Chinese banks’ income from fees and commissions increased by 24% in the first three months of 2013 compared with the same period in 2012, a significant improvement on the 17% rise between 2011 and 2012, according to Geoffrey Choi, Financial Services Partner at Ernst & Young Hua Ming. “Such income from intermediary business accounted for only 23% among Chinese lenders, suggesting huge room for further development if compared with international counterparts,” he said. In 2012, net profit growth of Chinese listed banks was 17%, down 12 percentage points from 2011. In the first quarter of 2013, profit growth fell to 13%, compared with 25% during the same period last year, Choi said. Affected by the ongoing interest rate liberalization process, the net interest margin continued to fall. “Banks must continue to optimize their international capital allocation, alter the development mode which seeks profits based on consumption of capital and improve their capacity to accumulate capital,” Choi said. Liu Shiyu, Vice Governor of the People’s Bank of China (PBOC), said earlier this month that the major Chinese banks might see a capital shortage of CNY40.5 billion in 2014 if they kept growth and internal financing at current levels. The Ernst & Young report found that the listed banks had increased client numbers and online/mobile banking transactions substantially last year. By the end of 2012, Industrial and Commercial Bank of China (ICBC) had 315 million
electronic banking customers. The proportion of its online business to total transactions has reached 75.1%, while its mobile banking business has increased 54.5% compared with the year earlier, with transaction values jumping nearly 16 times. Online transactions at Bank of China (BOC) rose nearly 33% year-on-year, while the number of mobile banking clients at China Merchants Bank (CMB) surged 115%, the China Daily reports.

The Hong Kong Mercantile Exchange (HKMEx) has suspended activities and handed back its trading license to regulators two years after opening as it had no sufficient cash to cover nine months of operations, a requirement set by the Hong Kong Securities and Futures Commission. The Exchange will however go ahead with a planned USD100 million rights issue and be ready within months to reapply for the trading license. HKMEx Chairman Barry Cheung said the closure would have no impact on investors and that client contracts would be honored. HKMEx was working with LCH.Clearnet to arrange settlement pricing on the exchange’s roughly 200 outstanding contracts. Chairman Cheung said the rights issue would solve the Exchange’s financial problems. “This exercise will raise USD100 million. It will be sufficient to meet the SFC’s requirements as well as to support the exchange’s operations for the next three to four years,” Cheung said. The next few months would be spent redefining strategy, finalizing the rights issue and closing negotiations with potential strategic shareholders in a bid to reapply for the license. The Hong Kong Mercantile Exchange’s failure to come up with a viable gold futures business proved to be its undoing as it wilted under competition from more established domestic and international exchanges, market participants say. Originally designed to be a platform for fuel oil futures, the HKMEx ended up being an exchange for gold contracts. HKMEx’s daily transaction volume amounted to about USD19.5 million, only a fraction of the daily turnover of USD7.7 billion to USD10.3 billion on its rival, the 103 year-old Chinese Gold & Silver Exchange.

Goldman Sachs is set to raise USD1.1 billion with the sale of its remaining stake in the Industrial and Commercial Bank of China (ICBC), the world’s largest bank by assets. Goldman earned net profit of USD7.72 billion on its seven-year investment. The move is the sixth disposal of ICBC shares by Goldman, bringing to an end the strategic partnership the two banks had established. New York-based Goldman bought a 4.9% stake in ICBC for USD2.58 billion before the Chinese bank’s initial public offering in 2006. The disposal could ease the capital pressures on Goldman. It also lets the bank lock in its gains at a time when Chinese lenders are set to report slower growth in net earnings as bad loans build up and interest rate deregulation sets in. ICBC’s first quarter net profit climbed 12% year-on-year. The sale by Goldman, despite repeated assurances over the past few years that it was a long-term investor in ICBC, was expected to affect confidence in the shares of Chinese banks, analysts said.

The Chinese government said it will unveil a plan this year to make the currency fully convertible under the capital account and establish a comprehensive system for individuals’ outbound investments, allowing mainlanders to directly buy Hong Kong stocks. While the yuan is already convertible under the current account – covering trade – the capital account, which covers portfolio investment and borrowing, is closely controlled. “The statement shows the leadership has attached great importance to the convertibility issue and the operational plan will give the all-clear for liberalization,” said Li Huiyong, Chief Economist with Shenyin Wanguo Securities. “Global and domestic economic conditions have pushed the leaders to accelerate the pace for reforms.” In 2007, Beijing first announced its ambition to internationalize the yuan and promote its use worldwide in step with China’s economic rise. Beijing opened the current account in 1996, allowing companies to exchange foreign currencies for trade deals. Meanwhile, the State Administration of Foreign Exchange (SAFE) has stepped in to restrain corporate borrowing in U.S. dollars and crack down on hot money inflows under the guise of trade as the yuan’s appreciation gains momentum. After a 1% rise of the yuan against the dollar so far this year, many companies have borrowed in U.S. dollars, converted them into yuan and bought into yuan-denominated assets, waiting for the Chinese currency to strengthen further. China’s capital and financial account surplus ballooned from USD20 billion in the last quarter of 2012 to USD102 billion in the first quarter of this year, highlighting heavy capital inflows. In the first two months of this year China’s exports surged 23.6% year-on-year, much faster than the 11.7% economists expected. Many exporters inflated bills to help channel in foreign exchange to await the yuan’s appreciation, media claimed. About 80% of the capital-account items listed by the International Monetary Fund (IMF) are already convertible or partially convertible in China, according to Yi Gang, Deputy Governor of the People’s Bank of China (PBOC).

Chinese banks will face asset quality challenges this year as bad loans continued to rise in the first quarter after the big five lenders wrote off CNY25 billion of sour loans last year, Deloitte Touche Tohmatsu said. Bad loans at the 16 listed lenders on the Chinese mainland totaled CNY424 billion by the end of March, CNY21.9 billion more than at the end of last year, according to the lenders’ financial results for the first three months. The bad loan ratio stayed below 1% on average. “Chinese lenders have low non-performing loan ratios compared to their foreign peers because credit assets expanded at a faster pace than the rise in bad loans, which casts a ‘dilution effect’ (on the bad assets),” said Deloitte. China’s top-five lenders wrote off CNY25 billion of bad loans last year, a surge of 110% from a year earlier, according to Deloitte. The bad loans at the big five banks totaled CNY340.8 billion by the end of March, or 80.4% of all listed lenders. The combined overdue loans of the top 10 listed Chinese commercial banks rose 29% from a year earlier to CNY487 billion at the end of 2012, according to PricewaterhouseCoopers (PwC). The average overdue loan ratio climbed to 1.21% from 1.06%, indicating the possibility of a further increase in non-performing loans in the future. The PwC report also noted the rapid rise in the wealth management business. Last year, 31,673 wealth management products worth CNY7.6 trillion were issued by the banks, up 68% from 2011.