Jia Yubao, Liang Kezhi Reporting from Shenzhen
The Industrial Bank started out as a small bank in the western coastal region of the Taiwan Straits. Today, it is a medium-scale publicly owned bank boasting assets of more than RMB 1 trillion and annual profits in excess of RMB 1 billion. The Industrial Bank's leapfrog development from local bank to regional bank, national bank and finally public bank is largely attributable to its differential operation.
For banks, it's is easy to just do what the rest do, but much more difficult to do something different. The way that Industrial Bank President Li Renjie sees it, banks are faced with the same traditional businesses of deposits, loans and remittance. Being different is not something that is manifested in specific products or services, but is more means of market deployment and strategy, namely, thinking about how one can be different in the development of traditional businesses, in comprehensive development and in overseas strategies. Without a niche in the big picture, there is no inherent way for small and medium-sized banks to survive.
Being different – this is the philosophy of Li Renjie, much like the Three Character Chants of old.
“Integrated operation is a tide that cannot be turned"
An important lesson that we have learned from the financial crisis is that finance is detached from the economy, surpassing it where it shouldn't, and that there are blind spots in regulation. But this isn't to say that there is something inherently wrong with integrated operation.
21 st Century: Since the outbreak of the financial crisis, the whole world has been asking the question, “Which is better, integrated operation or separate operation”. We have also heard some doubts in China. How do you perceive this?
Li Renjie: I've always held to the belief that integrated operation is an inevitable trend.
The integrated operation of finance is an inevitable demand of social and economic development. Finance serves the economy. It cannot be detached from the economy -neither too far ahead nor too far behind it. An important lesson that we have learned from the financial crisis is that finance is detached from the economy, surpassing it where it shouldn't, and that there are blind spots in regulation. But this isn't to say that there is something inherently wrong with integrated operation. Integrated finance is becoming an increasingly important part of economic development in today's society. Reverting back to separate operation and in doing so sacrificing the efficiency of society for financial stability is just another way of detaching finance from the economy, and is an incorrect approach. So despite the severity of the crisis, the financial reform initiatives of the United States did not propose a return to separate operation, and neither did Europe, which is going further than the US in terms of integrated operation.
Integrated operation has only just started in China. We can't assume that there is something wrong with us just because of the financial crisis that happened abroad. However, admittedly, we do need to “inoculate" ourselves, just like we do for H1N1, you don't start out on the antibiotics. To put it straight, integrated operation cannot be set back. China has only just got started, and there is no reason for us to turn back. But what we should do is draw lessons from the international financial crisis so as to prevent the same thing from happening again and working out a better approach.
21 Century: IB started relatively late in integrated operation. You have drawn up plans for integrated operation, but there have been no striking actions to follow up.
Li Renjie: Regarding integrated operation, I think that we should be centered around main banking businesses, without going too far beyond. We should think about how we can further distinguish ourselves. For example, retail, energy saving and emissions reduction, inter-bank business, fund transaction and assets managements are relatively distinguishing features of our main business. Therefore, we have established the trust company to facilitate private banking services by way of trust; and the financial leasing company which is based on our existing business features, mainly leasing equipment for energy-saving and emission-reduction enterprises as well as small and medium-sized financial institutions.
First, we drew-up our integrated operation plans. This has made us clear on what we will do and what we won't do, and about how to do it. Secondly, based on our planning, we consider how do we refine our internal management, how will we build firewalls between different types of business, and how will we approach capital allocation, risk coverage, fund support and talent support according to business development? Especially, in terms of talent support, we must put professionals in charge of professional businesses. We don't reallocate our existing personal, but instead recruit new teams for this task.
21 Century: With integrated operation being doubted, will it be more difficult for IB as a newcomer?
Li Renjie: We are just taking things one step at a time now, taking a cautious approach, only establishing mature things. We are currently in the process of preparations for a fund company, financial leasing company and a trust company. Of course, these are yet to be approved by the regulatory authorities.
21 Century: A short time ago, you transferred stock equities in Industrial Securities (120,000,000 shares, accounting for a 6.23% stake). According to the regulatory stipulations, Industrial Securities has to be transferred since they were passively held as mortgage assets. But artfully, you transferred them to your major shareholder, the Fujian Provincial Department of Finance. In shifting this stock from one hand to the other, are you planning to buy them back in the future?
Li Renjie: Once the time is right, we also hope to obtain a securities license. The Fujian Provincial Department of Finance is not only a major shareholder of the Industrial Bank, but also of Industrial Securities, so we've go to look at how things play out in the future. Industrial Securities is currently in the process of applying to go public.
