China’s banks emerge most profitable, but for how long?
July 1, 2010

As the manufacturing and services sectors look East, banks in emerging economies too are witnessing a shift in power from West to East. According to Banker Magazine’s ranking of the world’s banks by profits, assets, losses and the like, two Chinese banks top the list of the 20 biggest banks. Agricultural Bank of China, which is about to embark on the world’s biggest IPO, ranked at 14 does not quite make the cut. Among the big losers of 2009, European banks, which bought so much toxic securitized sludge, are well represented.

While three Chinese banks made it on the top 10 list of most profitable banks experts remain skeptical of what they might be hiding on their balance sheets. While the current situation appears sanguine, analysts fear large non-performing loans could come crawling out of the woodwork. Over the last year, large and mid-sized Chinese banks have doled out bundles of money at low-interest rates, often gratis in order to keep the domestic economy chugging along and consumers on a spending spree.  Experts fear the day when bad loans and uncollateralised lending to provincial governments are exposed. They fear that that’s when China’s bubble could burst leading to a crash in the stock market, property market and economy.

But so far, so good,  while senior bankers in Beijing and Shanghai admit that the high growth rates of 2009 cannot be sustained in the long-term without causing side-effects such as inflation, they are also working at reigning in risks and controlling corporate governance. Reforms in branch networks and management structures are continuing apace and new products are being rolled out across the board. Capital ratios are high and the intention is to keep them that way. Chinese banks are now also focusing on credit quality. Fee income is rising. Corporate and social responsibility as well as sustainable development are both big themes in China, and there are strategic moves to internationalize. On the face of it, there is no stopping the onward march and modernisation of the Chinese banks.

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