shanghai)

Bank of Hangzhou (Hangzhou)

Bank of Jiangsu (Jiangsu)

Bank of Nanjing (Nanjing)

Shengjing Bank (Shengjing)

Bank of Ningbo (Ningbo)

Huishang Bank (Huishang)

Bank of Tianjin (Tianjin)

Bank of Jinzhou (Jinzhou)

Harbin Bank (Harbin)

Zhongyuan Bank (Zhongyuan)

Bank of Zhengzhou (Zhengzhou)

Bank of Guiyang (Guiyang)

Bank of Chongqing (Chongqing)

Bank of Qingdao (Qingdao)

Rural Commercial Banks

(8)

Chongqing Rural Commercial Bank

(CQRCB)

Guangzhou Rural Commercial Bank

(GZRCB)

Jiutai Rural Commercial Bank

(JTRCB)

Changshu Rural Commercial Bank

(CSRCB)

Wuxi Rural Commercial Bank

(WXRCB)

Jiangyin Rural Commercial Bank

(JYRCB)

Zhangjiagang Rural Commercial Bank

(ZJGRCB)

Wujiang Rural Commercial Bank

(WJRCB)

September 2017Banking Newsletter

3

PwC

Table of Contents

1 Macro overview 05

2 Listed banks’ results analysis 11

3 Features 33

Banks and tech giants: stronger alliances for greater opportunities

Financial inclusion: a catalyst for banks’ business transformation

Compliance risk is of utmost importance as banks expand overseas

China’s financial reforms: a review from a new inflection point

4 Appendix 43


4

PwC

Macro overview

• The global economy continued to recover, China’s economy stabilised and is rebalancing

• Money supply growth slowed, credit expanded rapidly

• More effective financial risk prevention requires closer regulatory coordination

• Overall ODI slumped, B&R investment rebounded

Banking Newsletter

5

September 2017

PwC

Banking Newsletter

6

September 2017

PwC

The global economy continued to recover, China’s economy stabilised and is rebalancing

The global economy presented a solid recovery in 1H 2017, as trade, investment and manufacturing activities gathered pace and commodities, such as crude oil, rebounded in price. Deflationary pressures eased as consumer prices made a slight recovery.

Major developed economies continued to recover with employment improving and monetary policy normalising gradually. Emerging economies still faced the pressure of restructuring and transition, despite gradually stabilised growth.

China's economy was steady and recorded higher than expected GDP growth of 6.90% in the first six month of 2017. Growth was primarily driven by consumption (63.40%), followed by investment (32.70%) and net exports (3.90%).

Price levels were stable in 1H 2017. The Consumer Price Index (CPI) increased year on year by 1.50% and Producer Price Index (PPI) by 5.50% in June 2017.

Corporate profits grew rapidly in 1H 2017, while growth of fixed asset investment slowed. The supply-side structural reform deepened, with five priorities - cutting overcapacity, reducing excess inventory, deleveraging, lowering costs, and strengthening areas of weakness.

Many international institutions revised up their forecast on China’s growth prospects in 2017, as they believe the country has taken solid measures to rebalance the economy. For example, the International Monetary Fund (IMF) raised China’s growth forecast in 2017 by 0.10 percentage point to 6.70% - the third revision this year.

Banking Newsletter

Figure 1 China’s GDP growth

September 2017

7

Figure 2 Changes in CPI and PPI

2017 Q26.90%

5%

6%

7%

8%

9%

10%

11%

12%

13%

Source: National Bureau of Statistics

Note: The growth rate in the graph shows the situation at the end of each

quarter; for example, 2017 Q1 represents the growth rate for 2016 Q1.

2017.06,

1.50%

2017.06，

5.50%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

201

5.0

1

201

5.0

3

201

5.0

5

201

5.0

7

201

5.0

9

201

5.1

1

201

6.0

1

201

6.0

3

201

6.0

5

201

6.0

7

201

6.0

9

201

6.1

1

201

7.0

1

201

7.0

3

201

7.0

5

CPI PPI

2017.0

6

Source: National Bureau of Statistics

PwC

Money supply growth slowed, credit expanded rapidly

8

September 2017

Figure 3 Growth comparison between M1 and M2

Banking Newsletter

Table 1 RMB loan mix as of 30 June 2017

15.00%

9.40%

0%

5%

10%

15%

20%

25%

30%

M1 M2

Year-on-year growth

Source: PBOC Source: PBOC

Money supply growth continued to slow in 1H 2017. The Broad Money (M2) grew 9.40% for the first six months, 2.40 percentage points lower than that in the first six months of 2016. The Narrow Money (M1) growth was 15.00%, 9.60 percentage points lower than the same period in 2016. The difference in growth between M1 and M2 narrowed.

According to the interpretation by the People’s Bank of China (PBOC) in its Monetary Policy Report 2017 Q2, the slower growth of M2 was due to lower demand for residential properties, the impact of measures taken to strengthen financial regulations, shorten financing chains, and the reduction of layers in the financing structure. The PBOC also expects slower M2 growth to be the new normal as the deleveraging proceeds and financial sector places a greater focus on serving the real economy.

While money supply growth slowed, credit continued its growth momentum in 1H 2017, with RMB loan balances reaching RMB 114.57 trillion as of 30 June 2017, representing year-on-year growth of 12.90%. The new loan amount in the first six months was RMB 7.97 trillion, suggesting that monthly origination of new loans was over RMB 1 trillion, a record high.

Looking at the loan mix by sectors, even though the growth of mortgage loans slowed, overall household maintained its growth momentum and remained the main driver of credit expansion for the first six months in 2017. Demand for corporate loans (non-financial enterprises, government departments and organisations) remained stable.

From the perspective of all-system financing, the other reason for rapid credit growth was the reduction in corporate debt and equity financing.

Sector

As of 30

June 2017

(in trillions)

2017 1H vs

2016 1H

2016 vs

2015

Non-financial

enterprises,

government

departments

&organisations

76.27 +8.50% +9.30%

Households 37.15 +23.90% +23.50%

-Mortgage loans 20.10 +30.80% +36.70%

Non-banking

financial

institutions

0.70 -19.70% +11.60%

Overseas 0.45 +28.50% +38.70%

Total RMB Loans 114.57 +12.90% +13.50%

PwC

More effective financial risk prevention requires closer regulatory coordination

Financial regulators in China took further measures to control systemic risks in 1H 2017. In March, the CBRC began taking serious measures to tackle irregularities in the banking sector, namely the “three types of violations" (Document No.45, on violation of laws, violation of supervisory rules and violation of internal compliance policies), "three types of arbitrage" (Document No.46 on regulatory arbitrage, idle funds arbitrage, and related entity arbitrage"), and "four types of improper conduct" (Document No.53, on improper innovation, improper transactions, improper incentives and improper fees), particularly in interbank activities and wealth management business.

In July 2017, the National Financial Work Conference (NFWC), which is held every five years by China’s leadership, highlighted four guiding principles for future financial work. one of the principles was the enhancement of capabilities to mitigate risks. During this year’s NFWC, regulatory

coordination was elevated to a higher level by setting up the Financial Stability and Development Committee (FSDC) under the State Council. The PBOC’s role in macro prudential regulation and systemic risk mitigation was also strengthened.

Due to tougher regulations and financial institutions’ proactive adjustment of their assets and liabilities, interest rates in the money market edged up in 1H 2017. While trading activities decreased in interbank market, government bond and debt issuance yields rose.

According to the PBOC, the weighted average interest rate of loans to non-financial enterprises and other sectors is 5.67% as of June 2017, up 0.40 percentage points from December 2016. The rate for ordinary loans hits 5.71%, up 0.27 percentage points from December 2016; and home mortgage loans 4.69%, up 0.11 percentage.

9

September 2017

Figure 4 Four guiding principles for future financial work

Banking Newsletter

Four guiding

principles for

financial work

Market oriented, letting

market forces play a

decisive role in

financial resource

allocation

Strengthen regulations

and enhance capabilities

to mitigate risks

Optimise structure,

improve financial

markets, institutions

and products

Back to basics, serving the real economy

Figure 5 Changes in SHIBOR

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Overnight 3M 6M 12M

%

Source: China Foreign Exchange Trading SystemSource: Communique of the NFWC

PwC

Overall ODI slumped, B&R investment rebounded

To mitigate financial risks and reduce volatility of cross-boarder capital flows, Chinese authorities have implemented measures to contain the private sector’s "irrational" overseas investments. This has affected a large number of overseas M&A deals.

The State Council released Guiding Opinions on Further Guiding and Regulating the Direction of Overseas Investment”, to restrict overseas investment in areas such as real estate, hotels, cinemas, entertainment, and football clubs, and encourage investments in construction and infrastructure projects under the “Belt and Road” (B&R) Initiative. The Ministry of Finance also issued Measures on Financial Management of State-owned Enterprise's Oversea Investment to impose a stricter audit system. The Ministry of Commerce strengthened the review on the authenticity and compliance of companies' overseas investment cases, to guide investment into the real economy. The CBRC has been looking into banks’ risk in granting credit to borrowers who have been

actively participating in overseas M&A. The State Administration of Foreign Exchange (SAFE) further strengthened reporting requirements for foreign exchange violation cases to limit capital outflow.

As a result, according to the Ministry of Commerce, non-financial overseas direct investments (ODI) decreased year-on-year by 45.80% to USD 48.19 billion for the first six months in 2017. The ODI increased by 58.70% in the same period of 2016.

Non-financial ODI in territories along B&R, however, remained robust in 1H 2017, as the amount reached USD 6.61 billion for the first six month, or 13.70% of total non-financial ODIs. In Q2 2017, the amount increased by 11.93% year-on-year. The most popular destinations for investment capital were Singapore, Pakistan, Cambodia and Russia.

10

September 2017

Figure 6 Changes in Non-financial ODIs

Banking Newsletter

Figure 7 Changes in Non-financial ODIs along B&R

40.09

48.7745.36

35.89

20.54

27.65

-43.31%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

-60

-40

-20

0

20

40

60

ODI amount Growth

Source: Ministry of Commerce

ODI amount (In USD billions) Year-on-year growth

3.593.27

4.26

3.41

2.95

3.66

11.93%

-60%

-40%

-20%

0%

20%

40%

60%

-5

-4

-3

-2

-1

0

1

2

3

4

5

ODI amount Growth

Source: Ministry of Commerce

Year-on-year growthODI amount (In USD billions)

PwC

Listed banks’ results analysis

Profitability:

• Net profit growth slowed

• Net interest margin and net interest spread continued to narrow

• Retail banking business on the rise

Assets and liabilities:

• Assets: credit assets rose as a proportion; retail loans increased rapidly

• Liabilities: interbank certificates of deposits growth slowed; customer deposits remained a lion’s share

Credit asset quality:

• Both non-performing and special mention loan ratios fell, suggesting credit asset quality has entered a stable period

• Overdue 90 days or above loan to NPL ratio presented divergent trends

• Provision indicators remained stable

Capital adequacy:

• Capital adequacy ratios were stable, but capital management efficiency to be improved

Banking Newsletter

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September 2017

PwCBanking Newsletter

12

September 2017

PwC

Profitability:—Net profit growth slowed

In 1H 2017, the aggregate net profit of China's listed banks grew at a slightly slower pace as compared to the same period of 2016. While City Commercial Banks experienced the most apparent slowdown in growth, Large Commercial Banks saw a slight rise.

