Why It's Important
As China’s economy struggles to get back on the growth track and property market concerns remain unresolved, more regional lenders have relied on investment gains to make up for a slowing core lending business. However, these banks still face certain challenges such as low rates on loans, high operating costs, and most of all, narrow profit margins. In the meanwhile, most of them are departing their traditional roles of boosting small businesses and are keener on operations like bond trading amongst financial securities.
The Shift in Focus
Many of China’s rural commercial banks that are used to providing credit to small businesses have recently shifted their focus to investment revenues. The weak recovery of the economy and slow pass-through of monetary policy measures have pushed these banks to seek other sources of income such as fixed-income securities like bonds to boost their income. This movement also sheds light on the practice in which there is an emphasis on investment income to counter falling loan revenues.
By the Numbers
Suzhou Rural Commercial Bank and Zhangjiagang Rural Commercial Bank stated that their invested revenues in the first half of the current year increased by 116% and 176% respectively to the corresponding period of last year. Nonetheless, their net interest income which is the major income for these banks reduced by 7% and 12% respectively. A greater proportion of investment income is almost 30% of these banks’ total income, an uptick from figures that were only in the teens in 2021. Profits on the sale of financial assets held for trading and debt investments are the main cause of this increase.
Key Insights
With eroding asset quality and a drop in profitability, rural commercial banks especially those operating in less developed areas are hard hit. As stated by Elaine Xu, Director of Asia-Pacific Financial Institutions at Fitch Ratings, the loan growth for such banks has declined this year because of the low demand for loans and intensifying competition with large-scale banks. Larger banks are steadily extending their control in this lending to the micro and small enterprises while the regional ones are forced to become even more aggressive in trading their investments as net interest margins continue to shrink.
Investment Bubble Concerns
This shift towards earning income from investments has also attracted funds and retail investors with authorities cautioning that there is an emerging bubble in the bond market. An emphasis on bond trading is questionable in the long-run perspective and the applicability of this strategy in the changed market circumstances.
