Board of Directors Magazine, July 29, 2008
Editorial Note: twenty years ago, the founders of the Industrial Bank outlined a blueprint for the Bank-- “Establish a joint-stock commercial bank in line with market rules, international practice and international norms.” Over the past twenty years, the people at the Industrial Bank have been making endless efforts to take the Bank forwards, tirelessly forging ahead with reform and innovation. With their efforts and foresight, the Industrial Bank has left its mark on the development history of finance in China.
In 2007, the Industrial Bank successfully landed China's A-Share Market with stock code 601166. The Bank had a total share capital of RMB 5 billion Yuan in a public offering of 1.001 billion shares；
In 2004, capital from overseas strategic investors was officially obtained, pushing the total share capital of the Industrial Bank to RMB 3.999 billion Yuan. In the same year, the Bank set a long-term goal of “Striving to build a top-ranking bank with a history of centuries”；
From 1997-2000, the Industrial Bank initiated two successive increases of its capital by transferring un-distributed profits and accumulation funds into stock as well as the placement of new shares. The registered capital of the Bank thus increased from RMB 1.5 billion Yuan to RMB 3 billion Yuan；
In 1996, the Industrial Bank's first branch outside of Fujian Province opened in Shanghai. This was a key step in the Bank's efforts to develop a nationwide service network；
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(Chen Jie, Board of Directors Magzine)
As a product of China's financial system reforms as well as the one of the first joint-stock commercial banks in the nation, the Industrial Bank was founded on August 26, 1988 in Fuzhou City, Fujian Province, where was the front line of China's economic reform and opening-up. Four subsequent capital increases changed the Bank's ownership structure from regional to national and from national to international respectively.
So far, the Industrial Bank has been the first national joint-stock commercial bank in China to successfully acquire an entire city commercial bank, the first domestic bank to realize the centralization of bank data, one of the first banks to have capability for long-distance disaster recovery, the first domestic bank to issue subordinated term debts and the first bank to issue hybrid bonds, …… It can be safely said that the Industrial Bank will continue its trend of innovation in China's financial field now and in time to come.
Break from Hull : Arrival at the Right Time
In 1988, a series of seemingly unrelated events occurred in China and abroad that accompanied the birth and growth of Industrial Bank.
Internationally, with the surge in financial liberalization that begun in the 1970s came rapid increases in the type and level of risks faced by banks. This constituted a serious challenge to the overall stability of the bank system. In the aim of bolstering banks' capacity to handle risks and to promote fair competition, the governors of the Central Banks of twelve countries signed the Basle Accord at the beginning of 1988. The agreement established a unified approach for measuring the minimum capital standard of banks and stressed the practice of cushioning risk losses with capital. The provisions put forward in the accord were accepted by the international banking community. Banking supervision authorities all over the world began to use “Capital Adequacy Ratio” as a unified standard when measuring the strength of banks, as stipulated in the agreement. Despite the fact that China ' s supervision department waited ten years before introducing “Capital Adequacy Supervision”, it is apparent that the supplement of capital is an urgent issue that calls for an immediate solution in China's banking industry. Moreover, “Capital Adequacy Ratio” is now considered an important indicator in the evaluation of a Bank.
Domestically, in the spring of 1988, Fujian and Guangdong requested permission from the State Council to launch comprehensive reform trials to speed up the development of the export--oriented economy as a part of strategies to develop coastal economies in the two provinces. The State Council responded by granting preferential policies to expand opening-up and deepen reform in the two provinces. It gave permission for the two provinces to establish regional joint-stock commercial banks in the aim of propelling reform of the banking industry. This move lit-up a path of development for the Industrial Bank to follow--namely, establish a modern commercial bank organized as a joint-stock venture that operates in strict compliance with market rules. Supported by the Fujian Provincial Government and the People's Bank of China, a public offering was launched by the Fujian Fuxing Financial Company in alliance with the Fujian Investment & Enterprise Holdings Corporation and the Fujian Huaxing Trust & Investm ent Company, with the former being the core body of the venture. The Fujian Industrial Bank was subsequently founded on August 26, 1988. In early 2003, the “Fujian Industrial Bank ” officially changed its name to the “Industrial Bank Co., Ltd”. At the time, the Industrial Bank ranked fifth in Fujian after the ICBC, ABC, BOC and CCB. Its scale was similar to that of a medium-sized city commercial bank seen today.