The profit growth for Large Commercial Banks, City Commercial Banks and Rural Commercial Banks was mainly driven by net interest income. ForJoint-stock Commercial Banks, the driver was fee and commission income.

Banking Newsletter

13

Net profits

(in billions)

YoY

growth

Growth

compared with

1H 2016

39 Listed Banks 849.72 4.50% -0.50

Large Commercial Banks 577.73 3.53% +0.12

Joint-stock Commercial Banks 197.64 5.84% -0.25

City Commercial Banks 63.91 8.50% -8.09

Rural Commercial Banks 10.43 10.25% -6.01

Table 2 Net profits & growth overview of listed banks in 1H 2017

Figure 8 Share of profits for listed banks

September 2017

Note: As Zhongyuan Bank and Guangzhou Rural Commercial Bank did not disclose their interim

results for 1H 2015, their net profits were not included in the above calculation on change in growth.

67.99% 68.63%

23.26% 22.96%

7.52% 7.24%

1.23% 1.16%

1H 2017 1H 2016

Rural Commercial Banks

City Commercial Banks

Joinit-stock Commercial Banks

Large Commercial Banks

PwC

Banking Newsletter

14

Large commercial banks: stable profit growth driven by net interest income

In 1H 2017, most Large Commercial Banksexperienced a slightly higher growth as compared to the same period of prior year.BOC gained a large investment income from the sale of equity in its subsidiary, Nanyang Commercial Bank in 1H 2016, driving its net profits to double-digit growth. In 1H 2017, although the bank recorded similar gains on its disposal of another subsidiary, Chiyu Bank, the impact was very small. BOC’s net profit growth was 3.02% in the period, a level in line with other Large Commercial Banks.

Among Large Commercial Banks, only PSBC achieved double-digit growth for both periods.

2.01%

3.81%

3.44%

3.02%

3.43%

14.54%

0.82%

1.25%

0.47%

12.97%

1.11%

10.80%

ICBC

CCB

ABC

BOC

BOCOM

PSBC

2017 1H

2016 1H

Figure 9 Net profit growth of Large Commercial Banks

Figure 10Net profit growth vs. pre-provision operating profit

growth, Large Commercial Banks

September 2017

Four Large Commercial Banks recorded higher pre-provision operating profit growth than that of net profits.

Generally speaking, net interest income of Large Commercial Banks increased at a relatively faster pace and was the main driver of stable profit growth.

2.01%

3.81%

3.44%

3.02%

3.43%

14.54%

7.62%

7.56%

5.85%

-6.51%

-2.10%

30.00%

ICBC

CCB

ABC

BOC

BOCOM

PSBC

Net profit growth

Pre-provisionoperating profit growth

PwC

Banking Newsletter

15

7.53%

11.70%

5.48%

3.29%

2.06%

3.06%

2.13%

0.30%

18.32%

5.81%

6.52%

12.08%

1.58%

3.08%

1.24%

6.10%

6.07%

42.34%

CIB

CMB

SPDB

CMBC

CITIC

CEB

PAB

HXB

CZB

2017 1H

2016 1H

Figure 11 Net profit growth of Joint-stock Commercial Banks

7.53%

11.70%

5.48%

3.29%

2.06%

3.06%

2.13%

0.30%

18.32%

-16.08%

1.27%

2.27%

-8.23%

0.73%

1.45%

11.14%

13.68%

10.04%

CIB

CMB

SPDB

CMBC

CITIC

CEB

PAB

HXB

CZB

Net profit growth


Joint-stock Commercial Banks: fee & commission income underpinned profit growth

In 1H 2017, Joint-stock Commercial Banks saw their aggregate net profit growth slow as compared to the same period of the prior year. Only four of nine banks’ growth exceeded their growth figures in 1H 2016.

In terms of net profit contribution, as most Joint-stock Commercial Banks experienced shrink in net interest income, their net profit growth was largely underpinned by fee and commission income. That said, most banks saw their fee and commission income growth slowed to single digit.

Figure 12Pre-provision operating profit growth vs. net profit

growth, Joint-stock Commercial Banks

September 2017

Most Joint-stock Commercial Banks’ net profit growth was higher than their pre-provision operating profit growth in 1H 2017. Some banks’ pre-provision operating profit growth slowed.

PwC

Banking Newsletter

16

City Commercial Banks: net profit growth slowed

In 1H 2017, City Commercial Banks saw an obvious net profit growth slowdown as compared to the same period of the prior year. Some banks even recordeddecreases.

The main contributor of City Commercial Banks’ net profit growth was net interest income. As net interest income growth slowed, so did net profits.

4.51%

10.53%

6.43%16.92%

-3.24%

15.16%

13.25%

9.42%

0.95%

6.10%

9.35%

16.45%

9.10%

22.72%

11.31%

1.37%

6.08%

14.34%

10.10%

22.56%

13.16%

16.21%

12.11%

4.89%

13.14%

15.35%

21.73%

3.20%

10.45%

17.46%

Beijing

Jiangsu

Shanghai

Nanjing

Shengjing

Ningbo

Huishang

Hangzhou

Tianjin

Jinzhou

Harbin

Zhongyuan

Zhengzhou

Guiyang

Chongqing

Qingdao

2017 1H

2016 1H

163.78%

Figure 14Pre-provision operating profit growth vs net profit growth, City

Commercial Banks

Figure 13 Net profit growth of City Commercial Banks

4.51%

10.53%

6.43%

16.92%

-3.24%

15.16%

13.25%

9.42%

0.95%

6.10%

9.35%

16.45%

9.10%

22.72%

11.31%

1.37%

10.92%

11.05%

-16.00%

-19.33%

-17.26%

8.20%

11.66%

-1.32%

-15.09%

6.92%

17.08%

5.71%

3.56%

33.36%

5.54%

1.29%

Beijing

Jiangsu

Shanghai

Nanjing

Shengjing

Ningbo

Huishang

Hangzhou

Tianjin

Jinzhou

Harbin

Zhongyuan

Zhengzhou

Guiyang

Chongqing

Qingdao

Net profit growth


September 2017

A total of 11 City Commercial Banks’ net profit growth was higher than their pre-provision operating profit growth in 1H 2017. Five of these banks recorded decreases in pre-provision operating profits.

Note: Zhongyuan Bank did not disclose their interim results for 1H 2015, thus it is unable to calculate

the change of its net profits in 1H 2016.

PwC

Banking Newsletter

17

10.18%

24.98%

-12.84%

9.64%

11.12%

-5.75%

-0.56%

11.18%

7.32%

10.45%

11.68%

-6.98%

-14.98%

2.16%

Chongqing RCB

Guangzhou RCB

Jiutai RCB

Changshu RCB

Wuxi RCB

Jiangyin RCB

Zhangjiagang RCB

Wujiang RCB

2017 1H

2016 1H

86.33%

Rural Commercial Banks: Net profit growth varied

Rural Commercial Banks’ aggregate net profit growth fellslightly in 1H 2017. Within the group, the performance varied widely for individual banks, with some banks’ profit growth sliding to negative territory from prior year’s positive growth, and others experiencing continued profit decrease in two consecutive years. This variation in profit growth reflects different geographic areas and operating environments of Rural Commercial Banks.

Jiutai RCB’s net profit growth decreased by 12.84% in 1H 2017, following an increase of 86.33% in 1H 2016, largely due to a sharp increase in impairment charges.

Figure 15 Net profit growth of Rural Commercial Banks

September 2017

Figure 16Pre-provision operating profit growth vs net profit growth, Rural

Commercial Banks

10.18%

24.98%

-12.84%

9.64%

11.12%

-5.75%

5.40%

11.18%

13.13%

-11.84%

6.90%

14.82%

22.79%

-2.72%

8.37%

30.12%

Chongqing RCB

Guangzhou RCB

Jiutai RCB

Changshu RCB

Wuxi RCB

Jiangyin RCB

Zhangjiagang RCB

Wujiang RCB

Net profit growth

Pre-provision operatingprofit growth

Most Rural Commercial Banks’ pre-provision operating profit growth was higher than their net profit growth in 1H 2017.

Note: Guangzhou RCB did not disclose their interim results for 1H 2015, thus it is unable to calculate

the change of its net profit in 1H 2016.

PwC

Profitability indicators fell

In 1H 2017, profitability indicators of all listed banks, i.e. return on total assets (ROA) and return on equity (ROE) fell.

Except for Large Commercial Banks, other banks’ overall ROA fell to a level of below 1.00%. City Commercial Banks saw the most significant drop.

Figure 17 Profitability indicator – return on average total assets（ROA）

Figure 18 Profitability indicator – return on weighted average equity（ROE）

Banking Newsletter September 2017

18

1.13%

0.97%0.93% 0.93%

1.21%

1.04% 1.04%

0.95%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

Large CommercialBanks

Joint-stockCommercial Banks

City CommercialBanks

Rural CommercialBanks

2017 1H 2016 1H

The ROE for Rural Commercial Banks was much lower than that of the other groups of banks, which stood at a level of over 15.00%. 15.41% 15.28%

15.88%

11.57%

16.27%16.53%

17.31%

12.71%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%





2017 1H 2016 1H

PwC

Banking Newsletter

19

The narrowing of net interest margins (NIM) and net interest spreads (NIS) weighted down listed banks’ profitability.

Due to continuous loan repricing following the PBOC interest rate cuts in 2015, and the effect on separation of price and tax as a result of the business tax to value-added tax reform (“VAT reform”), all listed banks’ NIM and NIS narrowed in 1H 2017 as compared to the same period of the prior year. City Commercial Banks and Joint-stock Commercial Banks were the hardest hits.

Joint-stock Commercial Banks’ NIS and NIM were the lowest and Rural Commercial Banks were the highest.

