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Asia-PacificJune 30 2011

China's leading bankers set on an upward trajectory

How do the leaders of China’s leading banks view the banking sector, their own performances and their aims and ambitions? The Banker talks to the chairmen of China’s top institutions.
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China's leading bankers set on an upward trajectory

Industrial and Commercial Bank of China

The Industrial and Commercial Bank of China (ICBC) is not only the largest bank in China in terms of capital and assets, it is the sixth largest in the world in The Banker’s Top 1000 World Banks 2011. It is also the most profitable bank in the world and chairman Jiang Jianqing is not slow to bring this up. With pre-tax profits reaching $32.5bn in 2010, up 28.8% year on year, Mr Jiang is keen to add that profits in the first quarter of 2011 were up 29% on last year at $8.3bn, providing a stunning 25.4% return on equity. ICBC is also the world’s largest bank in terms of market capitalisation, reaching $233.5bn at the end of 2010.

But while Mr Jiang notes the bank’s excellent operating results reflect good growth in the economy, he acknowledges that credit growth in 2011 will be down to between 13% and 14% growth from the 16.9% expansion in 2010, following the change in credit policy from loose to tight in the second half of 2010.

ICBC can claim many domestic accolades, including largest wholesale bank, largest retail bank, largest electronic bank, largest issuer of credit cards and largest custodian bank. It also claims China's largest market share in the corporate deposit market and corporate loan market, as well as the largest market share in the personal loan market. The chairman adds that personal loans grew 35% in 2010 to $250bn, double that of 2008, in an area where ICBC has been putting particular focus.

ICBC is expanding on the world stage and constructing a global business network. At the end of 2010, it had 203 overseas institutions (up from 162 at the end of 2009) in 28 countries and regions, including 21 overseas branches and 181 overseas subsidiaries. Overseas assets grew strongly by 45% in 2010 to $75.7bn, providing $1.2bn in pre-tax profits, but this was still less than 4% of total profits.

Working with its African partner South Africa’s Standard Bank, ICBC hopes to expand in Africa this year, as well as targeting emerging markets, especially in Asia, with their higher growth rates. The bank also hopes to complete the acquisition of a small retail bank in the US. 

What is ICBC’s greatest challenge? Mr Jiang unequivocally points to capital stress and the need to keep the bank’s capital adequacy ratio above the set 11.5% ratio. “We have opportunities to expand but we need to maintain high profitability to deliver capital growth; we lowered our dividend distribution from 50% to 40% to allow the remaining 60% to provide more capital,” he says. With a capital adequacy ratio of 12.27% at the end of 2010, ICBC is comfortably positioned for more growth.

China Construction Bank

Ranked as the second largest bank in China and eighth in the world in The Banker’s Top 1000 World Banks 2011, China Construction Bank (CCB) is also the second largest bank in the world in terms of market capitalisation ($222.3bn at the end of 2010) and the second most profitable bank in the world, with net profits reaching $20.5bn in 2010, up 26.4%. Besides this, chairman Guo Shuqing highlights that the bank provided an average 21% return on equity between 2005 and 2010, had a strong capital adequacy ratio at the end of Q1 2011 of 12.45%, and has already met all Basel III requirements. 

Mr Guo is proud of the fact that net profit per person at CCB is 140% that of the big US banks. “It’s incredible we are more efficient than US banks at the moment in terms of net profit,” he says. CCB, whose main businesses are corporate banking (more than 40%), retail (more than 30%) and treasury operations (more than 20%), is focused on the domestic market. Mr Guo says: “Banking potential is bigger here than elsewhere. While our total assets overseas are less than 3% of our total, we only see our overseas assets growing in the next five years to 5% at the most.” Nevertheless, CCB opened branches in Sydney and Ho Chi Minh City in 2010, is opening a representative office in Moscow and is planning a presence in Dubai, Malaysia, Indonesia and Brazil. Mr Guo sees Latin America as a top priority.

Strong in traditional areas, such as infrastructure and project finance, CCB also sees strong growth potential in China's housing mortgage area, small and medium-sized enterprises (SMEs) and personal wealth management. Mr Guo says CCB is number one again in China in mortgages, but adds that mortgage quality is very high as the balance of residential mortgage loans accounts for only about 50% of the value of collateralised properties. 

Mr Guo is also bullish on SME lending, adding that such lending accounts for more than 20% of corporate loans, much higher than China's other ‘big five’ banks. “Five years ago we did not lend much to SMEs, but now with better know-how and systems, we can control risks and we are lending at good margins.”

