SHANGHAI: Recent research indicates China's listed banks have outperformed the big four State banks, even though the latter all rank among Asia's top 10 in terms of assets.

The Asian Banker, a think-tank that provides strategic intelligence for the financial sector, recently published its ranking of the region's top commercial banks.

The best performing outlets in China, according to the ranking, were shareholding banks, with Shanghai Pudong Development Bank ranked No 15, and China Merchants Bank and China Minsheng Bank sharing the No 38 spot.

Besides ranking banks by asset volume, The Asian Banker went a step further and developed an alternative methodology - Asia's Strongest Banks. It's a dynamic formula based on financial and operational parameters, asset quality, and improvements in profits and assets over the previous year.

China's four State banks were all ranked in the top 10 in terms of assets, but under the more stringent Asia's Strongest Banks formula they were considerably lower.

The three shareholding banks outperformed the State outlets with scores of 25 to 27 out of the maximum 35. The big four, meanwhile, ranged from 16 to 21.

The Strongest Bank ranking is an apt reflection of the State banks' weak performance in the profitability stakes. The problem is largely due to the fact that State banks are still making low-yielding, policy-directed financing to State-owned enterprises.

"These organizations are still registering minuscule returns at a quarter that of shareholding banks," said Li-May Chew, senior research analyst with the Asian Banker.

For instance, return on assets for the big four were barely 0.14 per cent and return on equity 3.2 per cent in 2002.

The big four accounted for 84.1 per cent of aggregate loans posted by the Chinese banks in The Asian Banker 300 and were amongst the top 10 biggest lenders in the region.

"Notwithstanding the outbreak of SARS (severe acute respiratory syndrome) earlier this year, China managed to sustain its pace of economic growth as a result of an exceptional loan explosion in the country," Li pointed out.

The Chinese banks in The Asian Banker 300 accounted for 16.4 per cent or US$1.17 trillion of the aggregate loans registered by the top 300 Asian banks.

It was no surprise the four State-owned banks - Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China - also ranked in the top 10 in terms of loans, accounting for 84.1 per cent, or US$981.2 billion, of China's total. Standing at 13.8 per cent of all loans registered by the top 300 Asian banks, this represented a significant share recorded by just four banks.

According to Emmanuel Daniel, managing director of The Asian Banker, the burden of NPLs (non-performing loans) is a critical issue and one that banks cannot ignore.

"A key issue for banks in China is effective risk management," said Daniel. "NPLs have been a huge issue for banks in China for a number of years and they will continue to be a burden, but we have seen evidence of increasing operational transparency and that can only benefit the industry."

Li said she doesn't think the big four can significantly reduce their NPL ratios in 2005.

"Government intervention may be necessary," she said. "Moving into 2003, shareholding banks continued to flourish. China Minsheng Bank, for instance, saw an almost 50 per cent increase in net income to 638 million yuan (US$77 million) in the six months to June 2003."

But she also pointed out the shareholding banks are facing numerous challenges.

"Their revenue base is not diversified enough. The network is also smaller than the big State banks," she said.

Daniel said China's domestic banks have been evolving as quickly as the government can liberalize the industry, focusing on new business areas, revamping their networks and looking to boost service levels.

Banks in China are further expanding into product areas such as credit and debit cards, mortgages and consumer loans.

(Business Weekly 11/11/2003 page4)