Jiang Jianqing: ICBC embracing new Chinese landscape

Jiang Jianqing, the chairman of Industrial and Commercial Bank of China (ICBC), cuts out an hour of his time from a day-long conference in Beijing with representatives from ICBC branches across China to meet with The Banker. A key theme at the conference was addressing the local economy’s shift from an investment to a consumption-driven model – one which Mr Jiang deems essential if China wants to reverse the recent drop in its gross domestic product (GDP) growth. 

The ICBC chairman is not worried about the drop in China's GDP growth to 7.7% since 2012. "China’s growth has decelerated compared to previous years, but if we look deeper we can see that maintaining the 9% to 10% annual GDP growth rate that was sustained for more than 30 years is not realistic for China,” says Mr Jiang.

Upgrading the economy also requires strengthening China’s services sector, whose contribution to GDP went from below 50% to above this mark in early 2015, according to Mr Jiang, who adds that this will decrease past strain on energy and resources in China.

Banking impact

However, the economic slowdown’s impact on China's banking sector is real. In ICBC’s case, this is shown through its non-performing loan (NPL) ratio. In 2014, the ratio climbed above the 1% mark – to 1.13% – for the first time since 2011, according to The Banker Database. 

The bank is looking to counteract this trend by strengthening new, fee-based business lines such as retail, private and investment banking, as well as by offering credit to new client pools. Expanding abroad is also a priority.

Meanwhile, China’s economic structural adjustments could offer credit growth opportunities in the rapidly growing services industry, the high-tech industry and advanced manufacturing sectors. “The Chinese people are consuming more cultural, education, healthcare and elderly care products. These are further areas of opportunities for ICBC credit,” says Mr Jiang. 

Though analysts accuse China’s big four banks (ICBC, Agricultural Bank of China, Bank of China and China Construction Bank) of having historically underserved small and medium-sized enterprises (SMEs) to focus on larger, more lucrative corporate clients, Mr Jiang says ICBC will focus more on SMEs in a move to expand its credit. In June 2015, the bank had Rmb1700bn ($273.97bn) outstanding in SME loans.  

Focusing more on SMEs could put further pressure on ICBC’s NPL ratio, however. “If we change the business model of a bank to focusing more on individual, SME or micro loans, the NPL ratio might become higher. Wells Fargo’s NPL ratio, for instance, is higher than ours,” says Mr Jiang.

New competitors 

Credit scoring – which remains challenging in a vast country such as China, as it does for older, larger banks with outdated credit scoring systems – will therefore play an even larger role if ICBC starts focusing on riskier clients. “ICBC has been upgrading and adjusting its SME credit scoring system for more than 10 years now,” says Mr Jiang. 

Analysts, however, argue that new privately owned, tech-savvy banks such as Tencent’s WeBank or Alibaba’s MyBank have more accurate and reliable credit scoring thanks to readily available information on existing customer or internet user pools. ICBC, along with other state banks in China, is eyeing these lenders closely.

“Some small, new banks are proposing to use big data technology to solve credit risk in their operations. ICBC will be happy to see their success in this front,” says Mr Jiang, who does not see these new entrants as challengers, but more as bringing potential benefits for the entire Chinese banking sector. 

“The participation of new financial institutions will boost the vitality of the financial sector and will help adjust the structure of financial businesses. This is a positive development overall,” says Mr Jiang.

Indeed, focusing on riskier retail and SME clients could be a challenge for these new entrants themselves. “As China’s economy undergoes structural adjustment, we can see that enterprises are having diverging performances. Some SMEs are having serious problems so these new market entrants face both opportunities and risks since they serve smaller firms,” says Mr Jiang.

In order for China’s new banks to benefit the banking sector, Mr Jiang believes that all firms engaging in financial services in China should be regulated as such. Though some of these new entrants have been given banking licences by the China Banking Regulatory Commission, China still has an enormous shadow banking sector. 

