Banks need to transform to boost margins

It is time for China's banks to transform as they are facing profit growth slowdown due to narrower interest margin from market-driven interest rates, and also competition from new businesses such as Internet-based mobile payment and direct lending, executives said in Tianjin Tuesday.

"The interim reports of banks show a slowdown in the sector's profit growth due to changes in the business environment," said Ma Weihua, president of China Merchants Bank, at a session of the Summer Davos.

A major reason is the slowdown of China's economy, partially due to the impact of the European debt crisis and China's efforts to restructure its economy, Ma said.

The slowdown of banks' profit was also derived from financial disintermediation, a process in which funds are withdrawn from the banks for investment purposes.

"Money had gone into non-banking sectors, including securities, stocks, bonds, wealth management products, private equity and private lending," he said.

The deposit growth rate fell to 11.9 percent in 2011, down 8.5 percentage points compared with the average growth rate of past 10 years, Ma said.

Also, the interest rate liberalization or more market-driven rates among commercial banks tend to drive up deposit rates as banks strive for funds, which means high cost for banks and narrowing profit margin from lending, said Li Ming Shieh, president of China Guangfa Bank.

The country's banking industry experienced high growth during the 2007-11 credit boom, with most of the banks growing by more than 30 percent annually, Li noted.

Yet in the first half of 2012, China's five largest banks made a combined net profit of 412.7 billion yuan ($65.2 billion), with growth rates ranging from 7.58 percent to 20.75 percent, about half the rate a year ago.

China's banking industry needs to make better use of the Internet technology and target consumer financing amid the country's shift toward a consumption-driven growth model, Ma said.

Some new business models such as mobile payment, and lending or financing through Internet such as peer-to-peer (P2P) lending bring both challenges and opportunities for traditional banks, Ma said.

It is projected that by 2015 there will be 1 billion mobile banking customers with an expected transaction value of over $1 trillion, said Jaspal Bindra, Group CEO and CEO Asia for Standard Chartered Bank.

The new businesses will have more cooperation with traditional banks than competition as they target different groups of customers, said Tang Ning, CEO of CreditEase, the largest online P2P lending in China.