Bank of China 2

Published by BUSINESS MONITOR INTERNATIONAL LTD
China Commercial Banking Report Q2 2009

Including 5-year industry forecasts
ISSN: 1747-8537
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2009 Business Monitor International. All rights reserved. All information, analysis, forecasts and data provided by Business Monitor International Ltd is for the exclusive use of subscribing persons or organisations (including those using the service on a trial basis). All such content is copyrighted in the name of Business Monitor International, and as such no part of this content may be reproduced, repackaged, copied or redistributed without the express consent of Business Monitor International Ltd. All content, including forecasts, analysis and opinion, has been based on information and sources believed to be accurate and reliable at the time of publishing. Business Monitor International Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information provided, and accepts no liability whatsoever for any loss or damage resulting from opinion, errors, inaccuracies or omissions affecting any part of the content.

Including 5-year industry forecasts by BMI
Part of BMIs Industry Report & Forecasts Series

Published by: Business Monitor International Publication date: June 2009
Business Monitor International Mermaid House, 2 Puddle Dock, London, EC4V 3DS, UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com
2009 Business Monitor International. All rights reserved. All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher.
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CONTENTS
Executive Summary .........................................................................................................................................5
Table: Latest Actual Data (CNYbn)....................................................................................................................................................................... 5 Table: Latest Actual Data (US$bn)........................................................................................................................................................................ 5 Table: Latest Key Indicators At December 2008 ................................................................................................................................................... 5 Table: Annual Growth Rate Projections, 2009-2013 (%) ...................................................................................................................................... 6 Table: Ranking Out Of 46 Countries Reviewed In 2009 ........................................................................................................................................ 6 Table: Projected Levels, 2008-2013 (CNYbn) ....................................................................................................................................................... 6 Table: Projected Levels (US$bn) ........................................................................................................................................................................... 7
Overview Commercial Banking Sector Of China .......................................................................................8 SWOT Analysis...............................................................................................................................................10

China Commercial Banking SWOT...................................................................................................................................................................... 10 China Political SWOT ......................................................................................................................................................................................... 11 China Economic SWOT ....................................................................................................................................................................................... 12 China Business Environment SWOT ................................................................................................................................................................... 13
Commercial Banking Business Environment Rating .................................................................................14

Table: Chinas Commercial Banking Business Environment Ratings.................................................................................................................. 14 Commercial Banking Business Environment Rating Analysis.............................................................................................................................. 14 Commercial Banking Business Environment Rating Methodology ...................................................................................................................... 16 Table: Asia Commercial Banking Business Environment Ratings ....................................................................................................................... 18
Global Outlook................................................................................................................................................19 Regional Outlook............................................................................................................................................21

Table: Comparison Of Loan/Deposit, Loan/Asset And Loan/GDP Ratios, End 2008.......................................................................................... 21 Table: Anticipated Developments In 2009 ........................................................................................................................................................... 22 Table: Comparison Of Total Assets, Client Loans And Client Deposits, 2007 And 2008 (US$bn) ...................................................................... 23 Table: Comparison Of Per Capita Deposits, End 2008 (US$)............................................................................................................................. 24 Table: Interbank Rates And Bond Yields ............................................................................................................................................................. 25
Commercial Bank Sector Outlook ................................................................................................................26

Macroeconomic Activity ...................................................................................................................................................................................... 26 Table: China Economic Activity, 2006-2013 .................................................................................................................................................... 29 Fiscal Policy........................................................................................................................................................................................................ 29 Exchange Rate/ Monetary Policy......................................................................................................................................................................... 31
Market Structure.............................................................................................................................................34
Protagonists......................................................................................................................................................................................................... 34 Table: Protagonists In Chinas Commercial Banking Sector .............................................................................................................................. 34 Definition Of The Commercial Banking Universe................................................................................................................................................ 35 List Of Banks ....................................................................................................................................................................................................... 35 Table: Policy Banks and "Big Four" State-Owned Commercial Banks ............................................................................................................... 35 Table: Joint Stock Commercial Banks, City Commercial Banks and Rural Commercial Banks .......................................................................... 35 Table: Locally Registered Foreign Banks............................................................................................................................................................ 36
Company Profiles...........................................................................................................................................37
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China Development Bank .................................................................................................................................................................................... 37 Key Statistics for China Development Bank (CNYmn)......................................................................................................................................... 37 Export-Import Bank of China .............................................................................................................................................................................. 38 Key Statistics for Export-Import Bank of China (CNYmn)................................................................................................................................... 38 Agricultural Development Bank of China ............................................................................................................................................................ 39 Key Statistics for Agricultural Development Bank of China (CNYmn)................................................................................................................. 39 ICBC.................................................................................................................................................................................................................... 40 Agricultural Bank of China.................................................................................................................................................................................. 41 Key Statistics for Agricultural Bank of China (CNYmn) ...................................................................................................................................... 41 Bank of China ...................................................................................................................................................................................................... 42 Key Statistics for Bank of China (CNYmn)........................................................................................................................................................... 42 China Construction Bank..................................................................................................................................................................................... 43 Key Statistics for China Construction Bank (CNYmn) ......................................................................................................................................... 43
Methodology ...................................................................................................................................................44
Basis Of Projections ............................................................................................................................................................................................ 45 Commercial Bank Business Environment Rating................................................................................................................................................. 45 Table: Commercial Banking Business Environment Indicators And Rationale.................................................................................................... 47 Table: Weighting Of Indicators ........................................................................................................................................................................... 48
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Executive Summary
Table: Latest Actual Data (CNYbn)
Date December 2006 December 2007 Change, %
Total assets 44,130.3 54,120.3 23
Client loans 23,828.0 27,774.7 17
Bond portfolio 5,356.8 7,447.6 39
Other 14,945.5 18,898.0 26
Liabilities and capital 44,130.3 54,120.3 23
Capital 1,310.1 1,842.5 41
Client deposits 34,801.6 40,105.1 15
Other 14,945.5 18,898.0 26
Source: BMI, Central banks, Regulators
Table: Latest Actual Data (US$bn)
Date December 2007 December 2008 Change, %
Total assets 5,654.5 2,385.2 -58
Client loans 3,053.1 1,224.1 -60
Bond portfolio 686.4 328.2 -52
Other 1,915.0 832.9 -57
Liabilities and capital 5,654.5 2,385.2 -58
Capital 167.9 81.2 -52
Client deposits 4,459.2 1,767.5 -60
Other 1,915.0 832.9 -57
Table: Latest Key Indicators At December 2008
Loan/deposit ratio 66.8% Rising
Loan/asset ratio 49.8% Falling
Loan/GDP ratio 112.6% Falling
GDP per capita, US$ 2,885
Deposits per capita, US$ 1,323
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Table: Annual Growth Rate Projections, 2009-2013 (%)
Assets Annual Growth Rate CAGR Ranking 6 7 21
Loans 8 9 18
Deposits 10 9 20
Table: Ranking Out Of 46 Countries Reviewed In 2009
Loan/deposit ratio 34 Local currency asset growth 3
Loan/asset ratio 27 Local currency loan growth 2
Loan/GDP ratio 6 Local currency deposit growth 8
Table: Projected Levels, 2008-2013 (CNYbn)
December 2008 Total assets Client loans Client deposits 67,650.38 34,996.06 48,126.17
December 2009f 75,768.42 40,245.47 52,938.78
December 2010f 83,345.26 45,074.93 57,173.88
December 2011f 86,679.07 47,328.68 61,747.80
December 2012f 90,146.24 49,695.11 66,687.62
December 2013f 95,555.01 53,670.72 73,356.38
f = BMI forecast. Source: BMI, Central banks, Regulators
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Table: Projected Levels (US$bn)
December 2008 Total assets Client loans Client deposits 9,901.99 5,122.37 7,044.23
December 2009f 10,980.93 5,832.68 7,672.29
December 2010f 12,628.07 6,829.53 8,662.71
December 2011f 13,758.58 7,512.49 9,801.24
December 2012f 14,778.07 8,146.74 10,932.40
December 2013f 16,195.76 9,096.73 12,433.28
f = BMI forecast. Source: BMI, Central banks, Regulators
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Overview Commercial Banking Sector Of China