At that time, China's market economy was still in its infancy and the joint-stock system was still in the trial phases. The State was implementing restrictions on finance and enterprises were commonly short of capital. The Industrial Bank encountered difficulty in seeking capital as it began to operate as a joint-stock venture. At the time the smallest stockholder in the Bank held a mere 20 thousand shares. The management of the Bank devised all possible means to attract investment and even introduced a policy in which any investor injecting RMB 3 million into the company could recommend a board member. However, the positive response from the market that the Bank desired never came. Finally, financial departments at all levels in Fujian Province subscribed for the majority of the equity stake with extra-budgetary funds and became the early stockholders of the Industrial Bank.
Since the Company Law had not yet come into existence, the equity structure design of the Bank followed that of foreign counterparts. There was RMB common stock, preference stock and foreign currency stock. At the same time, initial exploration into corporate governance began. Through the continuous improvement of the ownership structure, a modern corporate governance structure and its transmission mechanisms were developed. As a result, the Industrial Bank was able to establish a stable mechanism of operation and development which complied with the fundamental rules of a modern commercial bank. “In terms of ownership structure, the Industrial Bank aligned itself with international practice in 1988, and not in 2001 when China joined the WTO.”Tang Bin, the BOD Secretary of the Industrial Bank said jokingly.
Looking back at the development of the Industrial Bank, we can define the period from 1988 to 1995 as the pioneering phase of the Bank. In the spring of 1996, the Shanghai Branch of the Industrial Bank was established. In that July, the Industrial Bank announced a policy of “Start a new undertaking”, in which it specified: “Based in Fujian, expanding to Shenzhen and Shanghai, oriented to coastal regions and spreading influence inland.”Soon after, branches in Shenzhen, Changsha, Beijing, Hangzhou and Guangzhou were opened in succession. A service network covering the entire country was beginning to take shape. In 2000, Gao Jianping took over as chairman of the board. Gao put forward the development goal of turning the Bank into a national commercial bank. In 2002, he further defined this goal as “establishing a top-ranking modern commercial bank”. In just eight years, the total assets of the Industrial Bank have gone from less than RMB 50 Billion to the near one trillion seen at present. Moreover, the Bank's ROE is now as high as 25%. By means of opening new institutions and acquisitions, the Industrial Bank now operates on a nationwide basis. It has set up branches in a number of cities including Foshan, Yiwu, Taizhou, Wuxi, Wenzhou and Harbin. At present, the Industrial Bank boasts a total of 40 branches nationwide. “The fast and sound development of Industrial Bank, to a great extent, is the result of the Bank's sound capacity in strategic planning and implementation that has built-up during its long time market practice”, said board chairman Gao Jianping.
Go Public by Introducing External Investment: Self Challenge & International Alignment
For a long period of time following its establishment, the Fujian Provincial Financial Department and the financial bureaus of various cities in the province were the Bank's main shareholders. In an aim to further optimize the structure of shareholders and to meet the requirements for establishing a nationwide commercial bank, the Bank made conscious efforts to optimize and improve the structure of its shareholders every time it expanded ownership.
In 2002 the Industrial Bank made the decision to introduce capital before going public. The Bank chose this challenging and more complex approach for two reasons. The first was that it sought to absorb modern management approaches and techniques by introducing top overseas banks and experts into the decision making process. The second was that it sought to promote improvements in corporate governance from the inside by achieving a relative balance in the ownership structure.
In the process of inviting foreign strategic investors, the Industrial Bank found that choosing the right partners was no easy task. To gain the most favorable investment conditions, the Industrial Bank worked out three investment portfolios with mutual competitiveness. One of them is the portfolio seen presently that consists of HSB（Hang Seng Bank）, IFC(International Finance Corporation) and GIC（The Government of Singapore Investment Corporation Pte Ltd）.