Net

interest

margin

YoY

change

(bps)

Net

interest

spread

YoY

change

(bps)

39 Listed Banks 1.98% -21 1.86% -20

Large Commercial Banks 2.06% -11 1.95% -9

Joint-stock Commercial Banks 1.82% -40 1.68% -40

City Commercial Banks 1.85% -41 1.74% -36

Rural Commercial Banks 2.18% -24 2.03% -31

Table 3 Overview of NIM and NIS for listed banks in 1H 2007

Figure 20 Change in NIS for listed banksFigure 19 Change in NIM for listed banks

Profitability:—Net interest margin and net interest spread continued to narrow

Note: Jiangsu, Guiyang, Wujiang and Changshu Banks did not disclose their NIM and NIS for 2016, hence these figures are not included in the above

analysis.

September 2017

2.06%2.17%

1.82%

2.22%

1.85%

2.26%2.18%

2.42%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

2017 1H 2016 1H

Large Commercial Banks Joint-stock Commercial Banks

City Commercial Banks Rural Commercial Banks

1.95%2.04%

1.68%

2.08%

1.74%

2.10%

2.03%

2.34%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

2017 1H 2016 1H

Large Commercial Banks Joint-stock Commercial Banks

PwC

Banking Newsletter

20

Gross interest yield fell

Gross interest yield fell across all groups of banks in 1H 2017, with Joint-stock Commercial Banks and City Commercial Banks recording the largest fall. Downward gross interest yield was primarily due to the decline of loan yields.

Cost of funds varied

In terms of cost of funds, banks performed differently in 1H 2017. Large Commercial Banks’ cost of funds remained the lowest and continued to fall as compared to the same period in the prior year.

The other groups of banks, however, all experienced a rise in cost of funds, with City Commercial Banks bearing the highest cost of funds.

Figure 21 Change in gross interest yield of listed banks

Figure 22 Change in cost of funds of listed banks

September 2017

3.56%

4.07%

4.35%4.49%

3.75%

4.28%

4.58% 4.59%

0%

1%

2%

3%

4%

5%





2017 1H 2016 1H

1.62%

2.39%

2.61%

2.36%

1.71%

2.20%

2.48%

2.25%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%





2017 1H 2016 1H

PwC

Banking Newsletter

21

70.23%

67.32% 64.21%

66.89%

79.61%

80.70% 89.50%

83.40%

18.67%

19.49% 30.25%

28.51%18.07%

17.20%

10.69%

11.00%

11.10% 13.19%

5.54% 4.60% 2.33% 2.10%5.60%

2017 1H 2016 1H 2017 1H 2016 1H 2017 1H 2016 1H 2017 1H 2016 1H

Large Commercial Banks Joint-stock CommercialBanks

City Commercial Banks RuralCommercial

Banks

Net interest income Net fee & commission income Other non-interest income

Differentiated patterns for operating income mix

Total operating income of 39 listed banks decreased by 0.49% year-on year in 1H 2017, with Large Commercial Banks and Rural Commercial Banks increasing by 0.56% and 2.32% respectively; Joint-stock Commercial Banks and City Commercial Banks decreasing by 3.11% and 0.72%.

Large Commercial Banks and Rural Commercial Banks saw their proportions of net interest income rise and fee and commission income fall in 1H 2017. Joint-stock Commercial Banks and City Commercial Banks presented the reverse.

It is also worth noting that fee and commission income accounted for over 30% of the operating income for Joint-stock Commercial Banks.

Figure 23 Change in operating income mix of listed banks

In 1H 2017, most Large Commercial Banks and Joint-stock Commercial Banks’ fee and commission income came from bank card business; while most of City Commercial Banks’ came from agency service, and Rural Commercial Banks’ wealth management business.

Figure 24 Composition of fee & commission income in 1H 2017

September 2017

11.62%7.62%

15.45% 16.88%

14.54%

12.99%

31.85%23.26%

24.58% 34.84%

11.42%

12.88%

7.30%

16.09% 11.68%14.42%

12.71%9.60%

30.04%

6.15%

4.77%7.22%12.80%

5.82%4.54%

8.74%

8.59%5.15% 8.23% 8.04%





Others

Settlement andclearing

Credit commitment

Wealth management

Custodian and otherfiduciary service

Bank card

Agency service

Consultancy andadvisory

PwC

Figure 25 Change in operating income mix by business segments of listed banksA comparison of banks’ operating income by business segments suggested that corporate banking was the largest source in 1H 2017, but the proportion is falling.

On the other hand, the proportion of retail banking (also known as personal banking) business for Large Commercial Banks, Joint-stock Commercial Banks and City Commercial Banks were on the rise, indicating retail banking was an area that all listed banks were actively embracing.

Cost to income ratio (also referred to as efficiency ratio) for most banks rose in 1H 2017, as their operating income experienced slower or even negative growth due to increase in business and administration expenses.

While Large Commercial Banks’ cost to income ratio remained stable, the ratios for Joint-stock Commercial Banks and City Commercial Banks were relatively lower and the ratio for Rural Commercial Banks was the highest.

Figure 26 Change in efficiency (cost to income) ratios of listed banks

41% 42%49% 53% 53% 54%

42% 41%

39% 38%

39% 33%

19% 16%33% 34%

13% 12%

8% 9%28% 29% 23% 25%

7% 8% 4% 5%2%




RuralCommercial

Banks

Others

Treasury

Retail

Corporate

Profitability:—Retail banking business on the rise

September 2017

26.56% 26.01%24.62%

34.19%

26.15%

23.95%22.96%

32.87%

0%

5%

10%

15%

20%

25%

30%

35%





2017 1H 2016 1H

Note: As CIB, SPDB, HXB, Wuxi RCB and Zhangjiagang RCB did not disclosed their business

segments in 1H 2016, they were excluded from the above calculation of operating income.

Banking Newsletter

22

PwC

Total assets and liabilities—growth slowed

Figure 27 Total assets and liabilities growth of listed banks in 1H 2017

As of 30 June 2017, total assets of 39 listed banks increased by 4.21% from the end of 2016 to RMB 161.98 trillion. Total liabilities increased by 4.23% to RMB 150.66 trillion.

For Large Commercial Banks and City Commercial Banks, total assets and total liabilities grew at a rate above 5.00%, with total liabilities growing slightly faster than total assets.

5.22%5.40%

1.30%

0.96%

5.48% 5.50%

4.57%

4.24%

0%

1%

2%

3%

4%

5%

6%

Total assets growth Total liabilities growth

Large Commercial Banks Joint-stock Commercial BanksCity Commercial Banks Rural Commercial Banks

September 2017

Total assets

(in trillions)

Change

from 31

Dec 2016

Total

liabilities

(in trillions)

Change

from 31

Dec 2016

39 Listed Banks 161.98 +4.21% 150.66 +4.23%

Large Commercial Banks 104.68 +5.22% 97.11 +5.40%

Joint-stock Commercial Banks 40.92 +1.30% 38.22 +0.96%

City Commercial Banks 14.09 +5.48% 13.21 +5.50%

Rural Commercial Banks 2.29 +4.57% 2.12 +4.24%

Table 4 Total assets and liabilities of listed banks, as of 30 June 2017

Joint-stock Commercial Banks recorded the lowest growth among all groups of banks in total assets and total liabilities. The growth rate was around 1.00%.

Banking Newsletter

23

PwC

Assets and liabilities:—assets: credit assets rose as a proportion

6.87%8.91%

11.40%9.29%

3.43%

-1.15%

3.95%

12.90%

2.97%

-28.91%

-6.25%

-24.05%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%





Loans and advances Investments Interbank assets

Loans grew at a relatively faster pace for all listed banks’ in 1H 2017; interbank assets saw negative or low growth, with Joint-stock Commercial Bank and Rural Commercial Banks recording the most obvious fall.

Most banks’ investment portfolios, however, continued to grow at modest rates, with Rural Commercial Banks growing most rapidly from a low base.

All listed banks saw their loans rise as a proportion of total assets in 1H 2017, and investment portfolios and interbank assets fall accordingly.

Loans still accounted for the largest portion of assets for Large Commercial Banks, Joint-stock Commercial Banks and Rural Commercials Banks, while the largest holdings for City Commercial Banks were investments.

Banking Newsletter

24

Figure 28 Growth of different types of assets in 1H 2017

Figure 29 Change in asset mix of listed banks

September 2017

51.31%

50.52% 47.51%

44.18% 35.68%33.76% 40.46%

38.71%

25.33% 25.77% 34.59%35.44%

44.80% 45.46% 34.38%31.85%

6.17% 6.30%

5.41% 7.72% 8.11% 9.12%11.01%

15.16%

13.64% 13.73%8.66% 9.13% 8.76% 9.15% 11.89% 12.11%

3.56% 3.68% 3.83% 3.52% 2.64% 2.51% 2.26% 2.17%

2017 1H 2016 2017 1H 2016 2017 1H 2016 2017 1H 2016



BanksLoans and advances InvestmentsInterbank assets Cash & deposits with central bank

PwC

Banking Newsletter

25

9.57%7.14%

12.83% 13.02%9.78%14.86%

16.29%

7.08%

-46.81%

-19.70%

-25.94%

-17.51%





Corporate loans Retail loans Discounted bills

Loans continued to expand, driven by retail segment

In 1H 2017, most banks saw their retail loans grow at a faster rate than their corporate segments. The retail loans of Joint-stock Commercial Banks and City Commercial Banks recorded double digit growth, primarily driven by personal mortgage loans.

Corporate loans continued to grow for all listed banks, with City Commercial Banks and Rural Commercial Banks’ growth hitting double digit.

Figure 30 Growth of different types of loans in 1H 2017

Figure 31 Change in loan mix of listed banks

September 2017

Analysis of banks’ loan mix suggested that they all adjusted their lending preferences in 1H 2017 by reducing discounted bills as part of assets and liabilities management.

61.41% 59.88% 59.34% 60.37% 70.44%69.46%

66.92%64.71%

36.10%35.13% 38.14% 36.20%

25.47% 24.39% 28.09%

28.67%

2.48% 4.99% 2.53% 3.43% 4.09%6.15% 5.00%

6.62%

2017 1H 2016 2017 1H 2016 2017 1H 2016 2017 1H 2016



Banks

Corporate loans Retail loans Discounted bills

PwC

Assets and liabilities:—liabilities: interbank certificates of deposits growth slowed

All listed banks strengthened their funding bases primarily by issuing debts and attracting deposits in 1H 2017.

Inter-bank certificates of deposits and certificates of deposits, booked as debt securities issued, grew rapidly in 1H 2017. Larger banks tended to issue certificates of deposits, while their smaller peers preferred inter-bank certificates of deposits. The CBRC conduced special inspections in 1H 2017 to examine banks’ interbank business with a focus on arbitrage. As a result, the growth in inter-bank certificates of deposits slowed down.