In Q209 BMI is making a number of changes which we hope will substantially improve the impact and value of our reports on the commercial banking sectors of various countries.
Since we introduced the commercial banking reports in mid-2004, we have sought to generate insights by collecting and combining information from a number of sources. We have collated data pertinent to entire commercial banking sectors that has been published by central banks, regulators and/or trade associations, as well as basic information concerning individual market participants. We have also considered BMIs current views on the economic outlook for the country in question. Many aspects have been and continue to be brought together in a systematic way through our proprietary Commercial Bank Business Environment Ratings (CBBER), which facilitate cross-country comparisons. The key changes in Q209 and what they mean for readers are as follows: Comprehensively Upgraded Database We have now incorporated as much data as we can for 2008. We have also considered the size of total bank assets, client loans, capital and client deposits in relation to the overall economy, as well as in absolute terms. We have calculated figures in local currency terms, US dollar terms and euro terms. We have extended our forecast horizon out to 2013. We have also improved the coverage of historical data in this report. Our complete dataset is available for download from BMIs website. Concise Analysis Of The Sector The structural strengths, weaknesses, opportunities and threats (SWOT) of commercial banking do not usually change much from quarter-to-quarter. Nevertheless, they need to be explained in some clarity even if only to provide a context for the rest of the report. We have re-examined and (in most cases) substantially extended the SWOT analysis. Much more than previously, the SWOT analysis represents an at a glance overview of what really matters for the overall commercial banking sector. Broader And Deeper International Context For a very long time before the global financial crisis reached a critical phase in mid-September 2008, commercial banking was inherently international in nature. In other words, it was a rare commercial banking sector indeed that was totally isolated from cross-border influences. However, as a result of the crisis, international influences have become even more important than before. In response to this, we have extended the range of countries whose commercial banking sectors we consider each quarter by 11 Bahrain, Jordan, Kazakhstan, Kenya, Kuwait, Oman, Pakistan, Qatar, the UK, the US and Vietnam are now analysed. Our reports also include new Global and Regional Outlooks.
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Deeper Economic Analysis We include more extensive coverage of BMIs views of the economic outlook for each country. We also include a section that deals with monetary and exchange rate policy. Clearer Identification Of Protagonists We now look more closely at the mandates of central banks, regulators and trade associations. Clearer Definition Of The Commercial Banking Universe We now include a specific definition of the universe of commercial banks in each country. In most cases, we also include a comprehensive list of identifiable institutions. (The main exception to this is the US, where we confine the list to the 50 largest banks in terms of deposits.) By defining the commercial banking universe, and listing a much greater number of institutions that are active in each country, we hope that our reports are of much greater value to other researchers. New Company Profiles In Q209, we have sought to include 10 brief profiles of leading banks in each of the countries that we cover. We will add additional profiles in coming months. Wherever possible, we have tried to quantify the total assets, client loans, bond portfolio, client deposits and capital of each institution. Eventually, it should be possible for us to profile most or indeed all of the banks that are active in the countries that we follow. Naturally, we will continue to improve the structure and content of the reports over time. The extended Commercial Banking SWOT Analysis below summarises what we see as the key issues in this report.
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SWOT Analysis
China Commercial Banking SWOT
Strengths
Chinas economy grew by a 14-year high of 13% in 2007, making it the fastest-growing major economy in the world. Growth fell to 9% in 2008 and BMI is forecasting growth of 5.6% in 2009 Chinas economic policy-makers have proved capable, and will continue their methodical and professional approach to reforming the economy. In terms of the banking market structure elements of the limits to potential returns, China rates more highly than any other country in the Asia Pacific region China has a reasonably high CBBER relative to the other countries in the region surveyed by BMI. Only Australia, Hong Kong, Japan, Singapore, South Korea and Taiwan score more highly Current levels of investment could lead to over-capacity in the future, which might in turn lead to the re-emergence of deflationary pressures As the worlds largest exporter, China is experiencing pressure to raise its safety levels in order to reassure consumers In terms of the banking market structure elements of the risks to the realisation of returns, Chinas score of 58.3 ranks it lower than most other countries surveyed in the Asia Pacific region The latest data shows that Chinas economic growth is becoming broader based, with consumption and net-exports contributing more to growth, as fixed-asset investment slows As Chinas bilateral trade surplus with the US continues to increase, the country is coming under strong pressure from Washington for a further revaluation of the exchange rate

Weaknesses

Opportunities
Threats
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China Political SWOT
Strengths

The Chinese Communist Party, which has governed for the past 60 years, remains secure in its position as the sole political party in China Chinas expanding economy is gradually giving it greater clout in international affairs, and this will allow it to build politically important ties, especially with the developing world As with any other dictatorship, Chinas political system is inherently unstable and unable to respond to the wider changes taking place in Chinese society. Provincial governments often fail to enforce central government directives Although bilateral ties have warmed since the election of Ma Ying-jeou as president in March 2008, Chinas relationship with Taiwan remains problematic, with Beijing refusing to rule out the threat of force in the event of a declaration of independence by Taiwan China is actively expanding its political and economic ties with major emerging markets, such as Latin America, Africa, and the Middle East A new generation of leaders (the so-called fifth generation) is being prepared to take power in 2012-2013. This should ensure the continuation of reform and modernisation Growing corruption, widening inequalities, increasing rural poverty, and environmental degradation have led to an increase in social unrest in recent years. Rising joblessness as a result of the global recession could lead to even greater unrest Chinas Communist Party is facing increasing factional rifts based on ideology and regionalism. While greater political debate would be welcomed by many, internal regime schisms could prove politically destabilising China faces major challenges in ensuring that separatism in ethnically distinct regions such as Tibet and Xinjiang is kept at bay
Weaknesses
Opportunities

Threats
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China Economic SWOT
Strengths

China is the fastest-growing major economy in the world, and this has lifted hundreds of millions of people out of poverty over the past generation China has a massive trade surplus, and its US$1.9trn of forex reserves serve as a major cushion against external shocks Chinas economic policymakers are committed to continuing their gradual reform of the economy Chinas economy has been growing too fast for its own good. This has led to major imbalances, and environmental degradation Chinas dependency on exports to boost growth has made it vulnerable to the global recession. Private consumption remains weak, at less than 40% of GDP The close relations between provincial leaders and local businesses are fostering corruption, and are making it harder for the central government to enforce its policies Chinas economic growth is slowly becoming broader, with domestic consumption likely to rise in importance vis-a-vis exports, thanks to a middle class of 200mn-300mn people Chinas ongoing urbanisation will be a major driver of growth, and new cities will emerge in the less-developed inland provinces. The UN forecasts Chinas urban population rising from 40% in 2005 to 73% in 2050, a gain of 500mn people As China moves up the value chain, it will develop its own global brand name companies, fostering innovation and growth There are fears that the global recession of 2008-10 will mean an end to Chinas double-digit growth rate Despite a halt to the appreciation of the yuan currency, the recession is leading to job losses in Chinas export sector, and thus increasing social instability Relatively high food price inflation could become structural, as farmland is lost to industry or pollution, and farmers migrate to cities
Weaknesses

Opportunities
Threats

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China Business Environment SWOT
Strengths

China is continuing to open up various sectors of its economy to foreign investment With its vast supply of cheap labour, the country remains the top destination for foreign direct investment (FDI) in the developing world Foreign companies continue to complain about the poor protection of intellectual property in China Chinese corporate governance is weak and non-transparent by Western standards. There is a considerable risk for foreign companies in choosing the right local partner Chinas ongoing urbanisation and infrastructure drive will provide major opportunities for foreign investment in the landlocked provinces, and the transfer of skills and know-how The Chinese government is giving more protection and encouragement to the private sector, which is now the most dynamic in the economy and accounts for most of the countrys job growth Chinas government will block attempts by foreign firms to takeover assets of national importance China is experiencing rising labour costs, prompting some investors to turn to cheaper destinations such as Vietnam
Weaknesses

Opportunities
Threats

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Commercial Banking Business Environment Rating

Table: Chinas Commercial Banking Business Environment Ratings
Limits of potential returns Total assets, end 2008 (est.) Growth in total assets, 2008-2013 Growth in client loans, 2008-2013 Per-capita GDP, 2008 Tax GDP volatility Financial infrastructure Risks to realisation of returns Regulatory framework and development Regulatory framework and competitive landscape Moodys rating for local currency deposits Long-term financial risk Long-term external risk Long-term policy continuity Legal framework Bureaucracy Commercial banking business environment rating
Data US$9902mn US$6,293.8mn US$3,974.4mn US$2,886
Score, out of 10 9 9 9 4 1 8 7
Ratings score, out of 100 Market Structure 90
Country Structure 50
8 5 4.0 4 7 10 9 4 4
Market Risk 57
Country Risk 68
71
Source: BMI
Commercial Banking Business Environment Rating Analysis

