With the Chinese economy entering a transition period, mainland banks are faced with three major challenges, including increasing off-balance sheet businesses, tightening control on capital requirements and interest rate liberalization, with the last one being the biggest threat which could hurt lenders' earnings prospects.
In the wake of these challenges, banks should adopt some sound strategies to weather the strong headwinds during the economic transition.
First, banks should strengthen their risk pricing capability and put more emphasis on small-to-medium enterprises and retail business. Following the progress of financial disintermediation and interest rate liberalisation, large corporate clients will become less reliant on bank financing and thus banks' bargaining power will be undermined.
As such, to ensure business growth and maintain high profitability, banks must expand downward to develop SME and retail customer resources. In such a process, they have to innovate with regard to the lending flow and risk management techniques while balancing risks and yields through better risk pricing.
Second, innovative product lines plus integrated businesses. Economic transition means basic deposit and loan business will see continuous downward pressure on profitability and narrowing room for growth. Banks will need to adapt to the trends and the changing financial demands of customers by rolling out new products and services.
Looking ahead, large clients' demand for direct financing will bring more business opportunities to banks' investment banking divisions, while the increasing household income will speed up their asset management business.
Landmark building should respect the public's feeling
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