Looking ahead, the chairman sees opportunities in rural areas, with the help of better risk management, and in credit cards with the help of 10.23% shareholder Bank of America. With markets developing fast, the key challenge is the need to move into new areas and also work with small customers.

Bank of China

The oldest and most international bank in the country, Bank of China displayed strong growth in 2010 in all areas making it the third largest bank in China and ninth in the world in The Banker’s Top 1000 World Banks 2011. With assets up 19.5%, as well as profits up 28.5% in 2010, president and vice-chairman Li Lihui describes Bank of China’s performance as "remarkable". The president notes the improved 18.87% return on equity, the reduction in the non-performing loan (NPL) ratio to 1.1%, and the solid capital adequacy ratio of 12.58%, while also highlighting the continued strong improvement in first-quarter results in 2011 with post-tax profits up 28.03% to $5.3bn and return on equity rising to 20.23%.

Mr Li explains that Bank of China made significant progress on its diversified business strategy in 2010 in areas such as investment banking, fund management and aircraft leasing. He notes that lending growth had slowed to a more normal rate of 15.28% in 2010 and 12.12% year on year in Q1 2011, which is compared with a high 49% growth in 2009. However, Mr Li adds that despite the high growth in 2009, asset quality had remained sound. 

According to Mr Li, Bank of China’s large international network (with more than 700 operations abroad) has helped the bank to diversify its offering and expand within its domestic market, which he considers to be the fastest growing in the world. He says that Bank of China’s overseas assets amounted to Rmb2330bn ($360bn), four times that of its nearest Chinese rival, and accounted for 21.46% of the bank’s total assets and 19.89% of its profits.

Looking to the future, Mr Li wants Bank of China to be the most market-oriented and international bank in China, with the most developed IT systems and best risk management and internal controls. Bank of China also aims to set a benchmark for the Chinese banking industry in terms of diversified business platform development. While the Chinese market continues to be the main focus, the bank is targeting Asia and the Middle East, as well as Africa and Latin America. Mr Li is particularly keen to establish business operations in the Middle East and India.

Bank of China is in the process of gaining regulatory approval for a second headquarters in Shanghai, perhaps this year, which would take advantage of the city's massive commercial focus, and look after Bank of China's business and product development.

With an unassailable international network, Bank of China is well positioned for its expanding domestic market and has strength abroad as Chinese companies seek opportunities overseas.

Agricultural Bank of China

The smallest of China’s ‘big four’ state-controlled banks, Agricultural Bank of China (ABC), after becoming listed on the Shanghai and Hong Kong exchanges in July 2010, recorded outstanding results for the year. ABC is the fourth largest bank in China and the 14th largest bank in the world, up from its position as 28th in The Banker’s Top 1000 World Banks ranking last year. 

After the massive initial public offering last July, raising a record $22.1bn, ABC chairman Xiang Junbo was pleased to announce net profits for 2010 of about $14.6bn, a 46% increase year on year with total assets up 16.4% to Rmb10,300bn, almost double the 2007 assets, and return on weighted average net assets of 22.49%.

While not as big as ICBC in capital terms, ABC is the country's largest in other ways: it has more than 23,000 branch outlets, about 350 million retail clients and more than 480,000 staff. Mr Xiang, who has a doctorate in law from Peking University, sees the bank’s strength in its rural branches – these number more than 12,000 – extensive client base and unique synergy between urban and rural areas. With its high-end agriculture base, Mr Xiang believes other banks cannot compete with ABC. He explains that of ABC’s total loan book of Rmb4900bn, more than Rmb100bn goes directly to farmers (small loans to rural households), with 30% of income coming from the expanding county area market of towns and small centres, as opposed to villages. Mr Xiang believes these county areas have strong growth potential, with ABC’s loans to county areas expanding by 26.1% in 2010.

Meanwhile, the chairman explains that the bank’s NPL ratio has improved significantly to 2.03% in 2010 from the dark days of 2007 when it was 23.57%, and provision coverage has reached 168%.

Unlike some of its peers, ABC’s international strategy is relatively limited. It has a presence in the world’s major financial centres such as New York, London, Tokyo, Seoul, Frankfurt and Sydney, with plans for Dubai, Vancouver and Hanoi, along with the clear focus on countries bordering China.

Although ABC’s capital adequacy ratio rose to 11.59% at the end of 2010, it dropped to 11.4% in Q1 2011, but Mr Xiang believes a Rmb50bn (subordinated debts) capital replenishment will bring the ratio up to the regulatory standard set by the China Banking Regulatory Commission – namely 11.5% by the middle of 2011. He adds that two of the foreign shareholders are the Qatar Investment Authority (QIA) and the Kuwait Investment Authority (KIA), with 2.1% and 0.6% stakes, respectively. 