No outsider had an inkling of who the Industrial Bank would choose before the signing ceremony was held. Weighing over all options over and over again, the Industrial Bank finally decided to go with the HSB, IFC and GIC portfolio.
Talking about the reasons for choosing this portfolio today, Tang Bin, BOD Secretary of the Industrial Bank remarked that the decision was based on three considerations. Firstly, by attracting investment, the Industrial Bank sought to establish a relatively concentrated but moderately distributed structure of ownership so as to lay down a sound foundation of shareholders for good corporate governance；secondly, the investment portfolio had to have commercial banks of excellent reputation and solid strength as well as an organic combination of financial institutions of diversified types, which should combine checks and balances with combined strengths; thirdly, the Industrial Bank intended to choose foreign banks and financial institutions that worked in Chinese or had similar cultural backgrounds as its strategic investors so as to ensure efficient communications and links and lower costs in this regard.
Among the portfolio, HSB stood out due to its good corporate governance, sound internal control and outstanding retailing business；IFC, is an international financial institution funded by world governments and that aims to promote the development of market economies and financial systems in developing nations. It provides loans and equity investments for mixed economic projects in developing countries；GIC is the major platform of mixed economic investment by Singapore Government. It invests on the basis of the potential and growth prospects of companies. The selection of this investment portfolio no doubt reveals the Industrial Bank's strategic aims to promote the transformation of the Bank's business and profit modes and thereby attaining long term prosperity by drawing from the advanced experiences and approaches of top overseas banks.
The Industrial Bank attracted HSB, IFC and GIC with a 1.8 times P/B (Price/Book value ratio) and a highest proportion of shares accumulated of 24.98%. This investment introduction scheme set new records for Chinese commercial banks in several areas, including: most foreign shareholders introduced in a single time, the highest proportion of shares and the highest premium multiple. The Industrial Bank was thus able to enrich its structurally diversified and mutually complementary ownership structure.
Efforts to attract foreign investment came to an end at the end of 2004 when foreign funds were obtained. The Industrial Bank began to shift its focus onto the task of seeking public listing. However, the Company Law stipulates that the interval between financings should be at least a full year. This meant that the Bank would not be able to go public until May 2005 at the earliest. The management of the Industrial Bank were not in any way dispirited, and active preparations commenced to ensure successful listing as early as possible. However, the domestic equity division reforms that followed postponed the Bank's listing once again. Faced with such circumstances, the Industrial Bank regulated its asset structure to control capital requirements whilst at the same time probing other channels for the supplementation of capital such as hybrid capital bonds. In September 2006, the Industrial Bank became the first domestic bank to issue hybrid capital bonds. The successful creation and issue of hybrid capital bonds not only represented a new innovation in China's financing sector but also provided a significant tool and base for domestic banks to conduct active capital management.
The hardships that have to be endured before an IPO are known to all. However, the Industrial Bank's road to public listing is a classic example of an arduous journey. The Bank began to seek listing in the second half of 2002, but it wasn't until February 5, 2007 that the Bank's A-shares were listed on the Shanghai Stock Exchange. A total of five years had passed. As the first share in the first year of the comprehensive opening up of the financing industry and the first large cap of 2007 raising funds of over RMB 10 billion Yuan, the successful listing of the Industrial Bank established the Bank's status as an excellent blue-chip in the national capital market and also made it one of the mainstream banks in the domestic market. As Li Renjie, the president of Industrial Bank, once said, “the Industrial Bank did not seek listing for the purposes of financing or normalization. This move was based on our goal to establish a first–rate modern bank that will prosper for centuries”.
Sustainable Financing: Operating on A Wider Road
From the perspectives of capital supplementation and the improvement of corporate governance, the development of the Industrial Bank can be divided into several phases: the first phase is the foundation in 1988；the second is the increase of funds and shares in 1996；the third is the increase of funds and shares in 2000 and the completion of the 4th BOD change in 2001；the fourth is the successful introduction of foreign strategic investors and the 5th BOD change；and the fifth is the initial public offering in 2007 and the subsequent 6th BOD change.