In our commercial banking business environment ratings universe of 45 mainly emerging market states, it is little surprise that the US and UK come in first and second place respectively with scores of 88.0 and 82.0. Of crucial importance to both scores is a very high ranking in the crucial Limits of potential returns, Market structure sub-category, which accounts for 42% of the overall score. The two countries are ranked first and second in this category as well. This sub-category captures the size of the sector, and the potential for assets and loans to grow in US dollar terms. While both systems have been buffeted by the global credit crunch and will not post stellar growth numbers in percentage terms for the foreseeable future, the sheer size of the US and UKs financial systems means that there is massive potential for deposits, assets and client loans to rise. In addition, the generally solid institutional framework which
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looks set to be augmented with new post-credit crunch regulations will continue to provide a firm basis for the sector. Asia Rising Beyond the Anglo-Saxon economies, the highest ranking economies are in Asia. South Korea (76.7), Singapore (72.9) and Taiwan (72.6) occupy spots three to five. There are, though, countervailing trends in place in these three market leaders. While Singapore leads the world globally in the Risks to realisation of returns, Country risk sub-category, with a score of 84.0, South Korea and Taiwan both have a score of 64.0, ranking them at 17. This is a function of Singapores high score on key elements of BMIs economic, political and business environment risk ratings, which measure the risks to policy continuity. In contrast, the small size of the Singaporean economy and banking sector is a major factor limiting the potential for expansion, especially in a world of lower liquidity and risk appetite. South Korea and Taiwan, however, have large domestic economies to provide the deposit base necessary to fund credit growth. Elsewhere in Asia, we note that China (overall score 70.8) ranks seventh overall. As the worlds third biggest economy and still an emerging state at that it is little surprise that the scope for asset growth in China is huge. This has allowed the country to be ranked fourth in the Limits of potential returns category (74.0), and post the highest Limits of potential returns, Market structure sub-category score, at 90.0. What is preventing China from rising any higher is its poor performance in the Limits of potential returns, Country structure sub-category, at 50.0 (37th), and the Risk to realisation of returns category, at 63.4 (23rd). Of particular concern to BMI is the potential for a systemic collapse of the local system, where much lending is still state directed and risk management is still embryonic. In addition, despite the size of the whole economy, per capita GDP still remains low. We forecast US$3,024 for 2009, with significant income inequalities. This severely limits the ability of financial institutions to sell premium products in the local markets, and also means that average deposit levels are still very low. Emerging Europe, Limited Opportunities The emerging European states are posting surprisingly mediocre ratings outturns. We have outlined at length in recent months the potential for a systemic crisis in the region transmitted through the major Western European banks removing credit and capital from Central and Eastern Europe. These risks are exacerbated by the deep recessions we see in the Baltics, Bulgaria, Russia and Turkey, and the risks of further currency crises that could create even greater economic dislocations, as the massive economic asymmetries that have built up in the region unwind. When taken in tandem with the relatively small size of the local economies and the rapid banking sector expansion seen in recent years, it is little surprise that the highest rated emerging European state is regional heavyweight Russia, at 67.1 (14th globally), and that the top new EU member is the Czech Republic, at 64.5 (18th). Coming close to the bottom of both the regional and global peers groups are Latvia (39.0, 43rd) and Ukraine (43.0, 40th), which have both been forced to tap the IMF and EU for emergency funds.
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MENA Below Par Five of the nine countries in the Middle East and North Africa (MENA) region are in the bottom third of our 45 rated states, with only the UAE truly shining (71.0, 6th). This is a result of the massive decline in oil prices, which has resulted in a slump in liquidity in both oil producing states and those which have benefited from an influx of hydrocarbon revenues seeking higher returns. Of particular concern is that while some progress has been made on putting the regions financial infrastructure on a more sustainable footing in recent years, it is still far too dependant upon oil revenues, and there are few drivers of either economic or commercial banking growth outside of the natural resources sector. Indeed, it is particularly worrying that the not one MENA state has broken in to the top 10 states in the Limits of total returns, Market structure sub-category. The best performers are the UAE and Iran (joint 13th place in this category), and even with the growth of Islamic banking products, the boom years are over. We expect much more moderate growth in the financial space over the forecast period, to 2013. Opportunities In Africa While Africa remains one of the most under-banked regions in the world and hence one of the most insulated from the global credit crunch the commercial banking business environment ratings still reflect the major problems in operating in even the regions largest economies. Even with South Africas overall 70.4 rating score putting it in 8th place globally, this masks its stellar performance on the limits of total return (scoring 74.0, ranked 4th), and its poor risks to potential return performance (62.1, 24th). The countrys main weaknesses, in common with Kenya and Nigeria are bureaucracy, external economic risk, and financial market risk, all of which deter potential investors from engaging more forcefully in the local market. Diffuse Latin Performance Again, in Latin America, the ratings do not tell one particular story, with a widely diffuse regional picture developing. Perhaps the most interesting story is among the worst performers, which include Argentina (49.0, 37th), Colombia (43.7, 40th) and Venezuela (36.0, 45th). All three economies face difficult times over the coming years, having been fiscally imprudent. The latter two (especially Venezuela) have benefited significantly from the oil boom, which has now come to an end. There is little to be optimistic about in any part of the ratings for these countries, and we anticipate a much weaker performance than in Brazil (68.9, 12th), Chile (66.6, 16th) or even Mexico (65.5, 18th). Of particular note is Brazils crucial Limits of potential return, Market structure sub-category rating of 80.0 (4th globally) and Chiles reasonably solid 80.0 Risks to realisation of returns, Market structure rank of 8th.
Commercial Banking Business Environment Rating Methodology