The emphasis of “Going out”: Less developed areas
You have got to distinguish yourself from the rest, and know what suits you best. I don't think that just going out and buying a bank is the best way.
21 Century: A lot of people are turning their attentions to the development of the western coasts of the Taiwan Straits. IB is based in this area, so what about the actions of the bank in this regard?
Li Renjie: An important reason for developing the western coast of the Straits is to strengthen cooperation in economy and finance between the Mainland and Taiwan . There are close bonds between the people of Fujian and Taiwan. Many Fujian people, including myself, have relatives living in Taiwan.
IB is a Fujian bank. It has a high market share in the province, and especially in its three most developed cities of Fuzhou, Quanzhou and Xiamen. We have many contacts with local enterprises and the government, which offer us favorable conditions. So long as we have the chance to bring these advantages into play, we will not lag behind, and we will go onto big things.
There is overcrowding in Taiwan's financial sector, and competition is too great. We are one of the first mainland banks to apply for a permit for Taiwan. But we're not going there to fight for market share, but to provide convenient financial services to Taiwan businessmen and compatriots who come to do business on the mainland. This is our intention and orientation.
Objectively speaking, many Taiwan-funded enterprises establish their plants in the mainland, but their management headquarters, capital liquidation and internal settlement are not conducted on the mainland. This has posed difficulties for mainland banks when providing services to companies from Taiwan. If we have our own representative office or branch in Taiwan, we could join the credit reporting system of Taiwan, come to know the big picture and thus provide Taiwan businessmen and compatriots with more comprehensive financial services.
21 Century: Will you cooperate with Taiwan-funded banks in the future?
Li Renjie: Sure, that's a definite. But we are going to have to wait and see if that involves cooperation in terms of stock ownership.
21 Century: At a time when many Chinese banks are expanding abroad, what is the overseas strategy of IB?
Li Renjie: About that, you shouldn't be anxious that that you are falling behind just because others are expanding abroad. And you shouldn't follow blindly. You must make distinguish things, keep to your strengths, avoid weaknesses and carefully choose exactly where and how you expand. At least at the current stage, the emphasis of out expansion aboard is not on developed countries. Our existing operation and management capabilities render with no advantages if we go to developed countries. Comparatively, we might go to less developed regions such as Southeast Asia , where our operation and management capabilities and product services match. Moreover, we have closer cultural backgrounds, and we might have a stage on which to act. If you rush off to developed countries, you are swimming out of your depth.
21 Century: This overseas strategy certainly conforms to the strategy of being different that you adhere to.
Li Renjie: Yes. You have got to distinguish yourself from the rest, and know what suits you best. I don't think that just going out and buying a bank is the best way.
Bank-bank cooperation: build the road before driving on it
To draw a metaphor, once the road for cooperation has been built, the next objective becomes what kinds of cars do you drive down it, and how many do you have.
21 Century: IB has established unique features in terms of cooperation between banks. But we feel that there has not been a lot of deep cooperation outside of technical cooperation.
Li Renjie: IB is a medium-sized bank. Unlike the big banks, which have thousands of outlets across the country, we only have four to five hundred outlets. Limited in terms of outlets, we have to consider the question of how we can extend our service network and boost our service ability and influence. So, besides e-banking, we also have to consider establishing our own agency network. This is our thinking behind the cooperation with small banks.
In few years ago we were thinking that China is huge, and can't just be dominated by a few big banks, and it's inevitable that there will be a number of small and medium scale banks. But, there are a number of limitations and difficulties that these small and medium scale banks face in their survival, such as system construction, product creation and personnel training. Even a bank like the IB, which is of a certain scale, has to struggle and endeavor in this regard, so aren't the smaller banks in even more difficulty?
Social division is an inevitable trend. Not everything can be done yourself. Even medium scale banks like us have outsourced a lot, never mind the smaller ones. Through communication, many banks have accepted our mode of cooperation, including system establishment, interconnection, network agency, creation of wealth management products and even issue of subordinated bond. We have succeeded in cooperation in all businesses of banking. We have also considered capital cooperation. To draw a metaphor, once the road for cooperation has been built, the next objective becomes what kinds of cars do you drive down it, and how many do you have.
21 Century: The current situation that we are seeing is that a number of small and medium-sized banks, such as the Nanjing Bank and Ningbo Bank, have become strong. After going public, they have gone from commercial city banks to trans-regional banks. After such growth, is it not true that some small and medium-sized banks might not need such cooperation?
Li Renjie: Well developed commercial city banks will certainly not be satisfied with local development, and will definitely move towards trans-regional operation. This does not conflict with our bank-bank cooperation. Our emphasis is on banks smaller in scale and operation region.
