Never Stop Changing -- Stay Ahead of the Game
An Interview with Industrial Bank Chairman Mr. Gao Jianping
Founded in 1988, the Industrial Bank was among China's first joint-stock commercial banks. It has quickly become a gleaming new pearl in the capital market, despite only having gone public at the beginning of the year.
As the number of commercial banks entering China's capital market continues to increase,“Bank Shares” are becoming a bright “vista” in the stock market due to their increasingly solid performance and highly attractive future prospects. The performance results shown in the Industrial Bank's 2007 interim report which was published yesterday represent a major highlight in this “vista”.
How has the Industrial Bank managed to be so active in its development in recent years? How has its operational transformation achieved such rapid progress? What are the reasons behind this? I recently held an interview with Industrial Bank Chairman Mr. Gao Jianping with the hope of getting answers to these questions and more.
It is commonly said that you reap what you sow. Chairman Gao Jianping candidly stated that effective corporate management structure and sound management culture have been two major driving forces that have allowed the Industrial Bank to achieve the scale and standard it boasts today in a period of less than 20 years.
Question: The Industrial Bank published its 2007 interim results earlier today. Looking from the data, it's clear that the Industrial Bank has had a fantastic first half of the year, with profits having risen 108.65% over the same period last year. In line with this, today, Industrial Bank shares have risen from an opening price of RMB 24.8 Yuan to the RMB 50 Yuan that were seeing at present. Could you please tell us some more about the results that your bank has attained over the past few years?
Gao Jianping: As is shown in the interim report, all bank services have maintained constant, fast coordinated and sound growth in the first half of 2007, with a good balance having been found between sale, speed, quality and profit. The results are most pleasing. All major business indexes reached all new highs. Total assets, deposits and loans in various forms stood at RMB 815.6 billion, 435.8 billion and 378.1 billion respectively, with average annual increase over the past 3 years standing at 42%, 19% and 28% respectively. The bank has seen large profit increase over consecutive years. Pre-tax profits went from 2.8 billion to over 5 billion in the 3 years from 2004 to 2006, with the growth of 2005 over 2006 being 26% and the growth of 2006 over 2005 being 42 percent. Pre-tax profits for the first half of the year have already exceeded 5.1 billion, which represents a growth of 125% over the same period last year. So we can see that growth is speeding up constantly. Asset quality has continued to improve, with non-performing loans decreasing in both total sum and ratio. According to the Five-category Assets Classification Approach, the balance of non-performing loans of the bank stood at RMB 4.464 billion Yuan for the first half of the year, which represents a decrease of RMB 612 million Yuan compared that at the end of the year 2004. In addition, the ratio of non-performing loans has also dropped, with the ratio at the end of June standing at 1.18%, which is 1.32% lower than that at the end of 2004. The first public listing of stocks has been completed successfully, with the cumulative total of capital raised standing at RMB 16 billion Yuan, which has lead to a significant improvement in the bank's capital strength. At the end of June, the net amount of the bank's capital totaled RMB 46.4 billion and the average annual growth over the last three years has been 51%. The balance of stockholders' equity stands at RMB 34.6 billion, and the average annual growth over the past 3 years is 64%.
Question: The last few years can be said to have been a period of rapid growth for the Chinese banking industry. How do the results gained by the Industrial Bank compare to those of other banks?
Gao Jianping: Compared with other banks of the same type in China, the various services offered by Industrial Bank have been the fastest developing over the past few years. According to data from the People's Bank of China at the end of June, Industrial Bank ranks in 5th place among domestic banks of the same type (not including the Bank of Communications) in terms of total assets, which is two places higher than the ranking at the end of 2004. The bank currently ranks in 6th place in terms of both deposits and loans in various forms, with both seeing a one place rise since the end of 2004. Additionally, the balance and the newly added amount of the bank's inter-bank funds as well as the securities investment all ranked in 1st place. The Bank's cost-to-income ratio remained the lowest whilst the rate of return on capital remained the highest, with the bank ranking 3rd in terms of pre-tax profits. In the newest rankings of the Top 1000 World Banks published this year by The Banker Magazine (UK), Industrial Bank ranks in 260th place in terms of tier one capital, which is a rise of 37 places over last year and 301 places over the year 2001. The bank ranks in 145th place in terms of total assets, which is a 19 place rise over the last year and a 268 place rise over 2001. Additionally, the Industrial Bank came 10th. According to the Top 100 Chinese Banks released by the magazine this year, Industrial Bank continued to top national banks in terms of average profit ratio of capital, and the bank's tier one capital and total assets balance held 10th place.
