Chinese banks were the most profitable banks in the world in 2012 with the top 10 banks in China in 2013 achieving aggregate pre-tax profits of $231.3bn, a 16.1% increase on the previous year. But as the world’s second largest economy slows down, will bank profits in 2014 feel the negative effects?
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In 2013, the top 10 Chinese banks all saw more than double-digit pre-tax profits growth (except for Bank of Communications with 9.5%), but 2014 may prove more problematic. Jiang Jianqing, chairman of the world’s largest bank, Industrial and Commercial Bank of China (ICBC), says: “In the past 10 years, ICBC managed a 28% growth in profits every year, but when we look to the future we cannot sustain that 28% figure, it will be a bit lower. We need to look to sustainable growth in the future.”
A new way of thinking
Addressing the issue of achieving sustainable growth is a common theme among the major Chinese banks, with many institutions developing new strategies to adapt to the new economic conditions and the key concerns over a possible collapse in the property market and from rising local government debt.
Standard & Poor’s expressed worries in its China banking report late last year, saying: “We think it is highly likely that the banks could incur substantially higher credit losses in the coming years. If the government pushes more vigorously for the consolidation of industries afflicted by oversupply, this could lead to unexpected substantial rises in the banks’ credit losses, despite China’s still comparatively strong economic growth.
“In addition, we believe that liquidity management among China’s top banks is becoming increasingly strained. Should those regional banks that have relied heavily on interbank financing suffer severe credit losses and potential depositor runs, we would expect there to be wider negative repercussions for the banking sector as a whole.”
Minsheng’s new venture
A group of 50 entrepreneurs led by China Minsheng Bank chairman Dong Wenbiao have announced the formation of an ambitious new private company that aims to become China’s Morgan Stanley. Called the China Minsheng Investment Corporation (CMIC) and formed through the shareholders each contributing Rmb1bn in capital, Mr Dong tells The Banker that the new company’s mission is to help the government with investment and the restructuring of the economy.
Approved directly by Chinese premier Li Keqiang, the original founding principle of CMIC is to consolidate non-state-owned financial resources at the time of China’s economic restructuring and provide funding resources to emerging industries as well as investment opportunities abroad.
Mr Dong and others see the company, which has been compared to the state investment corporation China Investment Corporation, as a foundation to build a financial and industrial empire which could in time include China Minsheng Bank and its affiliates.
Mr Dong envisages the company supporting private investors’ overseas mergers and acquisitions as well as investing in domestic infrastructure development. There will be two business segments: finance and non-finance. The non-finance part is related to China’s industry consolidation, with a current focus on three industries with clear overcapacity: steel, solar and shipping. Three industry funds are being planned in this regard with a total fund size of Rmb 300bn. The finance arm of CMIC is reported to depend on its future equity-investing activities going forward.
Mr Dong believes China is on the verge of a huge restructuring period, similar to the US at the beginning of the 20th century, and as JPMorgan did at that time, the new CMIC private model with 50 equal shareholders is seen as the model for the future.
Pastures new
Meanwhile banks are heading in new directions and finding new markets. ICBC, the world’s largest lender, saw its income from investment banking rise by 43% in 2013 due to the surge in the demand of enterprises involved in industry structural adjustment. With its 4.9 million corporate customers and 441 million individual customers, ICBC is also expanding its global network to reach 40 countries, including new branches in the Middle East and Africa. Mr Jiang notes that ICBC’s overseas assets and profits amount to $220bn and $2.3bn, respectively, well below 10% of group totals. But he believes overseas assets and profits will account for more than 10% in the medium term.
Banks are also developing their particular market niches. China Construction Bank (CCB) chairman Wang Hongzhang emphasises the importance of the quality of growth, adding that quality growth now at 7.5% is better than the previous growth at 10%. In 2013, CCB adjusted its loan mix significantly, with a massive boost in small and micro businesses lending (up 15.89%) and personal lending (up 22.14%) as lending to iron and steel and manufacturing declined by 10.7% and 3.7%, respectively. CCB, which has a presence in 15 countries at present, hopes to increase that number to 22 countries/regions by the end of 2014, with new operations planned in France, Italy, Spain and the Netherlands. With 291 million personal customers, CCB is also pushing hard in retail and electronic banking services.
Bank of China, with its long history abroad and 600 branches overseas, believes there is huge potential for the renminbi to be used as a global currency and wants to extend its estimated 10% to 20% market share of renminbi clearing globally. It sees itself as a bridge between China and the West and has a long-term revenue target of 30% from overseas, compared to the current 20%.
Alternative thinking
Meanwhile, other banks are adopting alternative strategies and new business models. China Minsheng Bank, the ninth largest bank in China and privately owned, has long had a unique focus, first on small and medium-sized enterprises (SMEs) and also large-scale entrepreneurs, but in 2013 it introduced a new business approach, the community bank. Minsheng targets a community of 1500 families and believes there are 2000 such communities in Beijing.
As its chairman, Dong Wenbiao, explains, the bank focuses on the richest 500 families and provides a Chinese-style private banking service for these rich members of the community. It offers a small branch with one or two employees, providing wealth management services and lifestyle financial services to this elite group. Mr Dong hopes to set up 10,000 of these community banks by the end of 2015, catering for 10 million to 15 million of the richest families in China, a new and possibly extremely profitable business target.
The Shanghai Rural Commercial Bank (SRCB), China’s 20th largest bank, is also adopting a community approach, but one very different from Minsheng. SRCB president Hou Funing says his bank has established a neighbourhood banking policy with an innovative service platform, described as a “financial convenience store”. SRCB had set up 100 of these stores in Shanghai by the end of 2013 to serve the bank’s 200,000 SME customers and provide wealth management products as well as a limited range of 70 banking products.
While the bank has 400 branches, 25% of those are these specialist neighbourhood stores focused on local residents. These stores, Mr Hou explains, managed to take in more than Rmb19bn in deposits and Rmb6bn in loans last year, a good start. SRCB’s target is to develop 250 of these community branches and Mr Hou says that almost all of the existing 100 stores are profitable and his bank will focus on retail and, like US giant Wells Fargo, is developing the community bank approach.
Shen Si, corporate secretary of Shanghai Pudong Development Bank, China’s eighth largest bank, takes a philosophical view of the current economic changes. “It is like riding a bike, you need to adjust speed, you need to slow down steadily,” he says. Mr Shen acknowledges overheating in the property market but notes that the new government leadership is aware of the problem and just needs time to deal with it.
Risk control
In late May, China’s banking regulator, the China Banking Regulatory Commission (CBRC), said it was stepping up oversight to prevent risks from some failed property developers from spreading into the broader financial system, adding that the overall risk from property loans was controllable. “The overall risk of loans to the property sector is under control, as the proportion of property loans in total bank lending is not very high,” said Wang Junshou, deputy director of the CBRC, at a press conference.
While worries that the cooling real estate market could fuel an increase in bad loans is a major banking concern, ICBC’s first quarter 2014 pre-tax profits rose 8.3% compared with the first quarter of 2013, to $15.4bn, and that compares with $55.5bn for all of 2013. Bankers rightly acknowledge that declining growth and other factors, such as property prices, are worrying, but no dramatic banking collapse seems imminent, and as ICBC’s chairman Mr Jiang suggests, bankers will just have to be satisfied with a lower rate of profit growth.
