The numbers may not seem big — Rmb10 ($1.58) for changing a password, Rmb10 for reporting a lost or stolen debit card, Rmb25 for opening an online account, Rmb3 to get a text message reminder — but China’s 1.3 billion multiplier effect means that local bank fees soon add up.
Indeed, the country’s penny-wise savers have grown so resentful at the myriad bank charges that the China Banking Regulatory Commission (CBRC) has warned lenders that they face “severe punishment” if it deems their fees excessive.
Chinese bank customers have long grumbled about such charges, but their anger was inflamed when the banking industry posted yet another year of big profits for 2011. In response, the CBRC said in a statement on its website that it will proactively work with other government departments and issue rules regulating fees for banking services. It said it will punish banks that are found to charge “unreasonable” fees.
The regulator did not specify what would constitute a breach, but the warning clearly has a broad target. “Just take a look at who has the most explosive growth in non-interest income — actually, they all have very fast growth,” said May Yan, a banking analyst at Barclays.
China Minsheng Bank said last month that its 2011 net profit jumped 59% thanks to an improved revenue structure and greater efficiency. Its non-interest income soared 97% to Rmb17 billion during the year. Hong Qi, president of Minsheng, said that the result “was so good that it was embarrassing to post”.
Agricultural Bank of China posted 50% growth to Rmb68 billion in its net fee and commission income last year, supporting a 29% increase in its net profit during the year.
Overall, China’s listed banks reported an increase in net profit of 25% to 30% during 2011.
The country’s lenders have been keen to grow their loan books as a way to put their excess cash to work — and earning more from fees has helped to improve profit margins despite a fixed lending rate that is strictly enforced by the government.
“On top of the interest rate, banks often charge so-called advisory fees to companies that want to borrow in order to boost non-interest income,” said Yan.
China’s official benchmark lending rate is 6.6%, but the ambiguous “advisory fee” can help banks earn bigger margins, particularly on loans to smaller firms and private businesses, where demand is particularly high. Such charges can help offset the cost of loans made to state-owned enterprises, which tend to be political rather than commercial transactions.
China’s thrifty savers also shoulder some of the cost of these cheap loans thanks to a benchmark deposit rate of 3.5%. Consumer prices have consistently risen faster than the deposit rate, which means that savers are losing money in real terms.
The large number of savers helps to keep the gap between lending and deposit rates artificially wide, and partly explains why lenders in the country are posting such strong results even when the overall economy is slowing and many companies are making losses.
Wen Jiabao, China’s premier, said at a conference that the country’s state-owned banks are a “monopoly” that should be broken up. But Yan argued that the government has no real intention of weakening the dominance of state-owned lenders.
“The government hopes to reduce the country’s reliance on the banking sector as the sole funding channel,” he said. “It wants to develop other channels such as the bond markets.”
Overseas investors seem happy with the explosive profit growth in China's banking industry, but it is worth questioning where that growth has come from — and whether it is sustainable.