An Operation Model Showing Huge Vigor
Question: We can see that over the last few years the Industrial Bank has not only achieved rapid improvement in performance but has also witnessed significant changes in business and profit structures. Could you please tell us about this in more detail?
Gao Jianping: The Industrial Bank first announced that it would promote “Two Transformations” back in 2003. These two transformations refer to the transformations of business development models and profit models. Furthermore, these proposals were adopted as fundamental strategies in the 2006-2010 development plan of the bank. Following several years of efforts, the business transformation of the bank is continuing to go further and further. With the positive effects of the transformation becoming more and more evident, new outlets for business and profit growth are gradually forming.
In terms of business structure, we have seen that the proportions of retail services and newly developing services have increased substantially. To further clarify, at the end of June, retail credit assts accounted for almost 25% of the bank's total credit assets, a 16% rise over the total in 2004. The scale of newly developing business, in particular funds operation, has also grown substantially. The total balance of RMB and foreign currency assets at the bank's Financial Markets accounts for 39% of the bank's total assets. The bank's asset structure is becoming increasingly diversified, and reliance on traditional credit business is decreasing steadily.
Looking at income structure, we can see that the proportions of investment returns and non-interest revenue are steadily increasing, and that the proportion of revenue from the interest margin is gradually decreasing. In the first half of the year, interest on loans accounted for 62.4% of the bank's total interest revenue, which is 10% lower than the proportion from 2004. The total gain from investment on bonds accounted for 28.5% of the bank's total operating revenue, which is 15.8% higher than the proportion from 2004. Non-interest revenue accounted for 6.8% of the total operating revenue, which is a 5.1% increase over 2004. The bank's income structure is gradually becoming more diversified, and reliance on the traditional interest margin is decreasing.
In terms of client structure, core company client and retail VIP client groups are expanding rapidly, with the proportion of the entire client structure that they account for increasing steadily. At the end of June, the number of core company clients was 6100 more than the number at the end of 2005, and accounted for 11.5% of all company clients, 4.1% up compared with the end of 2005. The total number of retail VIP clients at the end of June was almost 350,000, which is an increase of more than 220,000 over the end of 2005. Retail VIP clients now account for 4% of the total number of retail clients, a 1.71% increase over the proportion at the end of 2005. Client groups are expanding steadily with increasingly solid foundations.
Question: Listed banks will be able to provide more financial products and create new areas for profit growth if they make a good job of integrated operation. What are the intentions of the Industrial Bank in regards to integrated operation, and in what aspects will you be seeking breakthroughs?
Gao Jianping: The trend of integrated operation in the financial sector poses both challenges and opportunities for banks. The development of financial institutions other than banks will to a certain extent lead to the division of private saving and competition in losing loan market. However, integrated operation also can help banks to broaden business scope, improve services and strengthen profit-making capabilities. On the one hand, the Industrial Bank is increasing its cooperation with various kinds of financial organizations, putting more effort into the cross-sale of various kinds of financial products and working hard to develop new areas of business, thereby doing business in more areas and widening channels for the inflow of revenue. Such new services include wealth management, asset custody, assets-backed securitization, bond underwriting and financial consulting. On the other hand, we are also looking into establishing or acquiring financial organizations such as securities, insurance and funds companies. The precondition for such moves is, of course, the consent of the law. This will mean that our business can be run in a variety of different forms.
Corporate Governance is the Key to Development
Question: Sound corporate governance guarantees the development of a bank. Over the past few years the Industrial Bank has achieved some very notable results. Such results must be founded on sound corporate governance. Could you please tell us a little bit about the highlights of the Industrial Bank's corporate governance?