Since Q108, we have described numerically the banking business environment for each of the countries surveyed by BMI. We do this through our Commercial Banking Business Environment Rating (CBBER), a measure that ensures we capture the latest quantitative information available. It also ensures consistency
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across all countries and between the inputs to the CBBER and the Insurance Business Environment Rating, which is likewise now a feature of our insurance reports. Like the Business Environment Ratings calculated by BMI for all the other industries on which it reports, the CBBER takes into account the limits of potential returns and the risks to the realisation of those returns. It is weighted 70% to the former and 30% to the latter. The evaluation of the limits of potential returns includes market elements that are specific to the banking industry of the country in question and elements that relate to that country in general. Within the 70% of the CBBER that takes into account the limits of potential returns, the market elements have a 60% weighting and the country elements have a 40% weighting. The evaluation of the risks to the achievement of returns also includes banking elements and country elements (specifically, BMIs assessment of longterm country risk). However, within the 30% of the CBBER that take into account the risks, these elements are weighted 40% and 60%, respectively. Further details on how we calculate the CBBER are provided at the end of this report. In general, though, three aspects need to be borne in mind in interpreting the CBBERs. The first is that the market elements of the limits of potential returns are by far the most heavily weighted of the four elements. They account for 60% of 70% (or 42%) of the overall CBBER. Second, if the market elements are significantly higher than the country elements of the limits of potential returns, it usually implies that the banking sector is (very) large and/or developed relative to the general wealth, stability and financial infrastructure in the country. Conversely, if the market elements are significantly lower than the country elements, it usually means that the banking sector is small and/or underdeveloped relative to the general wealth, stability and financial infrastructure in the country. Third, within the risks to the realisation of potential returns, the market elements (i.e. how regulations affect the development of the sector, how regulations affect competition within it, and Moodys Investor Services ratings for local currency deposits) can be markedly different from BMIs long-term risk rating.
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Table: Asia Commercial Banking Business Environment Ratings
Limits of Potential Returns Market Structure South Korea Singapore Taiwan China Malaysia Hong Kong Thailand Indonesia India Japan Vietnam Philippines Pakistan 76.7 53.3 70.0 90.0 63.3 50.0 63.3 66.7 76.7 30.0 53.3 46.7 46.7 Country Structure 85.0 85.0 77.5 50.0 77.5 87.5 67.5 60.0 40.0 77.5 47.5 47.5 47.5
Risks to Potential Returns Market Risks 76.7 96.7 83.3 56.7 76.7 70.0 80.0 76.7 53.3 63.3 40.0 56.7 56.7 Country Risks 64.0 84.0 64.0 68.0 70.0 82.0 64.0 48.0 60.0 80.0 50.0 52.0 42.0 Rating 76.7 72.9 72.6 70.8 70.1 68.7 66.6 62.6 60.6 56.3 49.5 49.1 47.3 Ranking 1 2 3 4 5 6 7 8 9 10 11 12 13
Scores out of 100, with 100 the highest. Source: BMI
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Global Outlook
BMIs view on the future of the global banking sector is evolving quickly, alongside the panoply of rescue plans being introduced by national governments and central banks. As the global financial crisis continues to play out, it is not inconceivable that many major global banks are technically insolvent, with impaired assets weighing heavily on their balance sheets. However, with the support of official entities, including central banks and national treasuries, it is more likely than not that the major banks that have survived the crisis so far will make it in the end. While we would have thought it likely a few months ago that many major banks would be nationalised, we are now increasingly convinced that governments have absolutely no desire completely to wipe out shareholders and subsume megabanks. This is as much about political expediency few leaders want to be associated with government takeover of national icons when it can be avoided as it is about ensuring that the banking sector has some scope to get back on its feet in a few years by banks remaining listed on the stock market and retaining a private-sector influence. Short of nationalisation, we believe that governments and central banks will do whatever it takes to keep banks afloat, whether via capital injections, troubled asset relief plans or debt guarantees. Having avoided the total meltdown of the global financial system, monetary and financial authorities will attempt to impose new regulations in order to stave off future crises. The upshot is that deleveraging and risk aversion is likely to be more of a structural than a cyclical phenomenon, and the free-wheeling lending practices of the past few years are going to be replaced by tight regulation and greater transparency. This means that for most banking sectors worldwide, loan-to-deposit and loan-to-asset ratios are likely to decline, with lower loan growth over the next few years. These trends are reflected in our forecasts, particularly for the more mature national banking sectors. So for the surviving banks, and even for bystanders, there are obviously significant concerns over what form global banking will take. There have been calls from the public and from national authorities for increased oversight and regulation for the financial sector as a result of the gravity of the current economic downturn and the perception that it originated from irresponsible lending practices. Several questions over the future regulation of the banking sector have yet to be answered. Transparency Financial institutions have been accused of a lack of transparency, which has exacerbated the lack of trust that investors have in banks, in turn making it difficult to raise capital. This is especially the case as some assets, including derivative instruments and illiquid toxic securities, are extremely difficult to value fairly, and it is unclear who is holding what. Bank Capital How much capital is enough? Pro-cyclicality has been at the heart of the problem. When times are good,
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and asset prices increase, lending is expanded, and capital looks adequate, but the opposite occurs when times are bad, creating a self-perpetuating downward spiral. Off-balance sheet lending in special purpose vehicles has made capital adequacy ratios more difficult to gauge. While a full reworking of the Basel II criteria appears unlikely at this stage, there may well be a move toward greater transparency, closer monitoring of risky positions, and regulatory measures against the pro-cyclical nature of capital positions. Compensation Banking compensation will come under increasing scrutiny, particularly for institutions that accept public financing. Here, regulators and bank boardrooms alike will have to strike a delicate balance between appropriate compensation for long-term (versus short-term) performance on the one hand, and placing artificial limits on compensation that would deter skilled workers from entering the sector on the other. Accounting Practices The jury is still out on the mark-to-market standard of accounting for assets on banks balance sheets. Some banks have complained that mark-to-market puts too much pressure on their capital bases at precisely the time when capital is difficult to raise. But the crucial counter-argument is that banks would have reduced their risk exposure in a more responsible manner if they had accurately and assiduously marked-to-market in the first place and consistently throughout the economic cycle, rather than waiting for markets to sour. Global Policing While it is clear that domestic regulators have fallen asleep at the switch, we believe regulation will also take more of a global guise in the future, as banks international activities increase. Basel II is a good start for standardising capital requirements, but given the increasing levels of country-to-country lending, there is likely to be a call for a stronger and more effective regulatory body to corral the activities of large international financial institutions. This may be difficult to achieve, however, as it would be hard to imagine major banks in developing markets accepting the same standards as in, say, Western Europe. Despite these potential developments, there remains considerable promise for the global banking sector. Although they may now be subject to increased scrutiny and regulation, most commercial banks and depository institutions were not involved in many of the worst practices that brought the banking world into the current crisis. Many banks that dabbled in exotic products will gravitate back toward bread-andbutter lending practices and maintaining stronger deposit bases. And we believe that emerging markets retain considerable promise, particularly where they have underdeveloped banking sectors and large populations with middle-class potential. This is reflected in our forecasts for continued deposit and loan growth for several emerging states banking sectors. As such, the global banking sector will almost certainly emerge from the current crisis in a different form, but with continued growth potential over the long term.
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Regional Outlook
Table: Comparison Of Loan/Deposit, Loan/Asset And Loan/GDP Ratios, End 2008
Loan/deposit ratio, % China Hong Kong India Indonesia Japan Malaysia Pakistan Philippines Singapore South Korea Taiwan Thailand Vietnam United States 72.7 54.2 81.2 74.6 77.5 76.8 73.9 69.2 78.3 132.2 85.6 96.6 105.1 87.2
Rank 39 45 31 37 34 35 38 40 33 8 28 19 15 27
Trend Rising Rising Falling Rising Rising Falling Rising Falling Rising Falling Rising Rising Rising Falling
Loan/ asset ratio, % 51.7 30.6 61.1 59.4 53.2 56.4 31.8 50.0 40.7 70.8 64.0 67.7 78.7 56.9
Rank 32 44 16 18 28 24 43 33 41 7 13 10 3 23
Trend Rising Rising Falling Rising Falling Rising Rising Rising Rising Rising Rising Falling Rising Falling
Loan/ GDP ratio, % 131.8 188.7 59.2 28.2 85.3 102.0 26.9 33.9 106.4 117.5 147.8 73.3 93.9 55.2
Rank 4 2 25 39 14 7 41 37 6 5 3 18 11 26
Trend Rising Rising Rising Rising Rising Rising Falling Falling Rising Rising Rising Rising Rising Falling
Source: Central banks, regulators, BMI
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Table: Anticipated Developments In 2009
Loan/deposit ratio, % China Hong Kong India Indonesia Japan Malaysia Pakistan Philippines Singapore South Korea Taiwan Thailand Vietnam United States 76.0 49.1 79.1 73.3 73.6 73.1 73.9 66.5 75.5 123.8 84.3 95.7 102.4 81.3
Trend Rising Falling Falling Rising Falling Falling Rising Falling Rising Falling Falling Rising Rising Falling
Loan growth, US$bn 710.3 -38.1 -64.5 -0.7 65.4 -14.1 0.8 -1.6 -29.7 -65.7 -20.3 -12.1 1.7 -236.3
Deposit growth, US$bn 628.1 3.6 -62.3 2.0 413.1 -5.7 1.1 0.6 -30.4 -6.7 -14.3 -10.6 3.7 361.4
Residual, US$bn 82.2 -41.7 -2.2 -2.7 -347.7 -8.4 -0.3 -2.2 0.7 -59.0 -6.0 -1.5 -2.0 -597.7
NB: Incorporates estimated economic data and projected banking data. Source: Central banks, regulators, BMI
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Table: Comparison Of Total Assets, Client Loans And Client Deposits, 2007 And 2008 (US$bn)
2007 Total Assets China Hong Kong India Indonesia Japan Malaysia Pakistan Philippines Singapore South Korea Taiwan Thailand Vietnam United States 7,416.7 1,327.3 789.0 203.8 6,862.5 346.7 142.1 108.4 404.4 1,506.7 871.3 268.0 88.0 13,034.1 Client Loans 3,806.3 379.8 484.9 106.7 3,690.4 191.2 38.6 53.2 161.9 1,057.0 552.6 181.7 66.7 7,906.5 Client Deposits 5,496.0 752.7 590.4 160.9 4,885.2 248.4 54.8 76.9 218.6 799.3 652.0 192.9 68.7 8,415.3 Total Assets 9,902.0 1,377.0 970.0 203.1 8,966.8 369.6 112.0 102.1 467.5 1,273.5 870.9 289.5 100.8 13,853.2 Client Loans 5,122.4 421.6 592.8 120.5 4,773.5 208.3 35.6 51.0 190.3 901.2 557.8 195.9 79.4 7,875.9
2008 Client Deposits 7,044.2 777.9 730.2 161.6 6,160.0 271.4 48.2 73.8 243.0 681.5 651.6 202.7 75.5 9,035.7
Source: Central banks, regulators, BMI
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Table: Comparison Of Per Capita Deposits, End 2008 (US$)
GDP per capita China Hong Kong India Indonesia Japan Malaysia Pakistan Philippines Singapore South Korea Taiwan Thailand Vietnam United States 2,886 31,889 854 1,821 43,878 7,555 823 1,677 36,947 15,877 16,384 4,158 975 46,941
Client deposits 5,230.3 111,017.9 622.9 689.2 48,288.2 10,041.7 299.4 822.9 50,215.4 14,112.3 28,286.9 3,152.3 870.4 29,700.3
Rich 20% client deposits 20,921 444,072 2,492 2,757 193,153 40,167 1,198 3,292 200,861 56,449 113,148 12,609 3,482 118,801
Poor 80% client deposits 1,308 27,754 156 172 12,072 2,510 75 206 12,554 3,528 7,072 788 218 7,425
Source: Central banks, Regulators, BMI
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Table: Interbank Rates And Bond Yields
Current account, % of GDP, 2009f China Hong Kong India Indonesia Japan Malaysia Pakistan Philippines Singapore South Korea Taiwan Thailand Vietnam United States 11.9 9.01 -3.21 5.47 3.81 11.9 -8.4 0.06 15.04 -0.84 6.6 0.2 -12.14 -4.53
Budget balance % of GDP, 2009f 2.9 -6.1 -1.3 -3.4 -4.7 -2.1 2.1 -1.1 -0.9 2.9 -2.3 -1.7 -7.2 -3.6
Three-month interbank rate, 2008 (%) 1.7 1.18 9.1 12.01 0.68 3.15 14 4.28 0.2 1.73 0.1 2.35 9.5 1.5
Three-month interbank rate, early 2009 (%) 1.7 0.85 6.7 9.3 0.52 2.1 11 4.2 0.25 0.3 9.5 1.42 7 1.5
NB: Incorporates actual financial markets data, estimated economic data and projected banking data. f = BMI forecast. na = not available. Source: Central banks, Regulators, BMI
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Commercial Bank Sector Outlook