“I believe that as long as these institutions engage in financial services, or quasi financial services then they surely need to be subject to regulation. You must be regulated according to what you are engaging in. If you are engaging in the food industry, you must be subject to food regulation; likewise, for financial services. That’s what the regulators should think. They must protect the interest of the general public,” says Mr Jiang. 

New business lines 

In addition to expanding its credit pool, ICBC is seeking to strengthen new business lines to increase profitability. Historically focused on commercial banking, ICBC is now looking to bolster its retail, wealth management and investment banking offerings.

The lender is also focusing on developing new products for its 400 million-plus retail customers. And its credit card business is also booming – as of June 2015, the bank had distributed 110 million credit cards to its retail customers. “We rank third in the world as a credit card issuer. In a few years I believe we will become the largest credit card issuer in the world,” says Mr Jiang.

ICBC’s credit card loans are also on the rise. Outstanding loans now amount to Rmb370bn with an NPL ratio of 1.3%, which is low for this sector in any global market, according to Mr Jiang. 

Developing its private banking business is also a priority for ICBC. Wealth in the Asia-Pacific remains the fastest growing in the world and local banks are keen to capitalise on this trend. ICBC wants to provide a mixture of asset management programmes and products to its private banking clients. High-net-worth individuals tend to be more interested in equity-related products, whereas clients with less capital find bonds and fixed-income products more attractive, according to Mr Jiang.

In order to support ICBC’s private banking offering and to expand its fee-based business as China’s economy slows down, the bank is looking to develop its investment banking arm further through a strategy to capitalise on the bank’s existing 5 million corporate clients. “We will develop our investment banking business based on the large amount of information we have from long-term relationships with our clients,” says Mr Jiang.

And this strategy seems to be working. In 2014, the bank executed 319 merger and acquisition (M&A) deals, making it the leading bank for M%A in Asia-Pacific, according to Thomson Reuters.

Expanding abroad

In addition to venturing into new businesses, ICBC’s priorities also include further overseas expansion. The bank’s objective is for international assets and profits to account for 10% of its respective total figures in the next five years.

Judging by 2014’s performance, ICBC is off to a good start on this score. The bank’s overseas assets grew to $236bn over the 12 months. Its pre-tax profits of overseas operations amounted to $2.9bn. 

In 2014, ICBC opened branches in London and Kuwait and a subsidiary in New Zealand. It also received approvals from local regulators to set up operations in Myanmar and Mexico — two markets no other Chinese bank has ever entered.

ICBC has also played a key role in the wave of renminbi clearing centres established worldwide in 2014. The lender was chosen as the clearing bank in Singapore, Luxembourg, Doha, Bangkok and Toronto. “We now have a network covering Asia, Europe and the Americas. We can offer our clearing business 24/7,” says Mr Jiang.

In addition to establishing operations overseas, ICBC also increased its profile internationally in 2014 by printing its debut Tier 1 offshore preference shares transaction – a Rmb35bn-equivalent triple-tranche multi-currency note in US dollars, euros and offshore renminbi.

This was the first ever offshore renminbi- and euro-denominated deal of this kind out of Asia and the largest multi-currency bank capital transaction ever completed out of the Asia-Pacific region. 

With Chinese banks becoming Basel III-compliant, with this transaction ICBC aimed for pre-emptive Tier 1 capital accumulation as Chinese regulators have already announced stricter capital requirements, says Mr Jiang. ICBC now needs to follow Basel III capital requirements after having received global systemically important financial institutions status from the Financial Stability Board.

Though faced with China’s economic slowdown and structural adjustments as well as new tech-savvy competitors in the banking sector, ICBC is taking rapid steps to renovate its strategy. Its impressive performance of late, exemplified by ICBC heading The Banker’s Top 1000 World Banks ranking for 2015 by Tier 1 capital – the third consecutive year it has topped the ranking – indicates that the bank undoubtedly has the means to withstand these shocks and upgrade its own business structure.