Gao Jianping: I agree with what you just said, sound corporate governance is the foundation and guarantee of a bank's development. In the early stages of development, a bank might be able to rely on a strong ability to develop business to seize a number of good opportunities and get a good start. However, once the bank's development reaches a certain stage, sound corporate governance is needed to guarantee continued development. It can even act as a driving force behind development. Only this way can the long-term development of a bank be ensured. The Industrial Bank realizes that sound corporate governance is a foundation which is absolutely essential if the bank is to attain its long-term goal of “Striving to build a top-ranking bank with a history of centuries”. Generally speaking, the Industrial Bank's corporate governance has the following highlights: the first is that we have a sound shareholder structure and a highly-developed governance structure, the second is that we've adopted an governance idea that is beneficial to the sustainable development of the bank, the third is that the decision-making function of the board is constantly being strengthened and the fourth is that our operation procedures are scientific and standardized.
Question: How is a sound shareholder structure characterized?
Gao Jianping: With capital and share increases in the years 1996, 2000, 2004 and 2007 respectively, the shareholding structure of the Industrial Bank began to make the transition from being regionally-based to being national and international. Up to the end of March 2007, stock proportions of Industrial Bank were as follows: state-owned shares 24.51%, state-owned legal person shares 22.20%, overseas legal person shares 19.98%, social legal person shares 24.66% and public shares 9.01%. The proportion of shares held by the largest stockholder was 20.40%, and the combined proportion of the shares held by the 10 largest shareholders stood at 55.82%. Thus, a shareholder framework diverse in structure, sound in proportion and in which different strengths work to compliment each other has formed. This is the foundation of the bank's sound corporate governance.
Question: And how is a highly-developed administrative structure characterized?
Gao Jianping: An ideal shareholding structure and high-quality of shareholders have driven on the formulation of a sound administrative framework in which the various levels of corporate administration have clearly defined responsibilities, effectively balance each other and operate in harmony. At present, the board of directors at the Industrial Bank has 14 directors, with 6 being equity directors (3 being foreign capital directors), 5 independent directors and 3 senior-management level directors. The board of supervisors is made up of 9 supervisors, including 4 equity directors, 2 external supervisors and 3 staff supervisors.
Having an independent director system and a special committee system is important in improving and standardizing the corporate governance of a commercial bank. The consideration behind the Industrial Banks' formation of a special committee was two fold: firstly, to integrate modern international administrative approaches whilst maintaining a high degree of individuality, and secondly, to stay closely in line with actual circumstances in China and thus ensuring a high level of maneuverability. Several committees have been set up under the board of directors, including: the executive committee, the risk management committee, the audit committee, the related party transactions control committee and the nominations, remunerations and review committee. Independent directors are in the majority in the audit committee, connected transactions control committee and the nominations, remunerations and review committee. The position of chief commissioner in all of these committees is taken up by independent directors. In addition, the three foreign capital directors play active roles in their corresponding committees. The industrial Bank board of supervisors has established an external supervisor system. A supervision committee and a nomination, remuneration and review committee have been established under the board of supervisors, and the roles of chief commissioner are taken up by external supervisors. What needs to be clarified is that despite the fact that independent directors play a leading roll in the boards of European and American companies, China does not yet have the policies or the climate for independent directors to play such a leading role. Having board special committees made up of independent directors alone cannot satisfy the bank's need to make frequent decisions, and there is also a lack of reasons for making independent directors take full responsibility for making the Bank's major decisions.
Additionally, the bank seized the opportunity provided by public listing in comprehensively revising banks regulations in 2006, thus satisfying the requirements of public listing and standardized operation. The modified regulations embody the spirit of laws and departmental regulations such as the new Company Law, Securities Law, Guidelines for the Articles of Association of Listed Companies and Guidelines on Duty of Due Diligence for Board of Directors of Joint-Stock Commercial Banks in order to further standardize operation and increase administrative efficiency. This way the newly modified regulations not only fully accorded to the requirements of new laws but were also able to fit in with requirements of future development. We were also keen to imitate the top practices of other banks in the industry as well as focusing on resolving some of the actual problems that had cropped up in our operation. For example, we introduced a cumulative voting system as well as online voting in order to better protect the interests of medium and small shareholders. This made it easier for small and medium shareholders to participate in the major decision making of the bank. Another example is that we introduced more forms of board meeting and standardized the procedures for calling and convening board meetings. This ensures that the board can exercise its authority in a way that is more independent, more standard and more effective.
