Credit card income will offer relief for Chinese lenders dealing with pressure on interest incomes but only banks with significant market share will reap the rewards, according to analysts.
Income sources for Chinese banks have been shrinking in the past few years, as successive declines in interest rates have driven net interest margins to historic lows. Banks had sought to make up the difference with sales of wealth management products (WMP) but these have been hit by tighter regulations this year, as regulators look to crack down on the shadow banking sector.
“Credit cards and sales of bancassurance should make up for the decline in WMP sales this year,” said Ken Shih, research director at DBS and Chinese banking sector analyst, at a briefing in Hong Kong on Tuesday.
“However, the credit card market is all about scale, and so the market leaders are the only ones who will benefit.”
The three banks Shih tips to do well out of credit cards in the coming year are ICBC, China Construction Bank, and China Merchants Bank.
“The growth in China Merchants Bank’s credit card fee income has been phenomenal. Credit cards provided 15 per cent of their income last year,” he said.
In 2016, just over 25 trillion yuan (US$3.6 trillion) was spent on credit cards in China, according to DBS’ estimates.
Credit cards are potentially very profitable for banks because of the high interest rates they can charge, as high as 18 per cent in some cases, and their little bad loan formation so far.
One reason why there’s scope for income from credit cards to rise is because they have so far contributed comparatively little to banks’ bottom lines.
Shih calculates that credit cards provided just 5.6 per cent of Chinese banks’ profits, despite societal changes making credit cards more attractive.
These societal changes include the fact that China’s middle class is growing, and more willing to spend, both in Hong Kong and abroad, which are drivers for credit card growth.
“Given that the base is pretty low, we think that the outlook is rosy,” said Shih.
China currently has between 600 to 700 million credit cards in the market, according to various estimates. Some foreign banks, including Citi, HSBC and Bank of East Asia, offer credit cards to Chinese consumers, but the vast majority are issued by domestic Chinese lenders.
Sales of wealth management products have slowed this year as Chinese lenders respond to tighter regulation over the shadow banking sector.
On Monday, the China Banking Regulatory Commission issued new rules requiring banks to submit weekly reports on the assets underlying their wealth management products.
Interest income still makes up the primary source of income for Chinese banks, but this has come under pressure from tightened interest rates.
Net interest margins hit record lows for many Chinese banks in the first quarter, though some were able to stem the declines, or post small rises.
These included the three banks – ICBC, CCB and China Merchants Bank – that Shih tips to do well from credit cards this year.