Three Signals for Banks

The business performance of Chinas five major state-owned banks has drawn wide attention.

While their total net profi t is still growing， remaining above 2.5 billion yuan （$362.84 million） daily， the growth is slow， and the net profi t of some of them is even declining.

In 2016， Industrial and Commercial Bank of Chinas net profit was 278.2 billion yuan （$40.38 billion）， up 0.4 percent year on year. Agricultural Bank of China realized net profi t of 183.9 billion yuan （$26.69 billion）， a 1.86-percent increase. Bank of China earned net profi t of 164.6 billion yuan（$23.89 billion）， a decline of 3.67 percent. China Construction Bank earned net profit of 231.5 billion yuan （$33.6 billion）， a yearon-year growth of 1.45 percent. Bank of Communications （BOCOM） realized net profi t of 67.2 billion yuan （$9.75 billion）， up by 1.03 percent.

The growth of non-performing loans was curbed in 2016. The banks average rate of non-performing loans stood at 1.69 percent， and the quality of bank assets improved.

By the end of 2016， the five had hired 1.72 million employees， a 1-percent decline over 2015. Of them， only BOCOMs staff strength grew by 1，088 persons.

These fi gures signal three things.

First， slower net profi t growth is an inevitable result of the economic downturn and nothing to be alarmed at. However， it signals commercial banks should accelerate business transformation and shift their strategic focus. Profits are declining because the interest margin between traditional deposits and credit businesses is narrowing， financial disintermediation is accelerating and Internet-based financial services are growing rapidly.

In light of this， commercial banks should transform their business philosophy and operational models， expand intermediate business and strengthen development and promotion of new products in this field. In addition， they must accelerate Internetcentered fi nancial reform and innovation.

Second， growth of non-performing loans has been curbed， an encouraging sign for the whole industry. But commercial banks should not be complacent and should stay alert for non-performing loans. The amount and rate of non-performing loans may rise again until the real economy improves substantially. State-owned commercial banks should exercise prudence in sanctioning credit， strengthen loan management and must not expand the scale of their credit assets blindly.

They should pay special attention to the risks caused by industrial policy changes. They should also timely change their industrial credit structures， control credit to industries with surplus production capacity， and refuse credit to poor-performing “zombie companies.” Growth of real estate credit must be curbed to prevent bubbles.

Third， decline of bank headcounts will inevitably continue. So commercial banks should improve the caliber of their staff and increase their benefi ts. The decline in net profits and the Central Governments order to control the salaries of stateowned enterprise staff made state-owned commercial banks lose some employees， including top-level professionals. In addition， some staffers were laid off because of structural adjustments， such as improved e-banking.

Downsizing under such conditions is to enhance commercial banks overall competitiveness. The reductions will press them to optimize their compensation and benefi ts systems， establish better evaluation mechanisms and improve their management models.