China: Profits up, NPLs down

The China Banking Regulatory Commission recently reported Chinese banking industry numbers and for a brief comparison:

Profits:
1H2007 - 268.97 billion yuan (35.8 billion U.S. dollars)
FY2003 – 32.28 billion yuan 

NPL (% of non-performing loans):
2007 – 8.98%
2003 – 17.9%

Total assets:
2007 – 48.5 trillion yuan
2003 – 26.5 trillion yuan

We can draw some rough conclusions from the numbers:

• Banks are getting better in managing credit and loans, but still have a ways to go.  Granted the NPL rate is essentially a backward looking indicator, the government and individual banks have several current projects to further reduce the rate.  4 years ago, NPLs were seen as the albatross around the neck of the Chinese banking industry and the reason why the industry would never take off.  Now, most of the tier-1 cities have city-wide consumer credit databases and 570 million people are in the national credit database, so getting there.

• Banks are growing.  This is pretty obvious from the profit numbers, but what’s interesting is that they’re growing more efficiently.  From 2003 until 2007, the assets of banks have nearly doubled while the profits are up nearly 8-fold, suggesting better efficiencies in the organisation and increased revenue from an customer base increasing in wealth and numbers, and a slowly diversifying set of banking products.

What needs to happen now:

• Increased product breadth – There aren’t a lot of choices for investors in China of where to put their money.  Earning less than 1-3% on a bank deposit doesn’t compare to the returns to be had in property and on the stock market.  Banks need to come up with new products to get a better share of wallet from the current customers and attract new money.

• Better services – Private wealth is starting to take off in China and for the wealthy, it’s easy to find good customer service.  A big opportunity for differentiation is in how banks deal with their non-wealthy customers.  Forget whether my bank has robust internet access or not, perhaps a deciding factor in the west, I chose it because I can take a number and wait rather than join a chaotic scrum of people jostling to get to the front of the line.  Although it’s a bit of a chicken and egg problem where the customers don’t really even know that they want better customer service so the banks aren’t providing it, the sense of entitlement with the Chinese is so strong, once one bank offers a really differentiated service, it’ll have a tremendous advantage.

• Rural Banking – the ‘last mile’ of banking on the frontier of China.  The income gap between the urbanites and their rural counterparts is still quite large in China with urbanites earning about US$1,500 in 2006, while rural inhabitants earned only about US$500.  Estimates of the number of actual rural residents vary from about 40-60% (actual number is hard to measure because of unauthorised migrations to urban cities, but the bank that successfully taps the rural market, will be very well positioned.  HSBC announced two months ago that they were setting up a rural bank in Hubei and should be a good example of how (or how not) to do business there.