Governance Idea Comes Gradually
Question: I take it that the Industrial Bank has its own unique idea to corporate governance?
Gao Jianping: The development of corporate governance ideal at the Industrial Bank can be divided into three phases:
The first phase was from the founding of the bank up until the end of the 1990's. The aim of corporate governance during this period was to maximize the interests of shareholders. The Industrial Bank maintained a high rate of return for its shareholders during this period, who shared the fruits of the Bank's growth.
The second phase started from the year 2000. The bank gradually came to realize that taking the interests of all related parties into account, such as clients, staff members and the public, was important for the long term development of a corporate enterprise, and that this could actually fuel the long-term development of a corporation. The Industrial Bank took action in this regard, for example, we were the first in the industry to propose and take out bank property insurance, employee loyalty insurance and directors & officers liability Insurance. These measures proved to be effective in protecting the interests of the bank and other related parties. Furthermore, the rate of non-performing assets dropped year-on-year and the provision coverage was sufficient. This went a long way in ensuring good investment returns for investors, protecting the interests of consumers and maintaining social harmony. Finally, the bank improved its system for the employment and development of staff and also improved remuneration management. We established an employee career plan and long term incentive system. This protects the legal rights of employees and helps them to get the most out of themselves.
The third phase has been the last few years. The bank has further explored the relationship between a bank's responsibilities to society and its sustainable development. For example, the developing energy-efficiency loans to promote the creation of a resource-saving and eco-friendly society. It was for this reason that we were awarded with the “Sustainable Deal of the Year Award” for 2006 which was voted on by International Finance Corporation (IFC) and the Financial Times (UK). This was the first time that a Chinese commercial bank has won this award. Furthermore, we have taken advantage of bank-bank platform in establishing a service value chain with small and medium financial institutions, thus achieving the sharing of resources, reducing repeated construction and creating a harmonious financial environment. We have tightened our controls on where credit loans go, increased the vitality of the economy, helped to improve people's livelihood and reduced the scale of out credit extension and loans to companies dealing in natural resources, companies with high energy consumption and high pollution. We have developed personal housing mortgage loans and loans to small and medium sized companies, thus helping people to improve their living conditions, helping small and medium sized companies to become stronger and breathing more life into the economy. Also, we have been active in getting involved in social and public undertakings. For example, in 2007 the bank donated RMB 10 million Yuan to found the “Industrial Bank Charity Education Fund”, which aims to help outstanding poor students in 5 of Fujian 's higher education institutions to complete their education. The bank also called for listed companies in the Fujian area to fulfill their obligation to society and create a harmonious social environment on the west coast of the Taiwan Strait .
Question: Most people believe that all that is required in the governance of a company is to follow regulations. How have the operational procedures of the Industrial Bank embodied concepts of science and standardization?
Gao Jianping: Corporate governance is the upper construction in a company while improving corporate governance can be done bit by bit. Over the past few years the Industrial Bank has been committed to improving the efficiency and scientific elements in board decision making. We have been highly innovative and enterprising regarding the running of the board of directors, and the results have met our expectations. For example, calling a preparatory meeting before a board meeting is formally convened. This is playing an irreplaceable role in the decision making process of the board of directors at the Industrial Bank. This mode is still quite rarely seen in the actual administration and running of companies in China. The scope of issues that the board of directors deliberates on is constantly widening. Some of these issues are of huge importance or are sensitive issues. Furthermore, the majority of the directors are non-executive directors, some are from abroad and some are from non-financial sector, and are therefore not totally familiar with everything to do with the banking affairs. Therefore, making enquiries and getting familiar with the issues tends to take up a lot of time in meetings. By introducing the preparatory meeting system, we have moved this process of familiarization and consultation to before board meetings. This has done a lot to improve the capacity for deliberation and the standard of decision making of the board of directors.