Exploring means of capital supplementation for a domestic commercial bank, the Industrial Bank became the first bank in China to issue subordinated term debts and hybrid capital bonds. Hybrid capital bonds are long-term bonds with the characteristics of upper tier 2 capital devised in compliance with the provisions of the Basle Accord and in reference to standard international practices concerning hybrid capital instruments. This also constituted a part of the financial innovation system that the Industrial Bank is committed to.
The government is currently enhancing macro control and implementing tight monetary policies. Under such circumstances, the Industrial Bank will vigorously promote the development of liability business, regulate and optimize its assets-liabilities structure, enhance the management of liquidity risks and market risks, actively advance the coordination and matching of assets and liabilities and the fast development of intermediary business. Looking at the development of international banking industry, financial disintermediation and universal banking have become the basic trend in global banking. The Industrial Bank has adopted and remained committed to a differential strategy for development. It has developed characteristics and strengths in certain areas including inter-bank business and treasury business. At the same time, the Industrial Bank has also placed a focus on mergers and acquisitions. “First of all we must have a clear understanding of our target market, knowing what good a merger or acquisition may do us；secondly, we must make the conditions of the merger or acquisition fair and reasonable, financial ecology also calls for harmony.” said Li Renjie, the president of the Industrial Bank. He also pointed out that commercial mergers and acquisitions should be in line with the needs of self-development.
“The Industrial Bank best understands the nature of a commercial bank and how to run one.” An analyst from a fund corporation made this comment about the Industrial Bank's position in the domestic banking industry.
To the management in the Industrial Bank, “A commercial bank is, in a sense, operating risks.” They have integrated various risks such as credit risks, market risks, operational risks and legal risks under TRM. The organizational structure and professional teams are also devised and allocated in accordance with the TRM system. Currently, guided by the new Basle Accord, they are in the process of developing and establishing a risk management and capital allocation system (RMCA). As an enterprise providing financial services, the Industrial Bank has given risk management a connotation of utmost importance. Particularly, in the process of transforming from a traditional commercial bank to a modern comprehensive bank, the first and the most foremost thing is that the board of directors has a good grasp of the direction of the Bank's strategic development. Furthermore, the Industrial Bank strictly controls the quality of credit assets. A top-down system of professional examination and approval has been established along with advanced IT systems. This has guaranteed the Bank's steady operation and rational development.
In regard to management, Gao Jianping, the chairman of the board, often uses the quote “small enterprises rely on chance, medium-sized enterprises rely on management and large enterprises rely on corporate culture.” The corporate culture of the Industrial Bank is a catalyst for the attainment of strategic objectives. In early 2005, the Bank appointed a corporate culture consultant firm to fine-tune its corporate culture. As a result, a cultural guideline and a cultural system centered on it came into being. A scheme was especially formulated to implement corporate culture.
At present, the Industrial Bank is involved in active preparations to become an equator bank. In January 2003, International NGOs issued the Collevecchio Declaration on Financial Institutions and Sustainability, hoping that financial institutions would comply with six principles, namely, Commitment to Sustainability, Commitment to‘Do No Harm', Commitment to Responsibility, Commitment to Accountability, Commitment to Transparency and Commitment to Sustainable Markets and Governance. The Declaration exerted a great influence on the drafting of the Equator Principles. Demonstrating sustainable financing in business expansion is as follows: Firstly, when decisions concerning large investments or loans are made, considerations should be given to the social and environmental risks involved so that the quality of the asset portfolio is improved；secondly, business opportunities in financial innovations in the field of sustainable development should be fully recognized and capitalized on so that financial products and services which contribute to social development and environmental protection are positively developed and promoted. Areas for such development include renewable resources, energy efficiency, clean energies, protection of biodiversity and small sum loans. Through developing financial products in these fields and providing innovative financial solutions, a new and vast market will be acquired.
In fact, the in-depth development of sustainable financing is another delivery of the promise that the Bank made when it was formed to “make more contributions to local economic construction and exploring paths for China's financial reform”.