Shanghai Pudong Development Bank

Shanghai Pudong Development Bank, known as SPD Bank, showed strong growth in 2010 to become the seventh largest bank in China and the 64th largest in the world according to The Banker’s Top 1000 World Banks 2011. The bank saw assets grow by 35% in 2010 to reach Rmb2200bn, with post-tax profits up 45.1% reaching Rmb19.2bn, the NPL ratio continuing to drop to 0.5% and provision coverage leaping to 380%.

Board secretary Shen Si explains that the bank raised Rmb40bn in a private placement in 2010 and the bank’s strategy was to upgrade the business model, explore new market areas, improve risk management capability and strengthen retail banking.

SPD Bank is already a national bank, operating in 28 of 32 the provinces across the country, and plans to open in all provinces except Tibet. It has 700 banking outlets and 2500 ATMs with plans to develop more markets in the west, middle and north of China. The bank has outlets in 100 key cities, plus an office in Hong Kong, which was to be upgraded to a branch in June, and 21,914 staff. The board has approved a representative office in London. 

In 2010, SPD Bank opened 426 banking outlets (accounting for 65% of the total) in key areas, such as the Yangtze River Delta, Pearl River Delta and Bohai Sea Rim Area. It promoted the construction of village or township banks, opening five rural banks (bringing the total to 11), and there are more rural banks being built.

China CITIC Bank Corporation

Confronted with the severe domestic market situations and increasingly tight regulatory restraints in 2010, China CITIC Bank Corporation has achieved an excellent performance and accomplished substantial breakthroughs in terms of operation scales, profitability and asset quality, making it the eighth largest bank in China and 66th in the world in The Banker’s Top 1000 World Banks 2011 listing.

Bank president Chen Xiaoxian explains that total assets rose 17.3% in 2010 to Rmb2080bn, with loans and deposits up 18.6% and 29%, respectively, putting China CITIC at the forefront of medium-sized joint-stock banks. Meanwhile, post-tax profits were up 50.2% to Rmb21.5bn, with return-on-average equity rising strongly to 19.29% and net interest margin up to 2.63%. In 2011, the bank maintained a healthy and coordinated business development, with net interest margins reaching 2.89%, taking the lead in the industry.

In terms of structure, China CITIC had 714 branches and sub-branches throughout China at the end of March 2011. The network covers six economic zones, namely the Yangtze River Delta (18), Pearl River Delta (80), Bohai Economic Rim (207), middle and west China (200), west coast of the straits (37) and north-east China (6). The bank plans to build 70 new outlets in 2011.

In terms of strategy, Mr Chen notes that China CITIC gives more support for foundation and strategic industries, such as communications, energy and telecommunications, and actively supports welfare housing construction. Focused on the strategy of quality industry, quality enterprise, mainstream market and mainstream customers, Mr Chen says the bank vigorously supports backbone enterprises with outstanding competitive advantages and powerful sustainable operation capabilities in key industries, as well as high-quality SMEs. Focused on retail banking development strategies, the bank vigorously develops personal housing and automobile mortgage loan businesses, and steadily carries out personal business loan activities.

China Minsheng Banking Corporation

Established in 1996, China Minsheng Banking Corporation (CMBC) is not only the ninth largest bank in China and the 73rd largest in the world in the The Banker’s Top 1000 World Banks 2011, it is unique in China for being 100% privately owned. It also has a highly specific market focus following a recent strategic positioning. According to chairman Dong Wenbiao, CMBC focuses on three key groups: non-state-owned large large and medium-sized enterprises, small and micro-enterprises, and high-end individual customers.

Starting in 2010, Mr Dong has led China Minsheng into a ‘second take-off’, with plans to become a distinctive bank with outstanding efficiency. In 2010, CMBC posted strong net profit growth of 45.25% to reach Rmb17.58bn, with total assets up 27.9% to Rmb1800bn and average return at 18.29%, and the group’s growth in net profits outpacing that of assets and loans. The bank also reported a significant increase in its net interest margin to 2.94%, a reduction in the NPL ratio to 0.69% and an increase in provision coverage to 270.45%.

Mr Dong sees big potential in the bank’s private enterprise focus. The strategic business unit reforms for large private entrepreneurs are to provide one-stop financial services and strengthen these entrepreneurs’ brands and market position. He explains the bank has 8000 large customers, 300,000 micro and SME customers, and 40 million retail bank customers. 