Banking Newsletter

26

Figure 32 Growth of different types of liabilities in 1H 2017

6.34%3.56%

7.63% 6.32%

-7.28%

-13.28%-11.72%

-31.09%

17.89% 17.79%

28.62%

43.29%

16.61%

12.83%

-19.72%

14.78%





Deposits from customers Interbank liabilitiesDebt securities issued Borrowings from central bank

September 2017

79.82%

79.12%

60.58%

59.05%

60.20%59.00%

73.02%

71.59%

9.87% 11.22%

21.45% 24.98%18.66% 22.30%

9.82% 14.86%

3.29% 2.94%10.82% 9.27% 16.11% 13.21% 13.00% 9.46%

4.57% 4.51% 2.75% 2.76% 2.74% 2.47% 2.56% 2.64%

2017 1H 2016 2017 1H 2016 2017 1H 2016 2017 1H 2016



BanksDeposits from customers Interbank liabilities

Debt securities issued Borrowings from central bank

All listed banks were seeking other means to increase their liabilities, including issuing green bonds, tier 2 capital bonds and convertible bonds.

Yet from the perspective of liability mix, customer depositsmaintained a lion’s share as of 30 June 2017, and increased slightly.

Figure 33 Change in liability mix of listed banks

PwC

Banking Newsletter

27

Time deposits rose in proportion

With respect to deposit mix, all listed banks’ time deposits - a stable source of funding – rose in proportion.

50.95% 51.18% 48.08% 47.99% 44.28% 43.55%39.22% 41.10%

47.54% 47.19%45.04% 44.86% 48.98% 48.19% 54.32% 52.80%

1.52% 1.63%

6.87% 7.15% 6.74% 8.26% 6.46% 6.10%

2017 1H 2016 2017 1H 2016 2017 1H 2016 2017 1H 2016



Banks

Demand deposits Time deposits Other deposits

Figure 34 Change in deposit mix of listed banks

September 2017

PwC

Credit asset quality:—both non-performing loans & special mention loans ratios fell, suggesting credit asset quality has entered a stable period

Aa of 30 June 2017, the non-performing loans (NPLs) balances of 39 listed banks increased by 4.24% as compared to 31 December 2016, to over RMB 1.30 trillion.

Both NPL ratios and special-mention loans ratios fell as compared to 31 December 2016, suggesting listed banks’ credit asset quality has entered a stable period.

City Commercial Banks’ NPL ratios and special-mention loans ratios were the lowest among all groups of banks.

Banking Newsletter

28

NPL balance NPL ratio

30 Jun

2017

(billions)

Change

from 31

Dec 2016

30 Jun

2017

Change

from 31

Dec 2016

39 Listed Banks 1,300.70 +4.24% 1.60% -0.05

Large Commercial Banks 874.61 +2.17% 1.59% -0.07

Joint-stock Commercial Banks 345.72 +8.52% 1.72% -0.01

City Commercial Banks 66.42 +10.18% 1.28% -0.01

Rural Commercial Banks 13.95 +7.96% 1.46% -0.01

Table 5 NPL balance and ratios of listed banks, as of 30 June 2017

Figure 35 Change in NPL ratios of listed banks Figure 36 Change in special-mention loan ratios of listed banks

3.11% 3.06%

2.44%

3.36%3.40%

3.18%

2.62%

3.94%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

LargeCommercial

Banks

Joint-stockCommercial

Banks


RuralCommercial

Banks

2017 1H 2016

1.59%

1.72%

1.28%

1.46%

1.66% 1.73%

1.29%

1.47%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

LargeCommercial

Banks


Banks


RuralCommercial

Banks

2017 1H 2016

September 2017

PwC

Credit asset quality:—overdue 90 days or above loans to NPL ratios presented divergent trends

Aa of 30 June 2017, almost all groups of banks saw their overdue loan ratios fall as compared to 31 December 2016, except for Rural Commercial Banks.

Banking Newsletter

29

September 2017

Figure 37 Change in overdue loan ratios of listed banks

Figure 38 Change in overdue 90 days or above loans to NPL ratio of listed banks

2.02%

2.93%

2.39%

2.64%

2.23%

3.00%

2.48% 2.44%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%





2017 1H 2016

As of 30 June 2017, loans overdue 90 days or above increased as compared to 31 December 2016for all listed banks.

Almost all groups of banks’ ratio of loans overdue 90 days or above to NPLs were on the rise, except for Joint-stock Commercial Banks.

Another fact worth mentioning is that the ratios of loans overdue 90 days or above to NPLs were well over 1.00 for Joint-stock Commercial Banks, City Commercial Banks and Rural Commercial Banks, suggestingcredit risk remains.

0.87

1.21 1.21

1.10

0.85

1.211.16

1.06

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4


Joint-stock CommercialBanks

City Commercial Banks Rural CommercialBanks

2017 1H 2016

PwC

Credit asset quality:—provision indicators remained stable

As of 30 June 2017, most listed banks’ allowance to NPLs ratio (also known as provision coverage ratio) were stable as compared to the end of 2016.

The provision coverage ratio of City Commercial Banks, which was relatively higher, fell slightly in 1H 2017, while that of all other types of banks rose.

The provision coverage ratios were lower for Large Commercial Banks and Joint-stock Commercial Banks; and were higher for City Commercial Banks and Rural Commercial Banks.

Banking Newsletter

30

Figure 39 Chang in allowance to NPLs (provision coverage) ratios of listed banks

164.29%

176.10%

237.70%244.69%

159.05%

170.24%

242.66% 241.35%

0%

50%

100%

150%

200%

250%





2017 1H 2016

2.61%

3.04%3.04%

3.56%

2.64%

2.95%

3.14%

3.56%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%





2017 1H 2016

Figure 40 Change in allowance to total loans ratio of listed banks

September 2017

The allowance to total loans ratio (also known as provision ratio) was relatively stable for all groups of banks, with Joint-stock Commercial Banks rising and other groups of banks dropping.

PwC

Capital adequacy：—capital adequacy ratios (CAR) were stable

Banking Newsletter

31

11.03%

8.98%9.29%

10.62%11.21%

8.94% 9.56%

11.21%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

LargeCommercial

Banks


Banks

CityCommercial

Banks

RuralCommercial

Banks

2017 1H 2016

Figure 41 Change in total CAR of listed banksAs of 30 June 2017, apart from Joint-stock Commercial Banks, the CAR for most listed banks fell.

Joint-stock Commercial Banks and City Commercial Banks’ CAR were relatively lower among all listed banks, indicating higher capital pressures.

Most listed banks’ capital management revolve around a central approach. On the other hand, they are actively exploring alternative financing channels to improve their capital management capabilities and promote the efficient use of capital.

Figure 42 Change in Common Equity Tier 1 CAR of listed banks Figure 43 Change in Tier 1 CAR of listed banks

September 2017

11.59%

9.82% 9.57%

10.66%

11.78%

9.62% 9.87%

11.24%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

LargeCommercial

Banks


Banks


RuralCommercial

Banks

2017 1H 2016

13.51%

12.23% 12.12% 12.51%

13.67%

11.80%

12.30%

13.29%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

LargeCommercial

Banks


Banks


RuralCommercial

Banks

2017 1H 2016

PwC

Banking Newsletter

32

September 2017

PwC

Features

• Banks and tech giants: stronger alliances for greater opportunities

• Financial inclusion: a catalyst for banks’ business transformation

• Compliance risk is of utmost importance as banks expand overseas

• China’s financial reforms: a review from a new inflection point

Banking Newsletter

33

September 2017

PwC

Banking Newsletter

34

September 2017

PwC

Banks and tech giants: stronger alliances for greater opportunities

Moving beyond previous internet-based efforts

In recent years, most banks in China promoted “internet finance” through direct-sales banking, e-commerce platforms and open financial services platforms. Yet this round of exploration did not meet expectations due to large tech companiescontrolled access to data and banks were constrains by their own organisational structures and management systems.

Cooperation with large tech companies offers an alternative for banks to embrace Fintech. In 1H 2017, CCB took the lead by signing a strategical

cooperation with Ant Financial (of Alibaba Group), followed by ICBC with JingDong, ABC with Baidu and BOC with Tencent. In late August, BOCOM also followed the trend by partnering with Suning. All five Large Commercial Banks are in alliance with large tech companies.

The importance of new technologies in banks’ FinTech development is widely acknowledged. FinTech has been playing increasingly crucial roles in risk pricing, resource allocation, cyber security and risk management. This is the primary reason for more and more banks to integrate financial expertise with technological capabilities by seeking cooperation with tech giants.

Table 6 Alliances between five Large Commercial Banks and tech companies


35

With BOCOM signing a strategic cooperation agreement with e-retailer Suning, all five Large Commercial Banks are in partnership with large tech companies in China. These efforts indicate an era of “extensive cooperation” between financial institutions and tech giants is approaching as a result of the FinTech boom, in which the ways consumers access financial products and services are changing. This also suggests that stronger alliances are needed to seize new opportunities.

Parties Date of agreement Cooperating areas

CCB + Ant Financial 29 March 2017

To jointly promote on-boarding of CCB’s credit card business online and

cooperation of channels & e-payment offline, information sharing between credit

systems of both parties.

ICBC + JingDong 16 June 2017

To jointly explore extensive collaborations in FinTech, retail banking, consumer

finance, corporate credit, campus eco-system, asset management and personal

joint accounts.

ABC + Baidu 20 June 2017

To jointly build a financial intelligence bank and consumer profiles by exploring

the application of customer intelligence, precise marketing, consumer credit

rating, risk supervision, robo-advisors, chatbots, particularly in financial products

and services, and distribution channels.

BOC + Tencent 22 June 2017

To collaborate extensively on cloud computing, big data analytics, blockchain

and artificial intelligence, and build eco-systems of inclusive financing, cloud

financing, smart financing and TechFin.

BOCOM + Sunning 22 August 2017To collaborate extensively in smart financing, full financing, cash management,

international expansion, business diversification

PwC

Partnerships are not always smooth sailing

While partnerships between financial institutions and tech companies are an inevitable trend, they are not all smooth sailing. PwC’s Global FinTech Survey China Summary 2017 launched earlier this year reveals that financial institutions believed “compatibility of IT system” as a key challenge, and “differences in business models” is the key concern shared by FinTech companies.

Banks need to upgrade capabilities in four ways

To ensure a successful cooperation with tech companies, banks are advised to upgrade their capabilities in four areas:

At present, most banks only have basic and scattered service capabilities, which do not unleash the full value of the new technology. There are no significant changes before and after banks apply new technologies to the relevant business processes, as many banks regard them as aids. As a result, improvements in process efficiency and resource allocation are not obvious.

In the cooperation between finance and technology, banks should fully embrace FinTech and make efforts to optimise and transform their customer services, business procedures and risk management in order to transform from product-centric to customer-centric, from automatic to digitalised, and from experience-oriented to data-oriented.

