Q: What are the prospects for growth in the Chinese economy, and what will the impact be on the country's banking sector and Agricultural Bank of China [ABC] in particular?
A: First, the Chinese economy has stabilised and is starting to pick up. Economic indicators such as gross domestic product [GDP], the purchasing managers' index [PMI] and total social financing show that China's economy is warming up. In March, the PMI bounced back to 50.9%, 0.8 percentage points higher than in February, and the highest for the past 11 months. In 2012, consumption made up 51.8% of China's GDP growth, but this climbed to 55.5% for the first quarter of 2013. Consumption is playing an increasingly important role in driving economic growth.
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Second, despite this growth, problems such as imbalances, a lack of coordination and unsustainable economic development remain prominent in China. In addition, unsound industrial structures, rising business costs, a lack of innovation and mounting constraints on resources pose serious challenges.
Third, despite its structural problems, the Chinese economy still enjoys a solid foundation for stable and sustained growth. The Chinese market is huge and there is significant potential for consumption, investment and exports to fuel further growth. Urbanisation is at an early stage and has tremendous potential. Our economy will continue to develop in a stable and sound fashion, as we are seeing major trends gaining momentum such as economic transformation, industrialisation, IT-based development, urbanisation and agricultural modernisation.
A stable macroeconomic environment is favourable for China's banking sector. However, economic slowdowns and restructurings bring certain risks. In particular, the elimination of excess production capacity and real estate market controls will put sizeable pressure on the asset quality of banks. In response, banks have strengthened their credit structure adjustments, closely monitored periodic economic changes and tightened their grip on the quality of loans extended to risky sectors.
ABC will be a big beneficiary from this stable economic growth. On the one hand, ABC’s distribution network spans urban and rural areas. Our business structure and asset allocation very much fit in with this urbanisation trend. On the other hand, ABC has always placed county area business and urbanisation-related business at the core of its strategy. We have a lot of experience in these areas.
At present, ABC is increasing its efforts to seize opportunities and tackle challenges presented by this increase in urbanisation. We will try to ensure that the bank makes the most of these opportunities to achieve a sound business performance.
Q: How do you judge the performance of ABC in 2012, and what were the particular highlights?
A: In 2012, faced with a complicated and volatile economic and financial environment in China, ABC committed itself to being more prudent in its operations, meaning that the bank successfully withstood severe external challenges and delivered great benefits for all stakeholders. This is demonstrated by the following facts.
First, the total assets of ABC increased by Rmb1600bn [$260.8bn] in 2012, a year-on-year growth of 13.4%, reaching Rmb13,200bn by the end of the year.
Second, in 2012, ABC had a net profit of Rmb145.1bn, 19% higher than in 2011. Return-on-average assets and return-on-average equity reached 1.16% and 20.74%, respectively, 0.05 and 0.28 percentage points higher than in 2011.
Third, ABC is one of the few banks where the non-performing loan [NPL] balance and ratio both declined, with our NPL balance standing at Rmb85.8bn and our NPL ratio at 1.33% as of the end of 2012.
Fourth, ABC's market capitalisation was ranked sixth in the world as of the end of 2012 and our investment value has been recognised by investors.
Q: How do you see your bank's prospects in 2013? What new developments are planned?
A: This year will be the first year of our three-year development plan. ABC will continue to focus on maximising shareholder value, deepening its reform strategy, accelerating innovation in management, enhancing diversified service capacities and steadily increasing operational efficiency. The economic slowdown and asset repricing, among other factors, will pose challenges to ABC's development in 2013, and we expect a moderate decrease in our return on assets and net profit growth, as well as difficulties in preventing a potential NPL rebound.
The most important task ABC will have over the next three years will be to make the most of its unique advantages. Our strategy is first, to consolidate our competitive edges in county-area business. That means strengthening our competitiveness in county areas by fully capitalising on our local advantages regarding clients and networks and seizing opportunities in areas undergoing urbanisation.
Second, we will forge a distinctive financial market business that plays to our strengths. ABC will use its abundant funding resources and low loan-to-deposit ratio to build a distinctive financial markets business and develop the wealth management business to meet customer demand for better asset management.
Third, ABC will push forward regionally coordinated development. Given that our branches in eastern China have taken the lead with regards to the bank's development, we now need to boost the coordinated development in different regions, especially for branches in mid-western China.
Q: Does ABC plan any particular developments overseas in 2013? How does your bank see the growing internationalisation of the renminbi?
A: ABC is a domestically focused bank. While building a first-class domestic bank, we are prudently developing our international business to improve our financial service capacities. In 2013, ABC will steadily continue with its overseas development. On the one hand, we will enhance the competitiveness of our Hong Kong branch so that it can function as an overseas fund-raiser, an offshore renminbi hub, and a link between domestic and overseas markets. Our Hong Kong office will be built into a flagship overseas branch.
On the other hand, we will gradually push forward our overseas business. Further expansion of our overseas network will target countries that have close trading links with China, sound infrastructure and huge development potential. In 2013, we will endeavour to establish two or three overseas branches in international financial centres to further improve our overseas service network.