Another important operational procedure is the board resolution implementation feedback mechanism that has been put in place. This mechanism refers to setting aside a certain amount of time before each board meeting is held for managers to report the implementation status of previous resolutions to the board. For example, during the 8th board meeting, management reported on the status of the bank's first issue of financial bonds, which totaled at RMB 10 billion Yuan, and the status of preparations for the second issue, which totaled at RMB 5 billion, as well as the progress relating to the issue of hybrid capital bonds. Directors were able to express their opinions and make suggestions after hearing the reports. This helped to maintain the seriousness of board resolutions and the authority that they carry, thus fully realizing the board's role as the highest decision making body.
Seeking More Refined and Scientific Decision Making
Question: The board of directors is the highest decision making body in a company. How does the board of directors of the Industrial Bank fulfill its decision making function?
Gao Jianping: The internationalization of corporate governance has become one of our major policy directions. We are considering taking bold steps in introducing the corporate governance models of leading international banks. These would become the main blueprint for the reform of corporate governance in Chinese banks. The most fundamental element in becoming aligned with international corporate governance is that that board of directors must fulfill its role as the core decision making body.
The Industrial Bank has been active in making headway in this regard, and has developed two characteristics. The first is that the decision making role of the board has been well fulfilled. The board has been active in strengthening its function as a decision maker. Originally, the issues that the board deliberated on were limited to profit distribution. However, at present the board has come a long way in expanding the scope of the issues that it deliberates on. The board now deliberates on issues such as development plans, capital supplementation, corporate governance, risk management, internal control, financial auditing, incentives and restrictions, major investments, project cooperation, bad-debt write-off and fundamental system formulation. Examples include the formulation of a 5-year development plan, capital supplementation plan, issuing and declaration documents for A shares, issuing financial bonds, credit card cooperation with the Hang Seng bank and drawing up provisions for remuneration and performance assessment of senior management. These major decisions have provided the conditions needed for the bank to establish scientific o utlook on development, find a balance between business expansion and capital constraint and push-on the reform of the bank's operation and management system.
The second characteristic is the scientific elements in the decision making process. The decision making of the Industrial Bank board of directors is independent, professional and prudent. For example, directors brought forward a number of highly specific suggestions regarding prominent issues during the discussions of the 5-year plan. Issues included whether orientation should be tilted towards scale or quality, whether the developmental foundation was solid enough or not and the head office's ability to implement. A good example of this was when the initial plan for the acquirement of the Foshan Commercial Bank was submitted for deliberation in 2004. The directors expressed different opinions at the time, including the following: some directors didn't agree that the acquisition of the Foshan Commercial Bank should be conducted for the purpose of increasing scale alone, and requested that due consideration should be given to input-output, cost accounting and risk control; some requested that the object, contingent assets and risks of the acquisition plan should be clarified; some requested that the specific object of negotiations and the specific conditions should be determined and some requested that there should be different schemes to compare and choose from. It wasn't until the board of directors and supervisors organized an on-site inspection of the Foshan Commercial Bank that the final approach for the acquisition was confirmed, following which the corresponding alterations were made to the acquisition plan. This acquisition case was praised by the main leadership of the China Banking Regulatory Commission.
Corporate Governance Development Never Ends
Question: A bank must have continuous and effective incentive and constraint mechanisms if it is to remain prosperous, i.e, establishing long-term mechanisms in corporate governance. At present, how does the Industrial Bank conduct effective restrictions and incentives in the aim of fulfilling the long term development goals of the bank?