In the early days of internet finance, banks placed high hopes for direct-sale banking. However, this model was side-lined by the market due to human

resource and finance constraints, as well as other operational challenges.

It is important to enhance the independence and the professionalism of FinTech business unit as it helps to ensure banks’ resilience in market competition, while securing their position as an innovator. An independent FinTech business unit also cushions banks’ management and operations arising from the impact of platform transformation.

Cross-disciplinary talent is essential to sustainable business and technological development of both financial institutions and tech companies. The latter have gained a competitive edge in building such talent pools and banks need to catch up quickly.

Partnering with tech companies to build cross-disciplinary FinTech talent pool and set up innovative teams will be key steps for banks to develop FinTech capabilities and enhance core competitiveness in the future.

Tech companies are more flexible in operations and offer more attractive incentives, which contributes to their innovation and growth. During their cooperation with tech companies, banks will not only obtain technological outputs, but also learn from their FinTech corporate culture. This can ignite their employees’ sense of mission and passion for innovation.

Banking Newsletter

36

September 2017

Pursuit internal transformation

Improve institutional flexibility

Build a cross-disciplinary talent pool

Develop a corporate culture fit for FinTech era

PwC

Financial inclusion: a catalyst for banks’ business transformation

Regarded as part of national development strategy in China, financial inclusion (also referred to as inclusive financing) will be a catalyst for the business transformation of banks rather than just a response to government initiatives. The scope of inclusive financing will also expand from payments and lending to social welfare, insurance and particularly to rural and SME financing. That said, financial literacy, consumer coverage, social credit system and risk control remain top challenges.

Banks and FinTechs as important drivers

Banks and FinTech (or Internet Finance) companies are major drivers of financial inclusion in China. In 1H 2017, five Large Commercial Banks, namely ICBC, BBC, ABC, BOC and BOCOM, have all set up their inclusive financing divisions. So have the other banks. Thanks to the features of far-reaching coverage, low costs and vast availability, FinTech companies have managed to expand their customer base to those who would otherwise have no access to financial services, thus becoming one of the best channels for realising financial inclusion.

Bottlenecks to be addressed

While inclusive financing is fuelling the country’s economic development, several challenges remain:

1. The residents’ financial literacy needs to be enhanced. Otherwise they are likely to be victims of irregular transactions and fraud. Financial education should be developed and planned at the national level, primarily targeting the disadvantaged, such as senior citizens, children and teenagers. Consumer protection is an integral part of financial inclusion.

Table 7 Development of inclusive financing business in five Large Commercial Banks


37

Establish date Work plans

ICBC 19 April 2017

• Dedication in six areas: 1) credit management; 2) capital management; 3) accounting system; 4)

provisioning and write-off policies; 5) funding management; 6) incentives and performance

assessment system.

CCB 11 April 2017

• Identifying and meeting customer needs by deeply understanding the markets and improving

management approaches, business models, product & service offerings and technology capabilities.

• Leveraging existing branch network and IT capabilities to lower transaction costs, expand service

scope and depth for SMEs and rural sector. Bridging the financing gap and creating synergy

between inclusive financing and other businesses.

ABC 28 April 2017

• Deepening institutional reform and replicating the successful experiences of rural financing in other

sectors of inclusive financing.

• Enhancing top-down planning by organisational restructuring and capacity building.

BOC 20 June 2017

• Overall planning with dedication in five areas: 1) comprehensive service mechanism; 2) statistical

support；3) risk management; 4) resource allocation; 5) performance assessment system.

• Focusing on target groups, such as SMEs, rural sector and mass entrepreneurism, to explore

unique inclusive financing models by firstly formulating standardised, transferable models and then

replicating those models in selective branches.

BOCOM 30 June 2017

• Improving institutional design from the top and planning organisational structure, statistical support,

performance assessment, risk management, resource allocation needed to support inclusive

financing business.

PwC

2. The coverage of inclusive financing needs to be expanded. While the emergence of FinTech has significantly enlarged the coverage of inclusive financing, it is evident that most FinTech customers are primarily merchants and consumers, leaving rural and middle-aged citizens and retirees underserved. This is far from the goal of financial inclusion which is to provide financial services to all levels and groups of society.

3. The inclusiveness of the credit rating system needs to be improved. Financial inclusion envisages a deeper penetration of financial services to grassroots communities, which requires stronger risk management capabilities. As a result, a wider coverage of financial services rests upon a greater inclusiveness of the credit rating system. China’s existing credit rating system covers only a small group of people and lacks information sharing. This has resulted in a large information gap.

4. Systematic risks exposed by inclusive financing need to be addressed. As the barriers to entering the inclusive financing business continue to lower, this has led to an explosive growth in the number of operators with varying capabilities, irregular information disclosure and the gradual exposure to higher credit risk during the economic downturn. Inclusive financing in China is still undergoing the full business cycle. Therefore, regulators should enhance supervision and identify blind spots to mitigate financial risks, while striking a balance between financial innovation and risk control.

A bumpy road ahead

Even though the road to implementing financial inclusion will not be smooth, there are still ample opportunities. We foresee these three trends in the coming years:

For banks, inclusive financing will be a catalyst for transformation to a platform-oriented, smart and innovative business model, rather than just to respond to government initiative. Apart from establishing dedicated business units to run financial inclusion businesses, banks should elevate it to a strategic level and build capabilities through organisational restructuring, technological and business innovation and resource sharing within the ecosystem.

The service scope of inclusive financing involves account opening, deposits, electronic payments, social welfare, lending, insurance, price information transparency, and integrated services. While electronic payment and lending are making impressive progress so far, other sectors, such as social welfare, insurance and price information transparency, will soon catch up. This will further improve access to financial services and efficiency of resource allocation.

The financing difficulties faced by “agriculture, farming and rural areas”, and small- and medium-sized enterprises (SMEs) remain the bottleneck for those underserved by traditional financial institutions. As the credit assessment of these groups improves, and the application of data analytics in risk control over supply chains matures, they will be the new focus of financial inclusion.


38

A catalyst for business transformation

Service scope to be expanded

Rural and SME financing is key

PwC was a knowledge partner of the B20 in 2016 to

assist its Financing Growth Taskforce by drafting policy

recommendations to the G20 leaders on promoting

financial inclusion by technology. Do feel free to

contact our experts for more insights.

PwC

Compliance risk is of utmost importance as banks expand overseas

Maintaining a sound corporate culture

As of 30 June, 18 out 39 Chinese listed banks have overseas branches across 60 territories (including Hong Kong, Macau and Taiwan), seven of which have branches only in Hong Kong. As newcomers with limited experience in overseas operation, how should these banks effectively manage compliance risks?

Taking Hong Kong as an example. Hong Kong Monetary Authority ("HKMA") revealed that, while banks have generally made efforts to promote a proper culture, they still need to monitor the potential implications of management and staff behaviour.

The HKMA issued a circular on Bank Culture Reform (HKMA, Bank Culture Reform, 2 March 2017) to guide financial institutions to develop and promote a sound corporate culture that supports prudent risk management and contributes towards incentivising proper staff behaviour with the aim of achieving positive customer outcomes and high ethical standards for the industry.

While there is no one-size-fits-all approach, the HKMA’s circular is a good reference for Chinese banks to promote sound bank culture in three areas:

1) Governance

It is commonly observed that Chinese banks tend to send senior management from domestic market to manage oversea operations. If a senior executive does not demonstrate a sound understanding of

operations, regulations and compliance rules, conflicts could arise in management teams and weakening the governance framework. This could also lead to regulator's impression that the senior management assigned is not promoting prudent risk management behaviour or striking the balance between business growth and sound risk management. In practice, a dedicated board-level committee should be established and chaired by an independent non-executive director. It remit should be to advise and assist the board in the build-up of a risk management framework.

2) Incentive systems

As most senior executives of Chinese banks’ overseas branches are sent from headquarters, there could be frequent change of leadership, the organisational structure may also be rapidly expanding as the business grows. The Board of head office should pay special attention to the organisational structures and personnel movement in overseas entities and ensure timely review and appropriate incentive schemes in line with the bank’s culture.

3) Assessment and feedback mechanisms

Banks should establish appropriate assessment and feedback mechanisms as part of business units and staff compliance risk monitoring. An effective and confidential whistle blowing channel should be put in place to allow timely reporting of any illegal, unethical or questionable practices.

39

Chinese banks has accelerated their international expansion in recent years, with many medium-sized banks (i.e. joint-stock commercial banks and large city commercial banks) following in the steps of large commercial banks by setting up their first overseas branches in Hong Kong as a springboard for global expansion. Aggressive expansion comes with rising compliance risk. Chinese banks are advised to respect differences in culture and governance, and to strengthen anti-money laundering (AML) management.


PwC

Anti-money laundering (AML) and counter-terrorist financing (CTF) as global issues

In additional to culture behaviour, anti-money laundering (AML) and counter-terrorist financing (CTF) are also sources of compliance risk. These issues are global in nature, and cannot be underestimated by Chinese banks planning for overseas expansion..

In recent years, regulators around the world have taken tougher measures with increasing sanctions. Both the US (New York State Department of Financial Services) and European (Financial Conduct Authority of the UK) regulators have inspected Chinese banks on AML/CTF compliance.

As the number of collegial orders signed with Asian banks continues to increase, it is expected that there could be more enforcement activities and sanctions imposed on Asian banks.

While regulations and laws differ around the world, Chinese banks should consider AML/CTF as part of wider compliance risk management. In particular, they should focus on the following three key areas:

AML and CTF risk assessment (on each product inventory list) should be incorporated into the transaction monitoring system, which clearly defines the risks required to be detected. When running IT applications, it is important to ensure model design (i.e. scenario design) is processed, tested and recorded by experienced data analysts. It should also have a proper structure to support the system with capability to detect and update related scenarios and parameters. In the operation of transaction monitoring system, periodic checks should be conducted to assess the completeness of system list and database, as well as to ensure a dedicated model design and governance framework in place to detect and approve related scenario changes. Compliance, operation and IT departments need to be given clear roles and responsibilities.

Roles and responsibilities need to be properly assigned to each line of defence. In the first line, business heads and relationship officers are responsible for daily compliance of AML and CTF. In the second line, risk management and compliance departments are responsible for reviewing policies and procedures on AML and CTF standards so that management and staff can be compliant. For the third line, the internal audit department shall independently test the internal control over AML and CTF compliance so that the Board can be assured that effective AML/CTF controls are in place. Last but not least, the Board should timely address and resolve any reported compliance issues concerning AML and CTF.