With the data available to us for China (which starts from 2006), we see Chinas loan-to-deposit ratio rising consistently but slowly in recent years. In 2006, Chinas loan to deposit ratio was 68% and in 2008 it had grown to 72%. Looking forward, we expect that the loan-to-deposit ratio will continue to gradually rise from 72% in 2008 to 76% in 2009 and 78% in 2010, before slowing down again to around 73% in 2013. This is, of course, the result of the anticipated trends in both loans and deposits. We expect loan growth to slow gradually from 26% in 2008 to 15% and 5% in both 2011 and 2012, before gaining again to around 8% in 2013. The five-year compound annual growth rate (CAGR) in loans should fall steadily from 14% in 2011 to 8% in 2013. With the continuing growth in loans, we expect that loans as a percentage of GDP will grow the next couple of years from nearly 131% in 2008 to 149% in 2010 before falling to around 142% in 2013. Likewise, we expect that deposit growth will slow from 20% in 2008 to 8% in 2010, before reaching 10% in 2013. The five-year CAGR in deposits should drop from 12% in 2011 to 8% in 2013. Deposits will likely grow as a percentage of GDP from 181% in 2008 to just above 194% in 2013. The absolute growth in deposits will be sufficient to ensure that deposits per capita rise from CNY35,733 in 2008 to CNY52,385 in 2013.
Macroeconomic Activity
Q408 GDP Data Confirm Our Fears BMI View: Economic growth dipped to a seven-year low of 6.8% in Q408, dragging full-year growth for 2008 to 9.0% a sharp decline from the 13.0% recorded in 2007, and the first time since 2002 that the worlds third largest economy had failed to register double-digit headline growth. However, the bad news does not stop there. Recent macroeconomic data has shown that economic activity continues to cool, and we do not foresee any turnaround in fortunes for the Chinese economy until the second half of 2009 at the very least, highlighting that is more likely to be 2010 before a recovery gets underway. With this in mind, we expect real GDP growth to slow to 5.6% in 2009. As anticipated, Q408 GDP data confirmed that China is far from immune from the unfolding global recession, with real growth dropping to 6.8% y-o-y. This marked the weakest outturn in seven years and dragged full-year growth to 9.0%, a sharp decline from the 13.0% recorded in 2007 and the first time since 2002 that the worlds third largest economy had failed to register double-digit headline growth.
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With things expected to get worse before they get better, we are anticipating further grim news from China in H109, and reiterate our below consensus 5.6% growth forecast for the year. Indeed, trade data for December revealed that both imports and exports suffered a second consecutive month of contraction, with exports falling by 2.8% y-o-y, accelerating from the 2.2% decline recorded in November, while imports plummeted by 21.3% y-o-y having dropped by 17.9% in the previous month. Notably, Exports to the US (which purchased 17.7% of Chinas total exports in 2008) fell by 4.1% y-o-y in December to compound Novembers 6.1% decline, while shipments to the EU (which, with a 20.5% share, was Chinas single biggest export destination in 2008) fell 3.5% y-o-y in December after remaining flat in the previous month. We have recently revised down our 2009 growth forecasts for both the US and the EU from -2.0% and -1.6% to -2.3% and -2.5%, respectively implying that export growth is likely to remain in negative territory (or at least remain very weak) over the near term. Meanwhile, imports are likely to follow suit as commodity prices continue to trend lower, demand for inputs for manufacturing exports decline and domestic demand remains sluggish. Domestic Demand Unlikely To Come To The Rescue Although not as bleak as recent trade data, leading indicators of domestic demand are painting an increasingly bearish picture. Retail sales grew by 19.0% y-o-y in December, and although this is still a strong number, it nevertheless marked a third consecutive month of slower growth having reached 23.2% in September 2008. Meanwhile, urban fixed asset investment (FAI) growth slowed to 26.1% in 2008. Once again, while this is still an impressive outturn, December nonetheless represented a third straight month of slower growth after peaking at 27.6% in the January-September period. Moreover, real estate investment continued its rapid slide in December, with growth decelerating for a sixth month in a row to 20.9% y-o-y, having hit a record high of 33.5% in June. Property price growth dipped into negative territory in December, and leading property market indicators suggest that the slowdown has further to run. The quantity of land purchased an indicator for future property development fell by 5.6% y-o-y in November, according to the most recent data available from the National Statistics Bureau, compounding the previous months 2.6% decline, while growth of floorspace of commercial buildings sold spent a ninth straight month in negative territory after it contracted by 16.5% y-o-y in November. Perhaps most worryingly though is the fact that despite growth of floorspace of commercial buildings under construction continues to slow (it registered growth of 18.7% y-o-y in November 2008, down from a peak of 32.1% in February of the same year), it is still expanding. This means that the gap between supply and demand is rising at a rapid rate, implying that property prices will remain subject to strong downward pressure throughout H109. Given that real estate investment accounts for approximately 20% of all urban FAI, and that FAI in turn accounts for more than 40% of GDP, this bodes very ill for headline growth.
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Furthermore, with investment in manufacturing contributing an even bigger slice to urban FAI than real estate, there seems little reason to hold out hope that FAI growth in 2009 can maintain anywhere near the 20%+ levels witnessed during Chinas recent boom period in 2009. Although industrial output growth rebounded slightly in December from the record low of 5.4% y-o-y registered in November, it still remained lacklustre at just 5.7%. To put this in context, full-year average industrial output growth in 2007 was 18.0%, and was 16.1% in H108, and official sources have been quoted as saying that factory output needs to grow at a rate of at least 12% if the government is to meet the 8% growth target which is widely seen as the minimum required to ensure sufficient job creation. Meanwhile, year-to-date growth in secondary industry slowed to 9.3% in Q408, according to the National Bureau of Statistics, marking a sixth straight quarter of decelerating growth after peaking at 13.7% in Q207. Can The Government Save The Day? In view of the increasingly dismal outlook for the Chinese economy, we are expecting further aggressive monetary easing and fiscal stimulus to be rolled out as Beijing tries to avoid a doomsday scenario. Indeed, given that producer price inflation dipped into negative territory on a y-o-y basis in December, contracting by 1.1%, and that consumer price inflation which slowed to just 1.2% y-o-y in the same month is likely to follow suit in Q109, the Peoples Bank of China (PBoC) certainly has scope to slash interest rates. However, given the lagged effects of any such moves, and the immediacy of Chinas problems, we fear that they will not have the desired effect. Indeed, with approximately CNY3.1trn of Chinas mammoth CNY4trn (US$585bn) fiscal stimulus package earmarked to be spent on infrastructure projects in their various guises, it seems difficult to see how Beijing will be able to successfully front-load its additional spending given the length of time required to put construction projects into action. Thus, although were not saying that government initiatives will have no effect, we maintain our 5.6% growth forecast for 2009. Beijings Nightmare Coming True Our concerns appear to be increasingly echoed by government officials, with Liu Mingkang, chairman of the China Banking Regulatory Commission, describing the task of meeting the official 8% growth target as exceptionally arduous, and central bank governor Zhou Xiaochuan also admitting that downside risks exist. Moreover, the State Information Centre (SIC), a government think tank, has said the FAI may decelerate in 2009 despite Beijings ambitious spending plans. According to the SIC, the government funded only 3.88% of FAI projects in 2008, with 77.43% financed by companies own funds and the rest by bank loans and foreign investors. Amid the current global economic climate, Chinese and foreign companies alike are very unlikely to be able to increase capital spending to the extent required. The SIC has said that while local governments were eager to start new projects, most planned investments would stay on the drawing board without corporate support.
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More worryingly, however, are previous comments made by Liu which suggested that growth below 7% could trigger social unrest. We are now already at this point, and with mounting anecdotal evidence and official data highlighting the rapidly weakening of the countrys job market, social unrest is worryingly close to becoming a reality. Indeed, an estimated 10 million migrant workers have reportedly already lost their jobs, while the latest purchasing managers index revealed that employment prospects weakened further in December with the employment sub-index falling in November. While many other governments will be facing similar pressures, the lack of any outlet for citizen dissatisfaction in communist-ruled China makes the current situation a particularly volatile one.
Table: China Economic Activity, 2006-2013
2006 Nominal GDP, CNYbn Nominal GDP, US$bn Real GDP growth, % 1 change y-o-y Population, mn
1 1 1
2007 24,973.5 3,285.00 13.0 1,336.10 18.0 4.0
2008e 26,844.5 3,864.90 9.0 1,346.80 12.9 4.2
2009f 2,8634.6 4,170.50 5.6 1,357.50 6.9 4.8
2010f 3,0518.2 4,522.30 6.8 1,368.20 9.0 4.4
2011f 32,859.8 5,095.90 7.9 1,378.90 11.1 4.4
2012f 35,415.2 5,712.90 7.6 1,389.60 10.6 4.3
2013f 3,8063.8 6,344.80 7.6 1,400.30 10.1 4.2
22,164.8 2,780.90 11.9 1,314.50 16.4 4.1
Industrial production 1 index, % y-o-y, ave Unemployment, % of 2 labour force, eop
Notes: BMI estimates. BMI forecasts. Sources: National Bureau of Statistics, BMI. National Bureau of Statistics
Fiscal Policy
Fiscal Shortfall To Widen Sharply In 2009 BMI View: Chinas fiscal balance swung sharply into deficit in December 2008 as Beijing ramped up spending in the final weeks of the year in an attempt to counter the ongoing economic slowdown. With economic activity forecast to slow further in 2009, Chinas fiscal shortfall is expected to widen from the 0.4% of GDP estimated for 2008 to 2.6% in 2009, as the government tries to spend its way out of the current crisis. Meanwhile, with such a heavy focus on infrastructure spending, we continue to question the efficacy of the governments CNY4trn (US$585bn) fiscal stimulus package. Having recorded a surplus of CNY1.2trn in the first eleven months of 2008, Chinas full-year budget balance plunged into the red in December as the combined spending of central and local governments climbed by 30.8% y-o-y to CNY1.66trn (US$243bn). With revenues lagging way behind at CNY325bn (a meagre 3.3% increase over the equivalent year-ago period), a CNY111bn full-year deficit was recorded, reversing the CNY154bn surplus registered in 2007.
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While this was equivalent to a still very manageable 0.4% of GDP, it nonetheless represents a sharp reversal in fiscal policy direction. Since reaching a multi-year high of 2.6% of GDP in 2002, Chinas fiscal deficit had narrowed in each of the following four years, and actually reverted into surplus for the first time in over 18 years in 2007. Thus, the 2008 budget figure signifies an end to fiscal consolidation and the dawning of a far more aggressive approach to fiscal policy. Indeed, Decembers data underscores Beijings intent to throw all its available resources at propping up rapidly sagging growth, and with this in mind, we expect to witness a sharp widening of Chinas budget deficit in 2009. China has already announced a CNY4trn fiscal stimulus package aimed at boosting economic activity over the next two years, and Prime Minister Wen Jiabao was quoted in the Financial Times in February saying that Beijing may take further new, timely and decisive measures. Indeed, with real GDP growth slowing to a seven-year low of 6.8% y-o-y in Q408, and 20 million migrant workers having lost their jobs, according to Chen Xiwen, the director of the Office of the Central Rural Work Leading Group, it appears that further fiscal stimulus is very much on the cards. At the same time, the Chinese government must contend with slowing revenue collections. Among a number of moves to ease the tax burdens on its citizens, Beijing has cut income and stock-trading taxes, lowered taxes on property transactions, scrapped the withholding tax on interest income and raised rebates for exporters, while taxes gathered from corporates also continue to weaken as corporate profits deteriorate in line with softening economic activity. Against this backdrop, we are forecasting Chinas fiscal deficit to widen sharply in 2009, to CNY740bn (or 2.6% of GDP), as revenue growth slows from 19.4% to 17.0% and expenditure growth moves in the opposite direction, accelerating from 25.3% to 26.8%. However, with risks to government spending weighted to the upside, and risks to revenues firmly skewed to the downside, we highlight that China could be facing a far larger shortfall. Nonetheless, we remain confident that Chinas budget position will remain within manageable parameters. The central government has been running a fairly conservative fiscal policy in recent years, meaning that scope to expand expenditure exists, even at a time when revenues are forecast to suffer. Indeed, central government debt has been estimated at around 18% of GDP at the end of 2008, suggesting that additional borrowing would be a viable option to fund the anticipated rise in government spending. Moreover, Wen has said that a plan to use of some of Chinas foreign currency reserves for domestic purposes is under discussion, and with more than US$1.9trn at its disposal, Beijings reserves should provide an ample source of extra funds. Efficacy Of Stimulus Package In Question The recently published breakdown of Chinas mammoth fiscal stimulus package has revealed that, in line with our expectations, the majority of the spending will be channelled into infrastructure projects, with
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45.0% of the CNY4trn package to be spent on railways, highways, airports and power grids, 25.0% to be spent on post-disaster reconstruction and 9.3% on rural development and infrastructure. This equates to approximately CNY3.1trn being spent on infrastructure projects in their various guises. Although this will have significant positive effects on employment and the construction industry over the near term, it is, as we have previously suggested, likely to have a far more muted impact on growth at least in the short term than if the money were to be channelled into tax cuts or subsidies, which would have a far more direct impact on consumers. Moreover, with such a vast amount being thrown at boosting infrastructure, there is a not insignificant risk of building bridges to nowhere (i.e. projects which serve little purpose upon completion, and whose only raison dtre is to boost short-term employment). While it is true that China may be able to make those nowheres into somewheres given the vast number of underdeveloped settlements outside of the eastern seaboard the construction of bridges to nowhere nonetheless provides substantial reason for concern. Indeed, it might even suggest that policymakers in Beijing appear to have learnt little from the ongoing global economic meltdown. Chinas growth model of aggressively boosting fixed investment and exporting its excess capacity, which has yielded such phenomenally successful results over the past decade, is ultimately unsustainable a fact underscored by developments witnessed over the past year. To be sure, if China is to achieve a more balanced growth path over the longer-term horizon, it must shift its focus away from its external sector and towards building a base for private consumption. However, on this front, precious little progress has been made in recent years. A better option for long-term economic development would be to spend more on building adequate health and social safety systems. One reason often cited for Chinas high savings rate is that people need to squirrel away money for medical treatment or possible retrenchment, given that loss of work has often meant a loss of the social benefits that come with the job. Thus, in the long term, China could increase consumption by providing a safety net that would obviate the need for such high savings. However, with only 1.0% of the proposed fiscal package being spent on health, culture and education, such a policy route appears to be off the table for the time being. Moreover, this is merely one of our concerns. The actual size of the planned additional spending is still under debate, as is the source of financing for the additional spending, while inherent corruption also remains a key concern. Thus, we remain sceptical as to the ability of Beijings announced fiscal stimulus package to rescue the economy from its current doldrums.
Exchange Rate/ Monetary Policy

