Chinese banks could improve their bottom lines with AI adoption, experts say

The development and application of artificial intelligence (AI) technology in China's banking sector could help the nation's lenders generate new revenue streams, as banks grapple with challenges ranging from a slowing economy to a struggling property sector, according to experts.

"For net interest income, banks are at the mercy of the central bank and the amount of liquidity the central bank allows into the banking system," Emmanuel Daniel, founder of the Asian Banker, a financial data services provider, said at the Future of Finance China Conference in Beijing on Friday. "To reduce their reliance on net interest income, [banks need to] increase their fee income."

The real challenge is to increase the amount of fees that banks charge customers, he said, adding that AI could lift banks' fee-based income to as much as 40 per cent from 30 per cent currently.

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The business model of banks will start to resemble software companies with the help of AI, rather than a traditional intermediation business, Daniel added.

China's big commercial lenders' interest margins are under downward pressure as they respond to Beijing's call to make borrowing easier and inject liquidity into the broader economy amid a property downturn.

China's six big state-owned banks posted lower profits in the first quarter. Industrial and Commercial Bank of China (ICBC), the world's largest bank by assets, reported a decline in quarterly profit for the first time in over a year.

The lenders of the world's second-largest economy have been accelerating AI adoption in recent years.

The nation's big banks made 400 million decisions daily on average using machine learning or AI models in the first half of 2023, ahead of their counterparts in other major Asian economies such as Singapore, India and South Korea, according to Christian Kapfer, director of research at TAB Insights, a global research and consulting firm.

"China's banks are certainly paying more attention this year to [AI deployment]," he said at the same event. "Last year was more like 'adopt these things as fast as possible'. This year, we see a much stronger focus on model quality and infrastructure requirements."

Even smaller Chinese banks are turning to AI to generate revenue and survive.

"As China's small and medium-sized banks are faced with more severe liquidity challenges, they are being absorbed by the larger banks," said Zhang Jun, dean of the school of economics at Fudan University.

These lenders will eventually lose their competitive edge if they do not adopt the latest technologies, he added.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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