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October 13, 2016

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Home » Business » Finance

Banks miss out on economic profit

SOME big Chinese banks may have posted accounting profit but this does not mean that they have created economic profit, due to their weak management of asset quality and poor capital efficiency, a report said yesterday.

A calculation of the 40 biggest Chinese banks revealed that newly listed giant lender China Postal Savings Bank, China Guangfa Bank, Bank of Hangzhou and Bank of Bohai were among the worst performers in generating economic profit, McKinsey & Co said.

The economic profit is the result after deducting both regular business expenses and alternative returns that companies decide not to pursue from their total revenue.

China Postal Savings Bank made 41.4 billion yuan (US$6.2 billion) in accounting profit last year, but made a loss of 8.3 billion yuan in economic added value in the same period, the report said. High operating costs and the bank’s vulnerability on fee-generating businesses were cited as the main causes.

“Some Chinese banks expand loans to earn interest and sacrifice capital liquidity to bring in book profits, but that’s not the right way to create value for savers and investors,” said Qu Xiangjun, managing partner of McKinsey.

Chinese banks are facing its coolest profit growth in decades amid deteriorating debt quality and narrowing interest margin. Most of their corporate businesses don’t generate growth in either scale or profit due to a slump in certain industries such as mining and steel.

China’s stock market regulator restarted the approval of initial public offerings of smaller banks this year to ease the liquidity pressure of lenders through market fundraising.

If banks’ bad debt ratio worsened to 2 percent, 11 banks out of the 40 mentioned in the report would post negative economic profit like China Postal Savings Bank, McKinsey said. It added that the average return on equity of the 40 banks could fall 1.5-2.5 percent.

The non-performing loan ratio of Chinese banks was 1.75 percent at the end of June, said the banking regulator.


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