China’s banking sector will continue to see stable development this year but the banks may face slower profit growth and rising pressure on their asset quality, a report said on July 10.

Uncertainties in global economic growth, rising trade friction as well as stricter financial regulation at home would mean that Chinese banks will continue to face challenges, according to a report released by the China Banking Association.

The report is an annual review and assessment of the Chinese banking industry with a focus on areas such as the banks’ asset quality, liability business and risk management capability.

The banks will have to deal with risks associated with the cleanup of the loss-making “zombie” companies, potential credit default by some real estate companies and risks from local government debt. The rise of protectionism and uncertainties in the global markets are also likely to affect banks’ cross-border business, the report said.

Despite the challenges, Chinese banks have managed to maintain stable operations with steady rise in asset scale and improved risk management capability, said Lian Ping, the lead author of the report and chief economist of the Bank of Communications.

As the end of the first quarter this year, Chinese banks’ total assets reached 276 trillion yuan ($40.1 trillion), up by 7.7 percent year-on-year. The non-performing loan ratio of commercial banks stood at 1.8 percent as of the end of the first quarter, slightly higher than the ratio of 1.74 percent in 2017. The banking sector also reported net profit of 571.5 billion yuan in the first quarter, up 6.09 percent year-on-year, according to the China Banking Association.

Lian said the banking sector has seen high-quality growth with better risk management, more effective internal controls and compliance practices, and greater ability to serve the real economy.

While the banks may face greater pressure on asset quality, the overall bad loan ratio is unlikely to rise above 2 percent this year, Lian added.

Pan Guangwei, executive vice-president of the China Banking Association, said that the Chinese banking sector will play a bigger role in serving the nation’s high-quality economic growth.

The banks will explore more business opportunities in the Belt and Road Initiative and major national development strategies. They will also boost credit support for smaller businesses, high-tech and innovative firms and the manufacturing industry, Pan said.

Zeng Gang, deputy director of the National Institution for Finance and Development, said that the banks have to switch from pure expansion of asset scale into improving the quality of their services.

“The transformation of the banks’ business model requires more sophisticated management to help reduce costs and more innovative tools to help replenish capital and raise the efficiency of the banks’ use of capital,” Zeng said.