Yuan To Fall By 1% In 2009 BMI View: In view of rapidly deteriorating growth prospects in China, we expect the yuan to remain
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within the CNY6.8000-6.9000/US$ range, as the Peoples Bank of China (PBoC) ensures the unit remains range-bound in order to promote price stability and bolster the all-important export sector. However, we emphasise the fact that a definite weakening bias remains in place. With the deluge of increasingly dismal data flooding out of China showing few signs of stopping any time soon, we are forecasting the yuan to end 2009 around 1% lower than its 2008 close, at CNY6.9000/US$. Looking ahead to 2010, however, we are anticipating the yuan to once again resume its appreciatory trend as economic growth momentum begins to pick up. Yet, we do not believe that the unit will be able to match the 6.9% gains witnessed in both 2007 and 2008, and are subsequently forecasting appreciation of approximately 4.5%. This will see the currency end 2010 at CNY6.6000/US$. The once enormous upside pressure on the yuan, stemming from persistently colossal trade surpluses and massive capital inflows, has all but disappeared as economic boom turns to bust in China. The years of persistent double-digit growth now look firmly behind us as the collapse of the Western consumer continues to weigh on demand for Chinese shipments, which in turn is seeing investment which has been firmly focused on the export sector during Chinas recent boom period take a tumble. Despite Beijings considerable efforts which have included the unveiling of a mammoth CNY4trn (US$585bn) fiscal stimulus package and 216bps worth of interest rate cuts since September 15 2008 we remain sceptical of their efficacy, and as such we have once again revised down our 2009 growth forecast. Having previously been anticipating a below-consensus expansion of 6.8%, we have become even more bearish and are now expecting growth to dip to just 5.6%. Indeed, recent data releases have underpinned our view. Exports fell 2.8% y-o-y in December to compound the previous months 2.2% decline, which marked the first decrease since February 2002 and the biggest drop since April 1999. Meanwhile, imports plunged by a mammoth 21.3% in December, having dropped 17.9% in November. While plummeting commodity prices will have been responsible to an extent, the dramatic fall nonetheless underscores not only weakening domestic demand but also a dearth of demand for inputs for manufacturing exports. In addition, industrial output growth slowed to 5.4% y-o-y in November, down from 8.2% in October, marking a fifth straight month of deceleration and representing the worst monthly reading excluding the months of January and February when the Lunar New Year distorts industrial output data since the monthly data series began in 1999. Furthermore, growth in urban fixed asset investment decelerated for a third consecutive month, slowing to 26.1% y-o-y in the January-December period, from 26.8% in the first 11 months of the year, having peaked at 27.6% in September. Finally, there is increasing anecdotal evidence that unemployment and factory closures are both rising at a rapid clip. Reportedly, more than 60,000 businesses closed down in 2008, while in the province of Shandong alone, nearly 700,000 people lost their jobs. With the likelihood that y-o-y inflation is poised to
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turn negative in Q109 also thrown into the mix, there appear few good reasons to expect anything other than a weaker yuan in 2009. Risks To Outlook If anything, we suggest that risks to our CNY6.9000/US$ forecast are weighted to the downside. If growth really slows sharply, and in particular too far below the governments 8% target, the Peoples Bank of China (PBoC) could allow the unit to drop further in order to try to boost export competitiveness and counter the negative effects of deflation. Indeed, a one-off devaluation still cannot be completely discounted, although we stress that this remains a low-probability scenario. To be sure, a competitive devaluation of the yuan would be a very risky strategy that would not only risk drawing the ire of the rest of the world and the US and its new president in particular but also potentially provide the catalyst for a series of regional devaluations and an ensuing trade war. Thus, we continue to believe that the political implications of letting the currency fall too far will continue to prevent China from pursuing such a policy.
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Market Structure
Protagonists
Table: Protagonists In Chinas Commercial Banking Sector
Central bank: Peoples Bank of China (PBC) www.pbc.gov.cn The Peoples Bank of China (PBC) was established in 1948 essentially as a state-owned commercial bank and has functioned as central bank since 1983. Under the guidance of the state council, the PBC formulates and implements monetary policy, prevents and resolves financial risks, and safeguards financial stability. The Law of the Peoples Republic of China on the Peoples Bank of China (2003) dictates that the PBC performs the following major functions: issuing and enforcing relevant orders and regulations; formulating and implementing monetary policy; issuing renminbi and administering its circulation; regulating inter-bank lending market and inter-bank bond market; administering foreign exchange and regulating inter-bank foreign exchange market; regulating gold market; holding and managing official foreign exchange and gold reserves; managing the state treasury; maintaining normal operation of the payment and settlement system; guiding and organising the anti-money laundering work of the financial sector and monitoring relevant fund flows; conducting financial statistics, surveys, analysis and forecasts; participating in international financial activities in the capacity of the central bank; performing other functions specified by the state council. Principal banking regulator: China Banking Regulatory Commission (CBRC) www.cbrc.gov.cn The CBRC authorises, supervises and regulates banks in China. It seeks to protect depositors and consumers interests, to maintain market confidence, boost the publics understanding of modern finance and to fight financial crimes. It also claims to encourage fair and orderly competition. Banking trade association: China Banking Association (CBA) http://www.china-cba.net/eng/ China Banking Association (CBA) was founded in May 2000 as a social organisation registered at the Ministry of Civil Affairs. CBA, on behalf of its 81 full members and 37 associate members, brings together various categories of banking institutions to best represent interests of this rapidly changing industry. With its missions generalised into four words, namely self-regulation, rights-protection, reconciliation and services, China Banking Association devotes all its skills and experience to: Encouraging self-regulation and communication among members; Regulating operation and management of its members; Protecting the legal rights of its members; and Promoting the healthy development of the banking sector. CBA now has 81 full members, including policy banks, the Big Four banks, joint stock commercial banks, city commercial banks, asset management companies, China Government Security Depository Trust & Clearing Company, China Post Savings and Remittance Bureau, rural commercial banks, rural cooperatives, rural credit unions and locally registered foreign banks, as well as 37 associate members, including banking associations in various provinces (including autonomous regions and municipalities directly under the central government).
Source: Official data, Company data
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Definition Of The Commercial Banking Universe