“We are addicted to small and micro-businesses,” says Mr Dong. In 2010, 66.2% of CMBC’s total loans were directed at small and micro-enterprises. But he notes that all loans to small and micro-businesses are for less than Rmb5m, the average loan is for six to nine months, the pricing is higher to reflect the risk, and they use a selective batch processing system that minimises risk. NPLs to these small and micro-enterprise borrowers (65% of which are to the service sector) are very low at 0.1%. 

Mr Dong explains that his bank’s help to an entrepreneur wholesaler in Kunming helped create 600,000 job opportunities and boosted sales volume to Rmb120bn, of which 25% is for export to Asia. He believes his bank now has effective financing models for large entrepreneurs and SMEs, as well as small and micro-enterprises, and can outperform other banks. His target structural model is 40% entrepreneurs and SMEs, 30% small and micro-enterprises, and 30% high-end wealth management from the current 80% non-state-owned enterprises and 20% state-owned enterprises.

At present, the bank has 530 banking outlets, 70% in eastern China, a diversified shareholding base of 1.1 million shareholders, the largest holding being 4%, with Morgan Stanley holding a 1% stake. CMBC is pushing forward its strategic transformation and its 'second take-off' for its unique niche in China’s banking market.

China Guangfa Bank

Formerly Guangdong Development Bank and renamed in April this year, China Guangfa reflects the bank’s national strategy and expansion outside Guangdong province. In 2010, the bank adjusted its operational strategies and business structure, and showed significant financial improvement, becoming the 12th largest bank in China and the 145th largest in the world, according to The Banker’s Top 1000 World Banks 2011.

Explaining the changes, president Morris Li, former head of Citibank Taiwan, says the bank achieved a net post-tax profit of Rmb6.2bn in 2010, up 82.7% on 2009 and exceeding the aggregated profits of the previous two years, as well as a 19.8% return on equity. Total assets were up 22.2% to Rmb814.4bn, the capital adequacy ratio rose to 11.02%, the NPL ratio dropped to 1.58% and provision coverage rose to 208.5%.

China Guangfa, which has 550 branches across China and is number eight of the 12 joint-stock commercial banks, is not pursuing size alone and is not lending big to government or real estate because it cannot do well on price, says Mr Li. “We want to have a variety of businesses and we are lending to capital-light businesses, such as SMEs, which account for 50% of total corporate lending.” He adds that, with Citibank expertise, asset pricing and risk controls for SMEs have improved and he is also looking to develop wealth management capabilities using the bank’s national network and also the knowledge he picked up at Citi.

Mr Li notes China Guangfa’s strength in credit cards: with 12 million cards issued, it is the sixth largest in China. Profits from credit cards account for 60% of total net profit. The bank's business model is now based around SMEs, credit cards and wealth management, which is not competitive now but is expected to become so in the not-too-distant future.

Beijing Rural Commercial Bank

A medium-sized Chinese bank ranked 26th largest bank in China and 343rd largest in the world in The Banker’s Top 1000 World Banks 2011, Beijing Rural Commercial Bank is seen as the largest of the 85 rural commercial banks in China, with total assets at the end of 2010 of Rmb335.8bn and profits before provisions of Rmb3.17bn, a 25.8% increase on the previous year.

Established as a rural co-operative in 1951, it became Beijing Rural Commercial in 2005 and, as chairman Qiao Rui explains, the bank has 694 branches. As of the end of 2010, the bank was involved in the businesses of agriculture, food production, textile manufacture and equipment manufacture in the rural areas around Beijing. He also notes the bank’s important card business, with 8 million customers in and around Beijing providing Rmb180m of the bank's Rmb542m intermediary business in 2010.

Mr Qiao believes Beijing Rural Commercial has a bright future and plenty of potential spare capacity. He notes the bank’s low loan-to-deposit ratio of 47.2%, well below the 75% limit imposed by the China Banking Regulatory Commission and allowing room for much more lending. The bank also appears to have a healthy capital base, with a capital adequacy ratio of 14.06% at the end of 2010, up from 11.1% in 2009 and well above requirements. 

While the NPL ratio declined sharply in 2010, it is still relatively high at 4.77% compared with banks with more advanced management systems, and although the provision coverage ratio improved to reach 109.05% in 2010, it is still relatively low.

For Mr Qiao, the outlook for 2011 is good and with last year’s capital increase of 14.6% there are good opportunities for more lending this year. He believes that rural financial institutions will have a bigger role to play, especially in providing financial services for farmers across the country who are also moving to the urban environment in their production activities and personal lives. He would like to expand outside Beijing and go international, but such strategies need final approval from the China Banking Regulatory Commission.

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