Gao Jianping: In 2004 the Industrial Bank hired a specialist human resources consultant to perform an in-depth investigation into the current status of employment and remuneration throughout the entire bank. With this survey as a basis and in line with the fundamental principles of maintaining external market competitiveness and ensuring internal incentive effects, the bank totally revamped its remuneration administration system. The bank introduced “Risk Funds” into the remuneration structure at the director, supervisor and senior management levels to highlight the roll of salary as a long term incentive. We did this by establishing systems for performance assessment and remuneration. At the function management level, we improved the proportion between fixed salaries and rewards, thus making salaries more attractive in attracting talent. In terms of business development, on the basis of the EVA comprehensive review system and in consideration of the development plan of the bank, we further optimized the related index systems and balanced the relationship between short and long term interests, thus guiding the development of business operation from extensive operation towards refined operation. Furthermore, the Industrial Bank is currently looking into the establishment of necessary equity incentive mechanisms.
Question: How has the Industrial Bank ensured the sound development of corporate governance culture? Specifically, what methods have been adopted?
Gao Jianping: With the rapid growth of the bank's scale, assets and profits as well as the expansion of branch organizations, it became a pressing issue to formulate a more systematic, unified and comprehensive administrative culture to lead the bank on. However, formulating an administrative culture that satisfies development needs is a long and continuous process. In consideration of this, we launched a system project for the development of corporate culture back in 2005. The administrative spirit and idea of the bank were infused into this project. We hired a professional consultancy agency to assist us in systematically organizing our corporate culture. Extensive research was carried out in regards to the course of the banks development, guiding principles of business, development goals and benchmark banks. This led to the formation of a system of corporate cultures idea, i.e the Guiding Cultural Principles of the Industrial Bank, Code of Conduct for Management of the Industrial Bank, and the Code of Conduct for Employees of the Industrial Bank. Additionally, we put efforts into promoting and implementing corporate culture so that it could be understood, appreciated and put into practice throughout the bank.
Question: Corporate governance at the Industrial Bank has made a great deal of headway, and has gone a long way in driving on the development of business and improving the standard of management. Looking towards the future, what is the bank's core task in regard to corporate governance?
Gao Jianping: As I said earlier, the Industrial Bank has a sound shareholding foundation, corporate governance ideas are advanced, the range of issues that the board of directors deliberates upon is wide-spread, with the decision making process becoming more standardized and scientific in nature and incentive mechanisms are improving. Sound corporate governance is relayed at all layers by means of internal mechanisms. It plays a crucial guiding role and corrective role in the development of all bank business and in the comprehensive improvement of management standards. I can safely say that if we did not have the foundation provided by sound corporate management that we do, the Industrial Bank would not have been able to achieve the results that it has.
To be frank, there is an advantageous factor that, objectively speaking, has played an important role in the sound development of Chinese commercial banks over recent years. That factor is the fast and healthy development of the Chinese economy. This means that those in the banking industry should make even greater efforts. For the Industrial Bank, ensuring the sound development of corporate governance is a key element in seizing these current opportunities and striving for further development.
Corporate governance development is both the foundation and the essence of modern corporate systems. It is an inherent requirement of the unique management properties of modern commercial banks. Corporate governance development is a never ending process. It must be steadily pushed-on in tandem with the development of the bank. The Industrial Bank still has a long way to go before it can achieve totally sound corporate governance. At present, the core task in the corporate governance development of the Industrial Bank is determining how to establish clear and effective, complete and standardized transmission mechanisms for corporate governance and how to comprehensively link the systems and operating mechanisms at each level in the bank, including the highest-authority level, decision making level, supervisory level, management level, implementation level and operation level, thus ensuring that the ideas, spirit and principles of corporate governance are spread to all aspects of bank management. Compared to the establishment of the core system and upper-level framework of corporate governance, this task is wider in scope and higher in difficulty, requiring compressive, systematic, in-depth and creative probing.
Since going public, the Industrial Bank has witnessed rapid development and increasingly good results. These achievements owe a great deal to sound corporate governance and effective management mechanisms. We have seen from actual events in the global securities market that investors are always willing to pay premiums for those listed companies with sound corporate governance when the financial circumstances of companies are similar to one another. The constantly rising price of Industrial Bank shares has to a certain extent shown that investors have recognized the current value of the bank, and have high expectations in regard to its future prospects.
From: Shanghai Securities News
Author: Yang Weizhong