Chinese banks must move from size reliance to sustain profits

Most struggle to diversify their income sources as they seek short-term growth.  

China’s banking industry is adapting a quality over quantity approach as their traditional banking models increasingly become unsustainable.

Mainland China holds the world’s four largest banks, and 20 out of the top 50 banks globally by asset size, according to data from S&P Global Ratings. But these banks’ huge assets could not mitigate profit pressures as the Chinese economy enters a “new normal”, according to KPMG.

“Against this backdrop, banks are experiencing profit pressure in their traditional deposit and loan business. A narrowing interest margin means that their traditional business model, which relies on asset scale, is unsustainable,” KPMG experts Lilia Ma and Fannie Cheng said in the KPMG Chinese Banking Survey 2024.

Banks are aware that they need to shift to more cost-effective business strategies.

“To make this transition, they need to cut costs, optimise their debt structure, and drive value creation,” Ma and Cheng said.

However, Chinese banks are reluctant to diversify their income sources as they pursue short-term growth.

“Many of them are aware of the limitations of the traditional scale-driven model, but they still find it difficult to shift away from it due to competitive pressure and long-standing performance evaluations,” the analysts said.

Volatility of the capital markets has also given rise to uncertainties that present obstacles to banks’ diversification efforts. External impacts and market fluctuations may lead to unstable returns for banks, which will affect their profitability and risk management.

Banks also need to address the talent gap if they want to diversify. These include hiring the right wealth management, investment banking, and green finance experts that not only have a solid knowledge on finance but also law, tax, and ESG, amongst others.

Professionals working in technology finance should also have have a good understanding of finance and technology.

“However, such multi-faceted professionals are somewhat scarce in banks, which means these institutions are not yet ready to pursue innovation and development in new areas,” Ma and Cheng said.