McKinsey: Banks should transform to increase their economic value

Chinese banks should make strategic moves for transformation to increase their economic value, said McKinsey & Company in a report on Wednesday.

The total economic value of 40 major banks in China fell 33 percent in 2016 from the previous year, according to a latest report of the global management consulting firm.

Taking the banks' returns on capital into consideration, their total economic value dropped by 160 billion yuan ($24 billion) to 333.5 billion yuan, in spite of a 1 percent increase in their total profits before tax and a 14 percent growth in total assets, the report said.

McKinsey conducted the research on China's five largest State-owned commercial banks by assets, Postal Savings Bank of China Co Ltd, 12 joint-stock commercial banks, 17 major city commercial banks and five largest rural commercial lenders by assets.

It forecast that Chinese banks will proceed to a dividing ridge with regard to performance during the next three years, as interest margins keep shrinking, the expectation for a rise in non-performing loans still remains, and regulatory tightening forces companies and financial institutions to deleverage.

Under these circumstances, John Qu, senior partner of McKinsey, said: "To better handle challenges caused by the liberalization of financial markets, banks should increase fees and commissions income by making innovation on products, including credit cards, savings products and asset management products, so that they can transform into asset-light banks."

Another crucial step is to make a comprehensive transformation in risk management, especially by stepping up post-loan portfolio risk management, enhancing risk warning capability, accelerating bad assets disposal and helping corporate clients restructure, Qu said.

He also advised banks to strengthen pricing management, refine operating cost management and improve operational efficiency with the help of digital instruments, and bring in leading talents in fields such as risk management, product innovation, data analysis and technologies from mature markets.

Among 13 A-share listed large State-owned commercial banks and joint-stock commercial banks, seven recorded a year-on-year drop in operating income during the first nine months of this year, according to their financial results for the third quarter 2017.