The extent to which management given overseas assignments can familiarise themselves with local business practices and the expectations of regulators will help mitigate the compliance risk arising from overseas operation. It is key to appreciate and address the principles behind the rules of regulation set by the regulators so that required regulations and compliance obligations can be fulfilled.

40

Effective system monitoring on AML/CTF

Three lines of defence with clear roles

Understand local business practices

List of key considerations for compliance risk management

• Can corporate policies catch up with changing laws and regulations?

• Have you well understood the requirements of domestic and

overseas regulatory bodies and known how to respond accordingly ?

• Have the board and senior management set a right tone from the

top to ensure a sound risk management practice is adhered to

especially on the build up and promotion of proper bank culture in

managing overseas operation and risk taking behaviour

• Is enterprise risk assessment regularly performed?

• Is the risk assessment on AML / CTF incorporated and carried out

on new products and services?

• How well do you understand your high risk customers?

• Have we continuously monitored customer business relations &

transitions so that suspicious activities can be timely identified

• Is the system checked regularly testing on its effectiveness &

efficiency so that constant improvement can be made on AML / CTF

transactions monitoring

• Are senior management and staff trained appropriately?

• Is the risk management framework periodically reviewed to ensure

compliance?

Feel free to contact PwC’s Advisory team to discuss further.


PwC

China’s financial reforms: a review from a new inflection point

This year’s conference was the fifth since the NFWC was first convened in 1997. Historically, while domestic and global macroeconomic environments vary, and different risks and issues arising from each stage of development, the agenda of the conference usually revolved around the financial sector’s support of the real economy, reforms in financial institutions, rural financial reform, improving capital markets, preventing financial risks, and opening up the financial sector.

China's financial sector has developed steadily in the past five years. However, new challenges have arisen as the industry evolved. This is particularly

true in an information technology revolution era where the Internet is disrupting traditional finance in every possible way. This requires closer regulatory coordination and new approaches, functional and thorough supervision.

At this new inflection point, and as China's financial reforms entered a new phase, we look forward to new ideas and innovation so that China's financial sector can address challenges appropriately and maintain sustainable development.

Figure 44 Timeline and key milestones of previous National Financial Work Conference


41

The National Financial Work Conference (NFWC) convened every five years was held again in July 2017. One of its highlights was to elevate regulatory coordination by setting up the Financial Stability and Development Committee (FSDC) under the State Council. History suggests that major reform decisions made at the conference will have significant impact on financial industry in subsequent years. At this historical juncture where information technology is disrupting businesses in every possible way, China’s financial reforms call for a new way of thinking and fresh perspectives.

November 1997

1st NFWC:

• Reinforcing PBOC’s financial regulatory functions

• Accelerate commercialisation ofstate-owned commercial banks

• Improve the multi-level and multi-type system of financial institutions

• Standardise and maintain financial order

• Accelerate a fundamental shift in theeconomic system and method of economic growth to create a better environment for a good financial

cycle

• Enable the financial system to better serve economic reform and development

February 2002

2nd NFWC:

• Strengthen financialregulations

• Facilitate the comprehensive reform of state-owned commercial banks

• Advance the reform of rural credit cooperatives

• Standardise the development

of securities market

• Enhance the establishment of a social credit system

• Increase financial support foradjusting economic structure and economic development.

• Improve the overall quality of the financial talent pool

July 1997

Asian financial crisis

January 2007

3rd NFWC:

• Deepen reforms in state-owned banks

• Accelerate rural finance reforms and development

• Construct a multi-level financial market system

• Exert financial services and regulatory functions

• Facilitate the opening-up of the financial sector

• Improve financial regulatorycapabilities

January 2012

4th NFWC:

• Greater efforts by financial sector to improve service functions

• Deepen reforms in financial institutions

• Strengthen and improve financial regulation

• Prevent and mitigate local governments’ debt risks

• Intensify the construction of capital and insurance markets

• Improve the financial macro-control system

• Expand the opening-up of the financial sector

• Strengthen the financial sector’s infrastructure

2001

China became a member of WTO,

and promised to open up its

financial sector gradually. 2008

Global financial crisis

2017

Financial Stability and Development

Committee under the State Council was

set up

2007

China opened its financial sector to foreign investment after the

transitional period for a new WTO member expired.

July 2017

5th NFWC:

• Financial sector’s reversion to

serve the real economy

• Pro-active prevention and

mitigation of systematic financial risk

• A firmly commitment to deepening financial reform

• Expand the opening-up of the financial sector

2010

ABC was publicly listed, the last among

large state-owned bank to do so.

2003-2007

ICBC,CCB, BOC and

BOCOM completed

transformation and listings.

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

PwCBanking Newsletter

42

September 2017

PwC

Appendix

Banking Newsletter

43

September 2017

• Financial highlights of listed banks

• Banking and capital markets contacts

PwC

Financial highlights of listed banks (I)-Large Commercial Banks

2017 1H（In RMB million） ICBC CCB ABC BOC BOCOM PSBC

Operating performance (January-June)

Operating income 362,151 320,388 276,953 248,236 103,688 105,973

Net interest income 250,922 217,854 211,323 165,042 62,708 87,514

Net fee & commission income 76,670 68,080 42,465 49,187 21,261 7,033 Other non-interest income 34,559 34,454 23,165 34,007 19,719 11,426 Operating expenses (166,789) (149,682) (144,902) (108,272) (56,491) (75,910)

Tax and surcharges (3,908) (2,907) (2,411) (2,456) (1,198) (797)

Business & administration expenses (76,091) (67,184) (78,407) (63,019) (27,020) (64,747)

Allowance for impairment losses (61,343) (60,510) (44,697) (26,960) (14,942) (10,366)Other business expenses (25,447) (19,081) (19,387) (15,837) (13,331) 0

Operating profit 195,362 170,706 132,051 139,964 47,197 30,063

Profit before tax1 196,498 172,093 133,210 140,378 47,355 30,063

Income tax expense (42,811) (33,084) (24,540) (29,829) (8,133) (3,471)Net profit 153,687 139,009 108,670 110,549 39,222 26,592

Non-controlling interests 692 670 77 6,859 247 (8)Profit attributable to shareholders 152,995 138,339 108,593 103,690 38,975 26,600

Financial Position (as of 30 June)

Total assets 25,514,046 21,692,067 20,573,586 19,425,980 8,930,838 8,543,826

Loans and advances, net 13,549,396 12,204,730 9,996,639 10,426,548 4,270,542 3,261,436

Loans and advances 13,865,909 12,507,021 10,411,918 10,650,703 4,370,147 3,340,454 Less: Allowance for impairment losses (316,513) (302,291) (415,279) (224,155) (99,605) (79,018)

Investments25,569,993 5,045,126 5,888,748 4,350,945 2,451,158 3,207,682

Interbank assets31,797,897 830,526 1,182,940 1,196,043 854,775 596,521

Cash & deposits with central bank 3,542,773 2,941,465 2,882,030 2,595,717 963,575 1,348,535

Others assets 1,053,987 670,220 623,229 856,727 390,788 129,652

Total liabilities 23,483,412 20,047,465 19,215,145 17,898,108 8,282,430 8,179,044

Deposits from customers 19,021,171 16,274,393 16,104,949 13,368,203 4,938,694 7,806,235

Interbank liabilities42,496,970 1,736,840 1,349,042 2,010,757 1,841,062 146,013

Debt securities issued5641,113 535,093 439,986 799,289 704,071 74,925

Due to central bank 511 520,110 435,749 916,062 508,304 0

Other liabilities 1,323,647 981,029 885,419 803,797 290,299 151,871

Total owners’ equity 2,030,634 1,644,602 1,358,441 1,527,872 648,408 364,782 Non-controlling interests 12,339 16,157 3,241 76,494 5,158 350

Total equity attributable to shareholders 2,018,295 1,628,445 1,355,200 1,451,378 643,250 364,432

Major financial indicators

Profitability (January-June)

Return on average total assets (ROA) 1.24% 1.30% 1.08% 1.18% 0.91% 0.64%Return on weighted average equity (ROE) 15.69% 17.09% 16.74% 15.20% 12.80% 14.91%*

Net Interest Spread (NIS) 2.03% 2.03% 2.11% 1.70% 1.44% 2.38%

Net Interest Margin (NIM) 2.16% 2.14% 2.24% 1.84% 1.57% 2.31%Cost to income ratio 21.01% 22.30% 28.31% 25.39% 26.96% 61.10%

Asset quality (as of 30 June)

Non-performing loan ratio 1.57% 1.51% 2.19% 1.38% 1.51% 0.82%

Overdue loan ratio 2.23% 1.49% 2.61% 1.97% 2.27% 0.99%

Allowance to total loans ratio 145.81% 160.15% 181.80% 152.46% 151.02% 288.65%

Provision coverage ratio 2.28% 2.42% 3.99% 2.10% 2.28% 2.37%

Capital adequacy (as of 30 June)

Common Equity Tier 1 capital adequacy ratio 12.67% 12.68% 10.58% 10.93% 10.62% 8.72%Tier 1 capital adequacy ratio 13.19% 12.84% 11.25% 11.80% 11.71% 8.72%

Capital adequacy ratio 14.46% 14.50% 13.16% 13.41% 13.86% 11.67%

Leverage ratio 7.29% 6.95% 6.07% 6.77% 6.65% 4.09%


45

Note：1.Profit before tax equals operating profit minus other operating (net) income;

2.Investment include: financial assets at fair value through profit or loss, available-for-sale financial assets, held-to-maturity investments and receivables;

3.Interbank assets include: deposits with banks and other financial institutions, demolition of funds and buy back financial assets;

4.Interbank liabilities include: deposits with banks and other financial institutions, capitalization of borrowed funds and repurchase of financial assets;

5.Issued debt securities include: subordinated debt, two capital debt, convertible corporate bonds, green bonds, financial bonds, mixed capital debt,

deposit certificates and interbank deposits* PSBC is listed in H share market, where the calculation of ROE is based on simple average rather than weighted average used in A share market.