21 Century: Are they the second tier of commercial city banks?
Li Renjie: Yes, even the third tier.
21 Century: And also, some local governments are integrating some commercial city banks and establishing new banks like Huishang Bank and Beibu Gulf Bank. Your cooperative partners are being further compressed.
Li Renjie: Such circumstances do exist. But as I mentioned just now, we have areas of emphasis in our bank-bank cooperation. For example, some well developed banks like the Bank of Jiujiang, who are limited in scale but have sound quality and a sound business structure, need to cooperate with other banks if they are to grow. The entire IT system of the Bank of Jiujiang was done in cooperation with us. The system of the village and township bank it established in Xiaolan, Guangdong was also done with us. In 2008, we bought a 20% stake in the Bank of Jiujiang.
21 Century: Now IB is not establishing new outlets, or is opening fewer outlets, and instead is adopting the mode of bank-bank cooperation. But what about five or ten years down the road? Channels will dominate in the future. Will you lose out in competition if you don't have enough physical outlets?
Li Renjie: We've decided to adopt the mode of bank-bank cooperation rather than adding outlets in certain regions. But in developed regions, we still focus on our own outlets. In recent years we have been accelerating the pace at which we open new outlets.
21 Century: Will you increase your capital cooperation with small banks in the future?
Li Renjie: In fact, there are a number of banks that would like us to become one of their shareholders. But the scope and means of cooperation will depend on our own capital status and development strategy. Cooperation isn't all about buying in. As I mentioned earlier, technical cooperation will be taken as a starting point. Once this road has been built, we can talk about what kinds of cars should be driven down it.
Capital increase next year
Looking from the first three quarters, both our capital adequacy ratio and core capital adequacy ratio are higher than the new regulatory requirement indexes. I believe there will be no problem before the end of this year, but future development will be influenced. We will increase capital next year.
21 Century: IB has developed at a rapid pace over the last few years. Now its risk-weighted assets are over RMB 700 billion. At a growth rate of 30%, this total will hit nearly one trillion next year. How will you make up for this large capital gap?
Li Renjie: Since the financial crisis broke out, regulation of bank capital has become more stringent. The capital adequacy ratio was 8% in the past, but now 12% or more is recommended if possible, and at least 10% is required. The core capital adequacy ratio was 4% in the past, now over 7% is required. If the capital adequacy ratio is lower than 10%, no new business will be allowed to banks like us. Looking from the first three quarters, both our capital adequacy ratio and core capital adequacy ratio are higher than the new regulatory requirement indexes. I believe there will be no problem before the end of this year, but future development will be influenced. We will increase capital next year.
21 Century: Does IB have any advantages in terms of cost control?
Li Renjie: We have always exerted strict cost management. This isn't about only one indicator. For example, our return on assets may not be the highest, but our return on capital may be very high. Another example is mortgage loans, as a single loan, the proceeds of mortgage loans may not be the highest, but the converted return on capital will be high. Why? Its risk coefficient is 0.5, and that of general corporate loan is 1. If your assets may be mortgaged for RMB 1 billion ordinary loans, it can be mortgaged for RMB 2 billion mortgage loans.
Likewise, many banks used to evaluate themselves on pretax profits, but we examine after-tax profits. For example, T-bond may be exempted from tax. Although the interest rate is low, yet our capital return is better. Under such a framework of examination, all operating organizations have learnt how to cut it fine and maximize capital return.
21 Century: IB also pays attention to non-interest income. But banks in China have still being relying on interest spread in recent years.
Li Renjie: One of the very important causes of the financial crisis was the marketization of interest rates, the inevitable result of which is that the interest spread gets smaller and smaller. When you can't earn money from traditional spread, you start to look elsewhere to earn money, playing financial tricks and moving contents out of statements to increase the leverage ratio. Since the crisis, people have been thinking, especially in China , whether we have gone ahead too fast with the marketization of interest rates. It can't be too fast. If you want to maintain financial stability and strengthen regulation, the first thing is to give financial enterprises a space in which to survive. So, the marketization of interest rates should be slowed down.
21 Century: Will the whole process of direct financing slow down?
indirect financing and direct financing would be adjusted in a short time. China mainly relies on indirect financing, and strengthening the development of direct financing would surely hurt indirect financing. But looking at the current situation, the development of direct financing is slowing down. Within the next few predictable years, the traditional business of China 's banking industry will still play a very important part, which is conducive to the stability of the financial system. The process of marketization of interest rate and direct financing will slow down. But the banking industry shouldn't just always rely on its traditional business. They should take precautions, develop their own integrated operation and prepare for the future.
(Source: 21 Century Business Herald )