Retail banking contributed to 27 per cent of the country’s total banking income last year, up from 22 per cent five years earlier, but still a long way from the international norm of between 40 and 50 per cent. That compels Chinese banks to seek out fresh income sources, especially since corporate banking -- traditionally the biggest revenue contributor -- has been pinched by rising bad loans amid the slowest economic growth in almost three decades, and structural reforms to retire obsolete capacity among state enterprises.

“The coming five to 10 years could be the golden era for China’s retail banking sector as its potential is yet fully tapped despite years of sizzling growth,” McKinsey’s partner Nicole Zhou said in Shanghai.

Leading Chinese banks have already seen the increasing urgency to reshape their retail banking operations to meet the evolving needs of retail clients, and face off competition brought by disruptive internet finance players, McKinsey said.

Micro financing, including small-sum credits extended to small business owners, is rising to become the largest income contributor, accounting for 29 per cent of total retail banking income by 2020, up from 2016’s 23 per cent, the consultant firm said.

That’s followed by wealth management, whose contribution is projected to rise to 27 per cent from 22 per cent in 2016.

Early adopters of the new technology, like China Merchants Bank, have already benefitted from the booming retail banking business, said Bank of Communications’ senior researcher Zhao Yarui.

“Retail banking, with lower funding cost and better assets quality, can be strong cash cows for lenders who do it right to exploit the market potential,” she said.

Data showed contribution to profit from retail banking rose at major listed lenders last year.

Retail banking made up 34.2 per cent of the pre-tax profit in 2016 among the 25 publicly traded Chinese banks that provided details of their loans, up from 30.9 per cent in 2015, according to data by PricewaterhouseCoopers.

The contribution was most apparent at Merchants Bank and others that play second fiddle to China’s six biggest lenders, accounting for 33.2 per cent of pre-tax earnings last year, up from 24 per cent in 2015.

This article appeared in the South China Morning Post print edition