Gabriel Wildau| Financial Times

Do not tell Jamie Dimon – who warned he “wouldn’t want to see the next JPMorgan Chase be a Chinese company” – but universal banking is gaining traction among mainland Chinese lenders.

The universal banking model, under pressure and deemed to be broken in much of the world, is finding favor in China as traditional lending businesses slow.

Last month, three of China’s four largest banks reported annual declines in fourth-quarter earnings for the first time since 2009. As elsewhere, clouds are gathering: in addition to tougher capital requirements Chinese lenders have to deal with interest-rate deregulation and rising bad loans on the back of an economic slowdown.

That is driving banks to look elsewhere for income, says Zeng Gang, director of bank research at the Chinese Academy of Social Sciences’ Institute of Finance and Banking.

“Pure lending business is based on interest margins, but with interest-rate liberalization, margins are shrinking and risks are rising. Intermediary fees are another source of income, with investment bank and wealth management as the main portion.”

China, which has traditionally maintained a strict Glass-Steagall-style separation between commercial and investment banking, bans commercial banks from underwriting initial public offerings or acting as broker-dealers in the stock market, the two biggest revenue sources for securities companies.

But bond underwriting, wealth management, M&A advisory and custodial services have all emerged as areas of competition between banks and brokerages.

And last month the China Securities Regulatory Commissionstunned markets by announcing it was considering issuing brokerage licenses to commercial banks. That sent brokerage stocks – which have outperformed China’s red-hot equity market in recent months – plunging.

Analysts say commercial banks, whose client base and physical branch networks dwarf those of securities companies, would quickly dominate the sector if regulators granted approval.

However, the specter of rivals to challenge western counterparts conjured up by JPMorgan’s Mr Dimon remains an unlikely one. While China’s banks tower above their global peers by the size of their balance sheets, they lag far behind in terms of revenue from non-lending businesses.

Recent earnings reports show banks are diversifying. At Industrial and Commercial Bank of China, the country’s largest bank, income from asset management for corporations rose 18 per cent to Rmb14bn ($2.28bn), faster than the bank’s 12 per cent growth in overall operating income.

Investment banking income, which includes bond underwriting, structured finance, mergers and acquisitions advisory and private equity, rose 3 per cent to Rmb30bn, following 12 per cent growth in 2013.

Yet total non-interest income at ICBC – which includes investment banking, wealth management, bank cards, settlement and other fees - was only 22 per cent of total operating income last year, less than half the 54 per cent ratio at JPMorgan.

Smaller banks are also getting in on the act. At Ping An Bank, non-interest income rose 77 per cent, increasing its share in the bank’s total operating income by six percentage points to 28 per cent. Investment banking, custodial services, bill issuance, and gold leasing were the main growth drivers, the bank said.

Small and midsized banks are generating fees by packaging off-balance-sheet loans into high-yielding wealth management products. This is effectively informal debt securitisation for weaker firms unable to access the formal bond market.