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Cover Stories Series 2014> Reform Initiatives Underway for 2015> Retrospect> Opinion
UPDATED: September 5, 2014 NO. 37 SEPTEMBER 11, 2014
Concerns Over Surging Bank Profits

Half-year financial reports of public companies listed on mainland stock exchanges show that the 16 listed banks earned 684.9 billion yuan ($111.5 billion) in the first half of 2014, far exceeding the total net profits of the 2,521 non-financial listed companies. Such an incident is not without precedence. However, its repeated occurrence gives one pause for thought and presents some thorny questions. As banks have taken away the bulk of the profits generated by enterprises, how can the real economy sustain itself? In turn, if the real economy continues its downward slide, how will the financial industry be able to maintain its juicy earnings?

Listed banks' lead in the profit list is, in some ways, heartening, indicating banks are still strong in profitability. In the past few years, the quality of their management along with their strength in innovation has made remarkable progress. However, it also reflects that the banking industry, far from serving the real economy, has instead become severely detached from it.

At the end of June, the 2,521 listed companies that have published their financial reports were seen to harvest profits of 581.3 billion yuan ($94.6 billion), and the profits of the 16 listed banks was 17.8 percent higher than that figure. The Industrial and Commercial Bank of China alone earned 148.1 billion yuan ($24.1 billion) in the first half of the year, equivalent to 21.6 percent of the total profits of the 2,521 non-financial public companies. Such an irrational profitability structure is bound to undermine sustainable economic development in the long term.

Since social wealth is fixed during a certain period of time, the more banks take away, the less enterprises propping up the real economy can get. In this way, these enterprises will gradually lose their incentive to operate, and head toward declination and bankruptcy. This represents a vicious circle and has begun to yield negative results. Although bank profits still edge those of real enterprises, the sector's crown has shown signs of slipping. As their half-year financial reports suggest, five of the 16 listed banks have witnessed their profit growth declining to a single digit. In contrast, the 16 banks maintained an average growth above 10 percent during the same period of last year.

Moreover, the bad loans of the 16 listed banks amounted to 558 billion yuan ($90.9 billion) at the end of June, an increase of 77.2 billion yuan ($12.6 billion) in the first half. With the exception of the Bank of Ningbo, all banks saw a surge in both bad loans and their non-performing loan ratio. Worse still, this adverse trend is not confined to listed banks. According to statistics from the China Banking Regulatory Commission, in the first half of the year, the bad loans of commercial banks increased 102.4 billion yuan ($16.7 billion), exceeding the total added amount of 99.3 billion yuan ($16.2 billion) last year. In the second quarter, bad loans rose by 48.3 billion yuan ($7.9 billion), marking an increase for 12 consecutive three-month periods.

Obviously, the sharp rise in bad loans mainly stems from the recession in the real economy and those enterprises affected. Bad loans caused by overcapacity, a sluggish steel trade and faltering small and micro-firms have begun to increase. The surge of bad loans will surely continue into the future if the relevant authorities don't seek solutions.

Moreover, traditional banks are becoming increasingly challenged by Internet finance. Whether it be in traditional banking services like borrowing and lending or in intermediary services like payment and money management, Internet finance has waged an all-out war against traditional brick-and-mortar banks. In the long run, it is likely business activities will be moved onto the Internet, while traditional banks are still struggling with their growing obsolescence. If they refuse to change, they are bound to perish in the wake of the overwhelming expansion of the Internet finance sector.

In short, the statistics in the first half of the year are worrisome. The only way out for the banking industry is to catch up with the times by embracing the age of Internet finance. More importantly, they should give top priority to serving the real economy. Only in this way can the banking industry sustain its profits and overcome challenges.

This is an edited excerpt from an article by Yu Fenghui, a financial commentator, published in Shanghai Securities News

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