PwC

Financial highlights of listed banks (II)-Joint-Stock Commercial Banks

2017 1H（In RMB million） CIB CMB SPDB CMBC CITIC CEB PAB HXB CZB

Operating performance (January-June)

Operating income 68,107 112,666 83,354 70,535 76,580 46,334 54,073 33,348 17,949

Net interest income 44,003 70,896 51,803 41,115 49,494 30,383 37,361 24,003 12,385

Net fee & commission income 18,310 34,750 24,154 24,477 22,761 15,992 15,748 9,020 5,090 Other non-interest income 5,794 7,020 7,397 4,943 4,325 (41) 964 325 474 Operating expenses (31,366) (63,090) (47,374) (36,333) (45,536) (24,331) (37,605) (20,197) (10,638)

Tax and surcharges (624) (1,073) (741) (753) (828) (543) (503) (395) (112)

Business & administration expenses (16,229) (29,249) (19,236) (17,561) (20,294) (13,593) (13,386) (11,551) (5,319)

Allowance for impairment losses (14,253) (32,648) (27,170) (17,139) (24,414) (10,030) (23,716) (8,218) (5,207)Other business expenses (260) (120) (227) (880) 0 (165) 0 (33) 0

Operating profit 36,741 49,576 35,980 34,202 31,044 22,003 16,468 13,151 7,310

Profit before tax1 37,080 49,942 36,751 34,451 31,116 22,004 16,432 13,181 7,310

Income tax expense (5,241) (10,476) (8,229) (5,837) (6,952) (5,032) (3,878) (3,274) (1,708)Net profit 31,839 39,466 28,522 28,614 24,164 16,972 12,554 9,907 5,602

Non-controlling interests 238 207 357 526 153 33 0 71 (11)Profit attributable to shareholders 31,601 39,259 28,165 28,088 24,011 16,939 12,554 9,836 5,613


Total assets 6,384,658 6,199,690 5,915,395 5,767,209 5,651,216 4,033,546 3,092,142 2,423,098 1,453,290

Loans and advances, net 2,203,179 3,404,094 2,929,721 2,636,361 3,012,896 1,917,181 1,549,052 1,274,795 512,472

Loans and advances 2,284,665 3,539,938 3,027,486 2,706,294 3,091,095 1,964,448 1,594,281 1,309,553 530,807 Less: Allowance for impairment losses (81,486) (135,844) (97,765) (69,933) (78,199) (47,267) (45,229) (34,758) (18,335)

Investments23,315,266 1,555,602 2,081,471 2,061,332 1,691,248 1,244,582 826,650 680,276 697,216

Interbank assets3146,085 445,343 221,552 307,419 265,020 359,248 238,339 163,447 69,287

Cash & deposits with central bank 460,813 606,623 501,390 424,669 519,590 345,530 289,977 264,035 130,018

Others assets 259,315 188,028 181,261 337,428 162,462 167,005 188,124 40,545 44,297

Total liabilities 5,986,106 5,777,866 5,523,221 5,392,687 5,258,518 3,767,371 2,880,688 2,263,485 1,367,476

Deposits from customers 3,008,219 4,142,254 3,172,519 3,010,734 3,453,476 2,271,303 1,912,333 1,376,875 803,068

Interbank liabilities41,887,872 770,716 1,380,367 1,263,272 1,011,998 655,226 461,995 408,651 359,025

Debt securities issued5728,855 346,902 672,491 542,144 472,227 531,006 350,650 321,843 168,146

Due to central bank 231,500 351,542 172,215 324,468 193,600 217,500 84,684 105,000 0

Other liabilities 129,660 166,452 125,629 252,069 127,217 92,336 71,026 51,116 37,238

Total owners’ equity 398,552 421,824 392,174 374,522 392,698 266,175 211,454 159,613 85,814 Non-controlling interests 5,553 2,447 5,195 10,327 5,273 643 0 860 1,459

Total equity attributable to shareholders 392,999 419,377 386,979 364,195 387,425 265,532 211,454 158,753 84,355



Return on average total assets (ROA) 1.02% 1.29% 0.96% 0.98% 0.84% 0.84% 0.83% 0.82% 0.80%Return on weighted average equity (ROE) 17.22% 19.11% 15.70% 16.23% 13.76% 13.76% 12.56% 12.68% 16.54%*

Net Interest Spread (NIS) 1.48% 2.31% 1.69% 1.27% 1.62% 1.32% 2.29% 1.96% 1.57%

Net Interest Margin (NIM) 1.75% 2.43% 1.82% 1.40% 1.77% 1.52% 2.45% 2.10% 1.75%Cost to income ratio 24.21% 25.96% 23.08% 24.90% 26.50% 29.34% 24.76% 34.64% 29.64%


Non-performing loan ratio 1.60% 1.71% 2.09% 1.69% 1.65% 1.58% 1.76% 1.68% 1.39%

Overdue loan ratio 2.08% 2.02% 2.91% 3.44% 3.13% 2.53% 4.33% 4.82% 1.43%

Allowance to total loans ratio 222.50% 224.69% 154.21% 153.33% 152.97% 152.17% 161.32% 157.63% 249.17%

Provision coverage ratio 3.57% 3.84% 3.23% 2.58% 2.53% 2.41% 2.84% 2.65% 3.45%

Capital adequacy (as of 30 June)

Common Equity Tier 1 capital adequacy ratio 8.65% 12.42% 8.90% 9.18% 8.61% 8.35% 8.13% 8.29% 8.27%Tier 1 capital adequacy ratio 9.26% 12.42% 9.67% 9.46% 9.60% 9.42% 9.05% 9.48% 10.05%

Capital adequacy ratio 11.87% 14.59% 11.84% 11.91% 11.76% 11.86% 11.23% 12.63% 12.38%

Leverage ratio 5.62% 5.83% 5.74% 5.69% 5.92% 5.69% 5.62% No data 4.95%

Banking Newsletter September 2017

46






deposit certificates and interbank deposits* CZB is listed in H share market, where the calculation of ROE is based on simple average rather than weighted average used in A share market.

PwC

Financial highlights of listed banks (III)-City Commercial Banks

2017 1H（In RMB million） BOB JSB BOS BNJ SJB BNB HSB BHZ BTJ BJZ HRB ZYB BZZ BGY BCQ BQDOperating performance

(January-June)

Operating income 26,498 17,020 15,394 12,425 6,469 12,316 10,815 6,583 5,291 8,532 7,472 5,876 4,860 5,681 5,076 2,835

Net interest income 19,049 13,833 9,205 10,150 5,470 8,603 9,575 5,911 4,299 8,387 6,324 5,614 4,060 5,053 4,033 2,345

Net fee & comm. Income 7,218 3,192 3,190 1,615 1,068 3,332 1,470 741 1,051 401 1,213 276 909 627 848 518 Other non-interest income 231 (4) 2,999 660 (68) 381 (230) (69) (59) (255) (65) (14) (109) 2 195 (28)Operating expenses (12,556) (9,986) (7,343) (6,080) (2,250) (6,769) (6,025) (3,648) (1,967) (3,189) (3,831) (3,638) (1,871) (3,485) (2,291) (1,193)

Tax and surcharges (323) (145) (175) (157) (93) (85) (73) (68) (49) (68) (64) (50) (35) (45) (40) (29)

Business & admin expenses (5,569) (4,423) (3,715) (3,324) (1,553) (3,924) (2,470) (1,998) (1,349) (1,506) (1,795) (2,309) (1,099) (1,507) (1,087) (764)

Allowance for impairment (6,653) (5,417) (3,443) (2,548) (604) (2,742) (3,482) (1,580) (569) (1,615) (1,972) (1,279) (737) (1,930) (1,164) (400)Other business expenses (11) (1) (9) (51) 0 (17) 0 (3) 0 0 0 0 0 (3) 0 0

Operating profit 13,942 7,034 8,051 6,345 4,220 5,547 4,790 2,934 3,324 5,343 3,641 2,238 2,989 2,196 2,785 1,642

Profit before tax1 13,939 7,088 8,127 6,366 4,220 5,539 4,865 2,946 3,312 5,343 3,641 2,238 3,008 2,190 2,830 1,642

Income tax expense (2,784) (867) (321) (1,206) (715) (765) (963) (415) (690) (1,313) (952) (491) (683) (282) (570) (364)Net profit 11,155 6,221 7,806 5,160 3,504 4,774 3,901 2,531 2,622 4,030 2,689 1,748 2,325 1,908 2,259 1,279

Non-controlling interests 76 45 10 56 (3) 9 121 0 6 39 30 29 54 5 10 3 Profit attr. to shareholders 11,079 6,177 7,796 5,105 3,507 4,765 3,780 2,531 2,616 3,991 2,660 1,719 2,271 1,902 2,249 1,276

Financial Position

(as of 30 June)

Total assets 2,239,167 1,727,172 1,711,416 1,132,849 938,711 938,529 812,678 754,085 659,884 644,013 546,927 458,010 417,535 414,191 408,429 281,976

Loans and advances, net 998,335 682,825 582,819 354,176 270,709 313,920 287,327 264,975 211,985 184,292 219,638 176,973 118,445 105,646 159,806 92,079

Loans and advances 1,029,550 701,062 600,908 368,522 277,777 325,698 295,915 273,112 218,467 190,333 225,906 184,236 121,953 109,675 164,209 94,509

Less: Allowance (31,215) (18,237) (18,089) (14,346) (7,068) (11,778) (8,588) (8,137) (6,483) (6,041) (6,268) (7,263) (3,508) (4,029) (4,403) (2,430)

Investments2

796,172 665,254 832,203 549,090 493,628 474,703 381,222 337,284 329,627 379,231 206,481 205,659 183,825 219,972 137,169 120,885

Interbank assets3

223,738 196,824 131,599 100,509 83,847 33,212 22,139 80,712 48,834 14,992 30,657 7,212 52,627 23,406 60,049 31,651

Cash & deposits with CB 179,457 131,057 135,548 104,926 76,310 87,859 85,483 61,894 56,753 46,825 55,132 52,449 45,669 45,276 42,040 28,215

Others assets 41,465 51,212 29,246 24,148 14,218 28,834 36,507 9,221 12,686 18,673 35,020 15,718 16,968 19,891 9,364 9,147

Total liabilities 2,089,446 1,639,827 1,590,175 1,068,140 890,284 885,147 756,587 713,918 616,872 598,396 506,872 420,925 394,462 391,058 382,144 263,788

Deposits from customers 1,267,905 984,311 880,752 720,289 443,457 555,112 511,080 381,954 354,571 312,060 344,901 279,554 245,401 273,256 238,705 157,297

Interbank liabilities4

364,891 349,828 392,068 62,995 216,533 123,722 124,551 151,602 155,749 168,911 60,866 75,345 80,245 43,696 49,757 44,074

Debt securities issued5

352,245 221,525 208,119 223,947 134,287 162,159 98,092 153,478 87,270 79,075 78,372 57,528 60,145 68,437 87,041 56,138

Due to central bank 48,011 52,060 80,111 32,550 70,500 11,500 0 0 1,500 178 511 2,486 1,092 330 0 1,468

Other liabilities 56,394 32,103 29,126 28,359 25,506 32,653 22,864 26,885 17,783 38,172 22,222 6,012 7,579 5,339 6,641 4,811

Total owners’ equity 149,721 87,345 121,240 64,708 48,427 53,382 56,092 40,167 43,012 45,616 40,055 37,085 23,073 23,133 26,284 18,188 Non-controlling interests 1,766 1,586 458 557 578 104 1,433 0 50 3,860 1,083 807 681 868 1,480 493