There are 81 full members of the CBA. These are grouped as follows: Policy Banks; State-owned Commercial Banks; Joint Stock Commercial Banks; City Commercial Banks; Rural Commercial Banks; Locally Registered Foreign Banks; Co-operatives; Asset Management Corporations; the State Post Bureau Postal Saving and Remittance Bureau, and; the Government Securities DTC. For the purposes of this report, we include the 45 Banks. Source: China Banking Association (CBA), http://www.china-cba.net/cbaenglish/eng2-2.htm
List Of Banks
Table: Policy Banks and "Big Four" State-Owned Commercial Banks
China Development Bank (CDB) Export-Import Bank of China(ExImBC) Agricultural Development Bank of China (ADBC) Industrial and Commercial Bank of China (ICBC) Agricultural Bank of China (ABC) Bank of China China Construction Bank (CCB)
Source: BMI
Table: Joint Stock Commercial Banks, City Commercial Banks and Rural Commercial Banks
Bank of Communications China Bohai Bank China CITIC Bank China Everbright Bank Huaxia Bank Guangdong Development Bank Shenzhen Development Bank Co. Limited China Merchants Bank Shanghai Pudong Development Bank Industrial Bank Co. Limited China Minsheng Banking Corp. Limited Evergrowing Bank
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Table: Joint Stock Commercial Banks, City Commercial Banks and Rural Commercial Banks
China Zheshang Bank Bank of Shanghai (City Commercial Bank) Bank of Beijing (City Commercial Bank) Baoshang Bank Tianjin City Commercial Bank Guangzhou Commercial Bank Shenzhen City Commercial Bank Chongqing Commercial Bank Chengdu City Commercial Bank Kunming City Commercial Bank Xian City Commercial Bank Lanzhou City Commercial Bank Nanjing City Commercial Bank Urumqi City Commercial Bank Beijing Rural Commercial Bank Corp. Shanghai Rural Commercial Bank.
Source: BMI
Table: Locally Registered Foreign Banks
HSBC Bank (China) Company Limited Standard Chartered Bank (China) Limited DBS Bank (China) Limited Bank of East Asia (China) Limited Bank of Tokyo-Mitsubishi UFJ (China) Limited Mizuho Corporate Bank (China) Limited Hang Seng Bank (China) Limited First Sino Bank Xiamen International Bank ABN Amro Bank (China) Co. Limited
Source: BMI
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Company Profiles
China Development Bank
Overview/Self-Description China Development Bank is under the direct leadership of the state council. The Bank is dedicated to promoting the development of the market through well-planned and balanced financing efforts that support development of the states key projects and construction in the infrastructure sector, basic industries, pillar industries and high-technology industry. In support of the states policies to implement disciplined development and build a harmonious society, the Banks funding efforts also go to constrained sectors, including urbanisation, SMEs, agriculture, rural communities and farmers, education, medical and health care and environmental protection. In 2006, CDB became the first mainland institution to issue yuan bonds in Hong Kong. Website http://www.cdb.com.cn/English/index.asp Key Statistics Status Public sector bank
Key Statistics for China Development Bank (CNYmn)
2007 Total Assets Loans & Mortgages Total Shareholders Equity 2,314,000 2,017,600 158,200
2008 2,890,000 2,270,000 349
Source: China Development Bank
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Export-Import Bank of China

Overview/Self-Description The Export-Import Bank of China (China Eximbank) is a government policy bank founded in 1994 and under the direct leadership of the State Council. The bank has more than 10 business branches and overseas offices in Johannesburg, Paris and St Petersburg. The bank describes itself as a key channel of policy financing for exports and imports of mechanic and electronic products, complete set of equipment, and high- and new-tech products, and for offshore construction contracts as well as overseas investment projects. It is also involved in on-lending state bank loans and Chinese Concessional Loans of the Mainland government. Website http://english.eximbank.gov.cn/ Key Statistics Status Public sector bank
Key Statistics for Export-Import Bank of China (CNYmn)
2007 Total Assets Loans & Mortgages 258,297 231,670
2008 204,793 175,986
Source: Export-Import Bank of China
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Agricultural Development Bank of China

Overview/Self-Description Agricultural Development Bank of China (ADBC) is a government policy bank founded in 1994 and under the direct leadership of the State Council. The mission and purpose of the bank is to promote development of agriculture and rural areas through: rising of funds for (government-directed) agricultural policy businesses; commercial businesses in the agricultural sector; acting as an agent of the state treasury for the allocation of special funds for supporting agriculture. Website http://www.abchina.com/en/hq/introduction.jsp/fid=20000021/sid=20000113/index.html Key Statistics Status Public sector bank
Key Statistics for Agricultural Development Bank of China (CNYmn)
2006 Total Assets Loans & Mortgages Total Shareholders Equity 932,562 884,396 20,211
2007 1,065,094 932,562 20,418
Source: Agricultural Development Bank of China
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ICBC
Overview/Self-Description The Industrial and Commercial Bank of China, founded in 1984 as Commercial Bank of China, provides industrial and commercial credit and savings that before its foundation were provided by Peoples Bank of China. ICBC is the largest mainland corporate bank with 2.72 million clients. ICBC was listed in Hong Kong and Shanghai in 2006. Website http://www.icbc.com.cn/icbc/sy/ Key Statistics Status Public sector bank
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Agricultural Bank of China

Overview/Self-Description As one of the four large state-owned commercial banks, Agricultural Bank of China (ABC) is an important component of Chinas financial system, with its head office in Beijing. In China, ABC boasts its extensive outlets covering urban and rural areas, strong funds and complete service functions, which wins the trust of our clients as well as enables the bank to make rapid growth, becoming one of the biggest banks in China. Abroad, Agricultural Bank also obtains the good reputation through its efforts, listed as one of the World Top 500 companies by Fortune. Website http://www.abchina.com/en/hq/index.jsp/lang=en/index.html Key Statistics Status State-owned banking giant
Key Statistics for Agricultural Bank of China (CNYmn)
2005 Total Assets Loans & Mortgages Total Deposits Total Shareholders Equity 4,771,019 2,793,266 4,036,854 79,607
2006 5,343,943 3,102,309 4,730,372 84,002
2007 6,050,127 3,430,723 5,283,314 88,628
Source: Agricultural Bank of China
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Bank of China
Overview/Self-Description Founded in 1912, state-owned Bank of China covers commercial banking, investment banking and insurance under brands including BOC Hong Kong, BOC International and BOCG Insurance. It is ranked among the top 20 banks in the world in terms of tier one capital. Its main business activities are commercial banking, including corporate and retail banking, treasury business and servicing other financial institutions funding needs. Website http://www.boc.cn/en/index.html Key Statistics Status Listed State Owned Commercial Bank
Key Statistics for Bank of China (CNYmn)
2008 6,483,121 3,141,972 4,863,664 431,071
Source: Bank of China
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China Construction Bank