The issue of renminbi internationalisation has risen to prominence as a result of China’s rapidly growing export-oriented economy and the country's national strengths. We believe that renminbi internationalisation will come about in the following manner.
First, we will witness an expedited internationalisation of the renminbi as the currency used in more regions and more business areas, and through more diversified means. Second, the drivers that are causing the renminbi internationalisation trend will change as using the currency in cross-border trade and investment will become increasingly convenient and investors will have greater confidence in holding renminbi. Third, we will witness rising renminbi transaction volumes and liquidity in international markets.
Q: What do you expect the important domestic banking developments in China to be this year?
A: The business environment for Chinese banks is changing dramatically due to faster economic restructuring, financial reforms and technological changes in the country.
First, China’s economic growth will slow, albeit mildly. Though the economy will sustain steady growth, its pace will be slower because of restraints on the country's resources, its environment and its demographics.
Second, interest rates will be further liberalised. In the short run, this liberalisation will narrow interest spreads, creating difficulties in liquidity management and assessing the size of risk assets, thus resulting in the shrinking profitability of China's banking industry.
Third, the financing structure of society will change. Financial disintermediation is gaining speed, leading to the rapid emergence of new financing channels that run in parallel to existing banking systems. Large enterprises with strong credibility will be less dependent on bank credit. These new trends have had an impact on the traditional revenue models based on loan extension.
Generally speaking, China’s banking industry will face stronger competition, which will in turn motivate banks to transform their business models. For commercial banks, faster business transformation and management reform will be manifested in the following areas.
First, interest rate management will be given a higher priority. In the short run, NIMs [net interest margins] will narrow due to interest rate liberalisation. To address this problem, commercial banks will speed up the restructuring of their clientele by enhancing pricing power. At the same time, to improve interest rate management, banks will increase their loan-to-deposit rates, raise the share of medium- and long-term loans in their portfolios, and fine-tune their time strategies in a more flexible way.
Second, capital management will become more important. At the beginning of 2013, administrative measures on the capital of commercial banks, issued by the China Banking Regulatory Commission, were officially put into practice. This means that China has put in place a capital management system that is in line with international standards. To increase return on capital, banks will accelerate their capacity building on capital management, develop a capital-efficient business model and control the growth rate of risk-weighted assets.
Third, risk-based pricing will rise in importance. Due to China's reduced economic growth rate and enhanced economic restructuring, commercial banks’ risk-based assets will grow. In addition, the financial disintermediation of large enterprises has had a relatively strong impact on banks' pricing power, compelling them to build up a better small and medium-sized enterprise customer base. Under such circumstances, banks have to prioritise risk-based pricing management and improve risk-based pricing power to offset risk-based cost.
Fourth, new technologies will play a more important role. The banking industry is increasingly being influenced by internet-based financing and new technologies. Banks will integrate technological innovation with business models so that an active application of the latest IT can effectively improve financial service capacity.
Q: What changes do you expect the arrival of the new government in Beijing to have on China's banking sector and the country's financial outlook?
A: In a recent press conference, Li Keqiang [China's premier] stressed that the new administration would keep sustainable and healthy economic development at the top of its agenda. To promote such economic development, we believe that China must take the following measures.
First, China must decrease its dependence on external demand and promote steady economic growth. To achieve this goal, the country must pay special attention to the important role of newly urbanised areas in terms of promoting investment, consumption and domestic demand.
Second, China must continue to adjust and optimise its economic structure. To this end, the country should push forward the healthy development of emerging industries with strategic importance, speed up the technological upgrades of its companies and expand its tertiary industries.
Third, China must do better when it comes to people’s living standard and economic development. To achieve this goal, the country must give more support to 'sannong' [agriculture, rural areas and farmers] and small and micro enterprises. It must also continue to increase investment in medical care, education and social security.
Fourth, China must integrate the benefits from its reforms, the potential of increased domestic demand and the dynamism of its innovation into a new driving force for development. To make the above measures effective, commercial banks must play an active role, too. Economic transformation and improvements will work to the benefit of Chinese banks.
Q: What type of new players are emerging in China's banking sector?
A: Two types of emerging player are grabbing the attention of China's banking industry. One is the non-bank financial institution. In recent years, the bank credit-dominated financing structure has been redefined due to the growth of emerging institutions, including trust companies, private equity and third-party asset management companies.
In 2012, incremental social financing amounted to Rmb2930bn, among which bank loans accounted for only Rmb732bn, less than 30% of the total. Accelerated financial reform will incentivise non-bank financial institutions to enter the traditional banking market, thus intensifying competition.
The other type of emerging player is the internet-based financial enterprise. Some large internet-based financial enterprises, via third-party payments, have been making their way into the traditional financial sector in recent years. Third-party payment businesses are expanding rapidly, with 233 being granted third-party payment licences in China. The size of this business reached Rmb3800bn in 2012, up by 73% on 2011's figures, with an average growth rate of about 100% for seven consecutive years. The rise of these companies will further reshape the landscape of China’s financial sector.