Attributable to shareholders 147,955 85,758 120,782 64,151 47,850 53,278 54,659 40,167 42,961 41,756 38,972 36,278 22,392 22,265 24,804 17,696



Return on total assets (ROA) 1.02% 0.91% 0.90% 0.93% 0.76% 1.05% 1.00% 0.68% 0.80% 1.36% 0.99% 0.78% 1.19% 0.98% 1.17% 0.91%

Return on equity (ROE) 16.42% 14.62% 13.02% 19.02% 14.79%* 20.30% 16.04%* 12.78% 12.38%* 19.76%* 14.09%* 9.63%* 20.80%* 17.38% 18.66%* 14.44%*

Net Interest Spread (NIS) 1.61% 1.46% 1.32% 1.74% 1.42% 1.98% 2.18% 1.55% 0.90% 2.51% 2.23% 2.63% 2.05% 2.53% 1.93% 1.62%

Net Interest Margin (NIM) 1.78% 1.60% 1.20% 1.87% 1.53% 1.96% 2.32% 1.63% 1.31% 2.80% 2.42% 2.80% 2.20% 2.64% 2.15% 1.79%Cost to income ratio 21.02% 25.99% 24.14% 26.75% 24.00% 31.86% 23.51% 30.35% 25.50% 15.83% 24.02% 39.29% 22.60% 26.53% 21.41% 26.94%


Non-performing loan ratio 1.18% 1.43% 1.16% 0.86% 1.53% 0.91% 1.06% 1.61% 1.46% 1.06% 1.65% 1.85% 1.38% 1.46% 1.25% 1.69%

Overdue loan ratio 1.73% 1.94% 1.25% 1.35% 1.91% 0.97% 1.85% 2.66% No data 3.17% 5.11% 5.29% 4.79% 3.77% 5.10% 4.81%

Allowance to total loans ratio 237.03% 181.33% 259.06% 450.19% 166.73% 398.52% 273.21% 184.89% 200.25% 300.33% 168.49% 213.52% 208.84% 251.51% 213.89% 152.17%

Provision coverage ratio 2.79% 2.60% 3.01% 3.89% 2.54% 3.62% 2.90% 2.98% 2.92% 3.17% 2.77% 3.94% 2.88% 3.67% 2.68% 2.57%Capital adequacy

(as of 30 June)

Common Equity Tier 1 CAR 7.74% 8.64% 11.40% 8.06% 9.21% 8.68% 8.62% 9.67% 9.29% 9.18% 9.46% 10.67% 8.59% 10.04% 9.21% 10.16%Tier 1 CAR 8.79% 8.64% 11.40% 9.48% 9.21% 9.55% 9.69% 9.67% 9.29% 9.19% 9.48% 10.68% 8.61% 10.05% 9.22% 10.17%CAR 11.13% 10.97% 13.40% 13.13% 12.10% 12.20% 12.42% 11.54% 11.64% 10.97% 12.02% 11.82% 12.08% 12.03% 12.88% 13.67%

Leverage ratio 5.77% 4.55% 6.49% No data 4.40% 4.97% No data 4.97% 6.05% No data No data 7.42% 4.82% No data No data 5.82%


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2. Investment include: financial assets at fair value through profit or loss, available-for-sale financial assets, held-to-maturity investments and receivables;

3. Interbank assets include: deposits with banks and other financial institutions, demolition of funds and buy back financial assets;

4. Interbank liabilities include: deposits with banks and other financial institutions, capitalization of borrowed funds and repurchase of financial assets;

5. Issued debt securities include: subordinated debt, two capital debt, convertible corporate bonds, green bonds, financial bonds, mixed capital debt, deposit certificates and interbank deposits* SJB, HSB, BTJ, BHZ, HRB, ZYB, BZZ, BCQ, BQD are listed in H share market, where the calculation of ROE is based on simple average rather than weighted average used in A share

market.

PwC

Financial highlights of listed banks (IV)-Rural Commercial Banks

2017 1H（In RMB million） CQRCB GZRCB JTRCB CSRCB WXRCB JYRCB ZJGRCB WJRCBOperating performance (January-June)

Operating income 11,445 6,242 2,868 2,362 1,386 1,175 1,206 1,364

Net interest income 10,271 6,051 2,188 2,095 1,242 994 1,027 1,232

Net fee & commission income 1,155 1,065 334 185 119 30 69 41 Other non-interest income 19 (874) 346 82 24 150 111 91

Operating expenses (5,300) (2,827) (1,762) (1,628) (735) (851) (863) (846)Tax and surcharges (72) (80) (31) (19) (13) (12) (8) (12)

Business & administration expenses (3,615) (2,260) (1,174) (871) (402) (431) (429) (408)

Allowance for impairment losses (1,613) (488) (557) (739) (320) (406) (426) (426)Other business expenses 0 0 0 0 (1) (3) 0 0 Operating profit 6,145 3,415 1,107 734 651 324 343 518

Profit before tax1 6,145 3,415 1,119 750 644 322 342 518 Income tax expense (1,511) (775) (219) (145) (123) 19 10 (77)

Net profit 4,634 2,639 900 605 521 341 352 441 Non-controlling interests 40 17 207 34 (1) (12) 1 3 Profit attributable to shareholders 4,594 2,622 693 571 522 352 352 438


Total assets 855,426 680,049 195,661 140,487 125,917 104,713 97,989 84,664

Loans and advances, net 310,396 267,601 72,020 69,277 61,891 51,778 45,761 46,072

Loans and advances 323,730 276,333 74,281 71,747 63,670 54,116 47,498 47,566 Less: Allowance for impairment losses (13,334) (8,731) (2,261) (2,470) (1,779) (2,338) (1,737) (1,494)

Investments2 289,221 247,969 64,105 46,747 44,397 38,206 35,340 19,088

Interbank assets3139,803 67,996 25,652 6,551 1,629 2,131 3,635 4,307

Cash & deposits with central bank 101,027 84,074 26,315 14,327 14,980 9,643 9,755 11,554

Others assets 14,980 12,409 7,569 3,585 3,020 2,955 3,498 3,643

Total liabilities 798,283 635,700 179,797 130,003 116,936 95,785 89,894 76,437

Deposits from customers 569,677 440,875 130,503 96,496 100,007 75,991 67,988 68,470 Interbank liabilities4

88,752 46,534 18,762 10,497 8,513 13,809 16,756 4,916 Debt securities issued5

96,520 126,733 27,627 18,999 3,302 1,694 1,057 0

Due to central bank 30,420 1,304 242 766 100 299 350 525

Other liabilities 12,915 20,254 2,663 3,244 5,014 3,992 3,743 2,526

Total owners’ equity 57,144 44,349 15,864 10,484 8,981 8,928 8,095 8,226 Non-controlling interests 1,587 1,970 3,821 603 100 247 121 102

Total equity attributable to shareholders 55,557 42,379 12,043 9,882 8,881 8,681 7,974 8,125 Major financial indicators


Return on average total assets (ROA) 1.12% 0.79% 0.93% 0.89% 0.84% 0.62% 0.75% No dataReturn on weighted average equity (ROE) 16.31%* 12.84%* 12.17%* 11.42% 11.76% 8.08% 9.02% 10.96%

Net Interest Spread (NIS) 2.42% 1.68% 2.03% 2.73% 1.81% 1.97% 2.04% 2.84%

Net Interest Margin (NIM) 2.59% 1.73% 2.21% 2.93% 2.07% 2.07% 2.24% 2.95%Cost to income ratio 31.58% 36.20% 40.93% 36.88% 29.08% 36.65% 35.65% 29.93%Asset quality (as of 30 June)

Non-performing loan ratio 0.97% 1.73% 1.59% 1.29% 1.31% 2.45% 1.97% 1.71%

Overdue loan ratio 2.92% 2.62% 3.17% 1.31% 1.51% 3.03% 2.10% 3.53%

Allowance to total loans ratio 425.14% 182.18% 190.84% 266.36% 212.63% 176.11% 185.67% 183.52%

Provision coverage ratio 4.12% 3.16% 3.04% 3.44% 2.79% 4.32% 3.66% 3.14%Capital adequacy (as of 30 June)

Common Equity Tier 1 capital adequacy ratio 9.66% 10.22% 9.52% 9.68% 9.70% 11.94% 11.92% 12.36%Tier 1 capital adequacy ratio 9.68% 10.25% 9.71% 9.71% 9.71% 11.95% 11.92% 12.36%

Capital adequacy ratio 12.41% 11.77% 12.43% 11.88% 11.96% 13.13% 13.08% 13.45%

Leverage ratio 6.31% 6.02% No data 6.03% 6.69% 7.70% 7.19% 8.19%


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deposit certificates and interbank deposits

* CQRCB、GZRCB、JTRCB are listed in H share market, where the calculation of ROE is based on simple average rather than weighted average usedin A share market.

PwC

Banking and capital markets contacts

Assurance Advisory Tax

Jimmy Leung – Shanghai James Chang – Beijing Oliver Kang – Beijing

+86 (21) 2323 3355 +86 (10) 6533 2755 +86 (10) 6533 3012

[email protected] [email protected] [email protected]

Margarita Ho – Beijing Yuqing Guo – Shanghai Matthew Wong – Shanghai

+86 (10) 6533 2368 +86 (21) 2323 2655 +86 (21) 2323 3052


Richard Zhu – Beijing Jianping Wang – Shanghai Florence Yip – Hong Kong

+86 (10) 6533 2236 +86 (21) 2323 5682 +852 2289 1833


Linda Yip – Beijing William Yung – Shenzhen

+86 (10) 6533 2300 +86 (755) 8261 8388

[email protected] [email protected]

Michael Hu – Shanghai Matthew Phillips – Hong Kong Assurance – Risk & Quality

+86 (21) 2323 2718 +852 2289 2303

[email protected] [email protected] Tracy Chen – Shanghai

+86 (21) 2323 3070

Shirley Yeung – Guangzhou Mary Wong – Hong Kong [email protected]

+86 (20) 3819 2218 +852 2289 2587

[email protected] [email protected] Nigel Dealy – Hong Kong

+852 2289 1221

Vincent Yao – Shenzhen Chris Chan – Hong Kong [email protected]

+86 (755) 8261 8293 +852 2289 2303

[email protected] [email protected]

Peter Li – Hong Kong

+852 2289 2982

[email protected]

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This content is only for general information purposes only, and should not be as a substitute for consultation with professional advisors.

© 2017 PricewaterhouseCoopers Zhong Tian LLP. All rights reserved. PwC refers to the China member firm, and may sometimes refer to the PwC

network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

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