Overview/Self-Description China Construction Bank is one of the top four commercial banks in the country with more than 13,000 branches. It operates in three business segments, they being corporate and personal banking and treasury operations. It subsidiaries include China Construction Bank (Asia), China Construction Bank International (Holdings), Sino-German Bausparkasse, China Construction Bank Principal Asset Management, and China Construction Bank Financial Leasing. Website http://www.ccb.com/portal/en/home/index.html Key Statistics Status Private sector
Key Statistics for China Construction Bank (CNYmn)
2005 4,585,742 2,394,533 4,011,475 287,677
2006 5,448,511 2,795,976 4,728,213 330,204
2007 6,598,177 3,183,229 5,349,600 422,281
2008 7,555,452 3,683,575 6,429,725 467,562
Source: China Construction Bank
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Methodology
BMIs commercial banking reports seek to provide insights about the operating conditions in and prospects for commercial banks in each of around 60 (mostly developing) countries. The reports do this by incorporating the latest information available from official sources such as regulators, international associations of regulators and trade associations, comparable information from other countries; and economic and risk data compiled by BMI. Since Q208, we have been able to incorporate final figures and statistics for 2007 in relation to almost all the countries that we consider. For some countries, it has been more practical to include data that pertains to a later date. The reports focus on total assets, client loans and client deposits. Total assets are analogous to the combined balance sheet assets of all commercial banks in a particular country. They do not incorporate the balance sheet of the central bank of the country in question. Client loans are loans to non-bank clients. They include loans to public sector and state-owned enterprises. However, they generally do not include loans to governments, government (or non-government) bonds held or loans to central banks. Client deposits are deposits from the non-bank public. They generally include deposits from public sector and state-owned enterprises. However, they only include government deposits if these are significant. We take into account capital items and bond portfolios. The former include shareholders funds, and subordinated debt that may be counted as capital. The latter includes government and non-government bonds. In quantifying the collective balance sheets of a particular country, we assume three equations hold true: Total assets = total liabilities and capital; Total assets = client loans + bond portfolio + other assets; Total liabilities and capital = capital items + client deposits + other liabilities. In terms of the equations, other assets and other liabilities are balancing items that ensure equations two and three can be reconciled with equation one. In practice, other assets and other liabilities are analogous to inter-bank transactions. In some cases, such transactions are generally with foreign banks. In most countries for which we have compiled figures, building societies/thrifts are an insignificant part of the banking landscape, and we do not include them in our figures. The US is the main exception to this.
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In some cases, total assets and client loans include significant amounts that are owned or that have been lent to customers in another country. In some cases, client deposits include significant amounts that have been deposited by residents of another country. Such cross-border business is particularly important in major financial centres such as Singapore and Hong Kong, the richer OECD countries and certain countries in Central and Eastern Europe.
Basis Of Projections
In Q208, we made a very substantial change to our methodology for making projections. Previously, we had assumed that assets, loans and deposits would each continue to grow at particular rates through the 2007-2012 forecast period. This approach had several disadvantages. One was that, in reality, the main elements of banking systems emphatically do not change at even rates through time. Another was that it was that the growth achieved in the recent past may be unrepresentative of what is likely to happen in coming years. Third, it did not automatically recognise that, over the long term, the growth rates of the various variables should converge with the growth in nominal GDP. Accordingly, from Q208, we assume that the growth rate, for each of the three variables, varies over time. The growth rate in 2008 is deemed to be the actual growth rate achieved over the 12 months to the point in time for which the latest data is available. The growth rate in 2009 is assumed to be a weighted average 80% of the actual rate achieved in the previous year and 20% of the long-term nominal rate of growth in GDP that BMI has projected for the five years to the end of 2013. The growth rate in 2010 is assumed to be a weighted average where the respective ratios are 60% and 40%. In 2011, the ratios are reversed. In 2012, the ratios are 20% and 80%. In 2013, the three variables are assumed to increase at the annual rate of growth in nominal GDP over the five years: in effect, 2013 is the only year of the five where the actual growth of the variables achieved in 2008 has no impact on the projected growth rates.
Commercial Bank Business Environment Rating

In Q108, BMI introduced a new Commercial Banking Business Environment Rating for each of the 60 or so states we assess. In introducing this rating, our approach has been threefold. First, we have explicitly aimed to assess the market attractiveness and risks to the predictable realisation of profits in each state, thereby capturing the operational dangers facing companies operating in this industry globally. Second, we have, where possible, identified objective indicators that serve as proxies for issues/trends within the industry to ensure consistent evaluate across states. Finally, we have used BMIs proprietary Country Risk Ratings in a nuanced manner to ensure that the ratings accurately capture broader issues that are relevant to the industry and which may either limit market attractiveness or imperil future returns. Overall, the new ratings system which now integrates with those of all 16 industries covered by BMI offers an industry-leading insight into the prospects/risks for companies across the globe.
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In Q109, we updated all reports so that they incorporated the latest available banking data. In almost all cases, we were able to include data that pertained to mid or late 2008 Ratings System Conceptually, the new ratings system divides into two distinct areas: Limits of potential returns: Evaluation of industrys size and growth potential in each state, and also broader industry/state characteristics that may inhibit its development. Risks to realisation of those returns: Evaluation of industry-specific dangers and those emanating from the states political/economic profile that call into question the likelihood of anticipated returns being realised over the assessed time period. Indicators The following indicators have been used. Almost all indicators are objectively based.
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Table: Commercial Banking Business Environment Indicators And Rationale
Limits of potential returns Market structure Estimated total assets, end 2008 Estimated growth in total assets, 2008-2013 Estimated growth in client loans, 2008-2013 Bancassurance potential (BMIs ratings score for the life insurance segment) Country structure GDP per capita Active population Corporate tax GDP volatility Financial infrastructure Risks to realisation of potential returns Market risks Regulatory framework and industry development Regulatory framework and competitive environment Moodys rating for local currency deposits Country risk From BMIs Country Risk Ratings (CRR) Short-term financial risk Short-term external risk Policy continuity Legal framework Bureaucracy Rating from CRR, evaluating currency volatility Rating from CRR, denoting the states vulnerability to externally-induced economic shock, which tend to be the principal triggers of economic crises Rating from CRR, evaluating the risk of a sharp change in the broad direction of government policy Rating from CRR, to denote strength of legal institutions in each state. Security of investment can be a key risk in some emerging markets Rating from CRR to denote ease of conducting business in the state Subjective evaluation of de facto/de jure regulations on overall development of the banking sector Subjective evaluation of the impact of the regulatory environment on the competitive landscape External assessment of risk A proxy for wealth. High-income states receive better scores than low-income states Those aged 16-64 in each state, as a % of total population. A high proportion suggests that the market is comparatively more attractive A measure of the general fiscal drag on profits Standard deviation of growth over seven-year economic cycle. A proxy for economic stability Measure of the financial sectors development, a crucial structural characteristic given the insurance industrys reliance on risk calculation Indication of overall sector attractiveness. Large markets are considered more attractive than small ones Indication of growth potential. The greater the likely absolute growth in total assets, the higher the score Indication of the scope for expansion in profits through intermediation Indication of the scope for expansion in profits through bancassurance and/or other fee earning activities
Source: BMI
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Weighting Given the number of indicators/datasets used, it would be wholly inappropriate to give all subcomponents equal weight. Consequently, the following weights have been adopted.
Table: Weighting Of Indicators
Component Limits of potential returns, of which: Banking market structure Country structure Risks to realisation of potential returns, of which: Banking market risks Country risks
Weighting, % 70 60 40 30 40 60
Source: BMI
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Published by BUSINESS MONITOR INTERNATIONAL LTD

China Commercial Banking Report Q2 2009

China Commercial Banking Report Q2 2009

Part of BMIs Industry Report & Forecasts Series

China Commercial Banking Report Q2 2009

Business Monitor International Ltd

China Commercial Banking Report Q2 2009

Overview Commercial Banking Sector Of China .......................................................................................8 SWOT Analysis...............................................................................................................................................10

Commercial Banking Business Environment Rating .................................................................................14

Commercial Bank Sector Outlook ................................................................................................................26

Business Monitor International Ltd

China Commercial Banking Report Q2 2009

Business Monitor International Ltd

China Commercial Banking Report Q2 2009

Date December 2006 December 2007 Change, %

Total assets 44,130.3 54,120.3 23

Client loans 23,828.0 27,774.7 17

Bond portfolio 5,356.8 7,447.6 39

Other 14,945.5 18,898.0 26

Liabilities and capital 44,130.3 54,120.3 23

Capital 1,310.1 1,842.5 41

Client deposits 34,801.6 40,105.1 15

Other 14,945.5 18,898.0 26

Source: BMI, Central banks, Regulators

Table: Latest Actual Data (US$bn)

Date December 2007 December 2008 Change, %

Total assets 5,654.5 2,385.2 -58

Client loans 3,053.1 1,224.1 -60

Bond portfolio 686.4 328.2 -52

Other 1,915.0 832.9 -57

Liabilities and capital 5,654.5 2,385.2 -58

Capital 167.9 81.2 -52

Client deposits 4,459.2 1,767.5 -60

Other 1,915.0 832.9 -57

Source: BMI, Central banks, Regulators

Table: Latest Key Indicators At December 2008

Loan/deposit ratio 66.8% Rising

Loan/asset ratio 49.8% Falling

Loan/GDP ratio 112.6% Falling

GDP per capita, US$ 2,885

Deposits per capita, US$ 1,323

Source: BMI, Central banks, Regulators

Business Monitor International Ltd

China Commercial Banking Report Q2 2009

Table: Annual Growth Rate Projections, 2009-2013 (%)

Assets Annual Growth Rate CAGR Ranking 6 7 21

Source: BMI, Central banks, Regulators

Table: Ranking Out Of 46 Countries Reviewed In 2009

Loan/deposit ratio 34 Local currency asset growth 3

Loan/asset ratio 27 Local currency loan growth 2

Loan/GDP ratio 6 Local currency deposit growth 8

Source: BMI, Central banks, Regulators

Table: Projected Levels, 2008-2013 (CNYbn)

December 2009f 75,768.42 40,245.47 52,938.78

December 2010f 83,345.26 45,074.93 57,173.88

December 2011f 86,679.07 47,328.68 61,747.80

December 2012f 90,146.24 49,695.11 66,687.62

December 2013f 95,555.01 53,670.72 73,356.38

f = BMI forecast. Source: BMI, Central banks, Regulators

Business Monitor International Ltd

China Commercial Banking Report Q2 2009

Table: Projected Levels (US$bn)

December 2009f 10,980.93 5,832.68 7,672.29