China Commercial Banking Report Q2 2008

In March 2008, we updated all data for the 59 countries surveyed with official figures, sourced from central banks and regulators. In most cases, we were able to find data that pertained to the end of 2007: in almost all other cases, the data pertains to September 30 2007. As a result, the insights that we derive on particular countries are based on consistently sourced information that is far more current than it had been previously.

Although we gather data for countries such as the US, Japan, Australia and the eurozone, the vast majority of the 59 countries whose banking industries we survey are, or are generally seen as being, emerging markets. For all the widely publicised problems of large banks in developed countries, in the wake of the subprime banking crisis in the US, 2007 was an extremely good year for the banking sectors of the emerging markets. In local currency terms, the median growth in assets was 21% (in Brazil). The median rates of growth in loans to non-bank customers and in deposits were 22% (in India) and 18% (in Morocco). In some countries - and not just those enjoying oil booms - the figures were spectacular. In Ukraine, for instance, assets and deposits rose by 76% and 62% respectively. Loans grew by more than one-third in Bulgaria, Estonia, Latvia, Lithuania, Romania, Russia, Serbia, Slovenia, Peru, Bahrain, Iran and Nigeria. Deposits also rose by more than one-third in most of these countries.

In absolute terms, China's banking sector enjoyed reasonable growth through the year to December 31 2007. In local currency terms, total assets, total loans and total deposits increased by 20%, 10% and 12% respectively. Of the 59 countries surveyed, China ranks 32nd in terms of local currency asset growth, 51st in terms of local currency loan growth and 43rd in terms of local currency deposit growth.

As the tables above show, China's rankings in terms of its loan/deposit, loan/asset and loan/GDP ratios are 23rd, 41st and seventh respectively. All three ratios fell. This is in a country with per capita GDP of US$2,419, where deposits per capita are a high at US$3,982.

In Q108, we envisaged that total assets, total loans and total deposits would rise by 16%, 16% and 17% annually through the 2007-2012 forecast period. Now, and using an improved forecasting method, we are looking for growth rates of 15%, 12% and 12% respectively.

Since Q108, we have calculated, on a consistent basis, a Commercial Bank Business Environment Rating (CBBER) for each of the 59 countries surveyed. The CBBER includes an assessment of the limits of potential returns: it does this by taking into account the size, growth potential and bancassurance potential of the banking sector, as well as aspects of the economy in 2007. The CBBER also depends on an assessment of the risks to the realisation of potential returns: this reflects BMI's assessments of overall country risk, together with the regulatory and competitive environment.

China's overall CBBER is 70.5. The equivalent figures for the US and the eurozone are 84.6 and 84.8, respectively. China's CBBER is higher than most other countries in the Asia Pacific region, with the exception of Australia, Hong Kong, Japan, Singapore, South Korea and Taiwan. Within the CBBER, the most important aspect is the banking market structure element of the limits of potential returns. This element accounts for 42% of the overall CBBER. China's rating for this element - 87.5 - is very high by both regional and international standards. It is also far higher than the country structure element of the limits of potential returns (50.5). Additionally, the total assets of China's banking sector relative to those of other countries, and the absolute growth in total assets and client loans during the 2007-2012 forecast period are very high.

The CBBER highlights the factors that are holding back China's banking sector. One is the relatively low level of per-capita GDP (which is exacerbated by the uneven distribution of income). Another is bureaucracy. However, the most important constraint is the volatility of the economy over the long term.

In 2007 China achieved a 14-year high rate of growth and this will prompt policymakers to move more swiftly to slow the economy's expansion.