The Innovation of Balance Sheet in Li Renjie's Style
Date: December 16, 2010 Source: 21st Century Economics Report
He is walking back and forth in the meeting room, one viewpoint with each step, just like every time we have met over the years. From the interviews with Asian financiers, Li Renjie is one of the few people who likes to walk while thinking.
Being the president of the Industrial Bank, originating from Shenzhen and having an innovative spirit, he has the courage to continuously set trends and prove himself with seemingly unconventional innovative actions. Of course the once existed criticism; “half a real estate stock” and so on, have all vanished like smoke.
Presently, what Li Renjie plans is a balance sheet with his own characteristics. From chasing a market of large, medium and small sized enterprise clients, to doing business mainly with medium-sized enterprise clients; from lowering the proportion of mortgage loans, to reducing the proportion of public credit, and then expanding the non-credit business such as bond investments; from providing third party custody and inter-bank cooperation, to being the “shadow CFO” of enterprises and expanding the various kinds of public and private intermediary business, Li Renjie's pace of innovation has always been fast.
In his point of view, “the balance sheet of the China banking industry will definitely change. We need to make the preparations and arrangements beforehand.”
“We should be the shadow CFO of enterprises”
21st Century: The situation has been changing, externally with America's second-round quantitatively easy monetary policy, internally the pressure of inflation. Moreover, the Central Bank is continuously increasing the deposit-reserve ratio. What impacts will this have on the amount of credit next year?
Li Renjie: Since September, the public's main concerns about macroeconomic control have switched to anti-inflation and anti-asset bubbles, which has gradually become a consensus and this trend has become increasingly obvious since the fourth quarter, that the country is changing the direction of its monetary policy relatively fast. If this so-called inflation trend or if market bubbles cannot be significantly improved, this change may be continued. It is predictable that the entire amount of credit next year will be less than this year's level; approximately RMB 7.5 trillion.
21st Century: Many economists and industry insiders predict that the amount will be approximately RMB 7 trillion next year.
Li Renjie: It could be even smaller. As far as I'm concerned, the situation next year will be like this: the newly-added credit supply will definitely be less than this year, but the proportion of direct financing such as debt issuance will increase. Generally speaking, the total amount of social financing should remain at a certain level. Meaning, it's not good to suddenly put on the brakes, which would bring about the “uncompleted projects”.
In this case, there should be some adjustments in the way bank credits are operated. Take the Industrial Bank for example, the supply of credit supply will be focused on small-and-medium-sized enterprises and individuals, and the bank will increase in this direction. On one hand, this can improve the degree of the entire economic activity; on the other hand, the bank's rate of capital gains can be increased by improving the bargaining power towards small-and-medium-sized enterprises and individuals. As for those large-and-medium-sized enterprises, we need to meet their demand as much as possible through direct financing.
21st Century: From the financing point of view, the diversification of corporate financing is increasingly obvious, which reversely forces the bank to provide the corresponding diversified services, not limited to loans.
Li Renjie: Precisely. This requires the bank to improve its public services rather than just continuing to offer only a deposit and loan business, which needs to be done using ideas, methods and instruments of an investment bank. Let's consider this from another perspective. If you are the CFO of the enterprise, how would you consider banking services? I often ask people to think in a manner from different positions, which means public banking services need to be considered from the perspective of a “shadow CFO” of an enterprise. As a result, it's apparent the public banking services can't be simply deposits and loans any more, but be across the range. We need to provide different types of financial services for different stages of enterprise development. Furthermore, we should not be afraid of crossing borders. We will do what is within our capacity, and we will ally with other financial institutions to do what is beyond our capacity. This is not a problem.
For instance, it is typically hard to grant loans to start-ups, so we can help them by introducing some risk investments companies and private equities. When these entities are introduced, the balance sheets of the start-up will be different, and production can be expanded, then we can issue direct loans to them. When the enterprises have grown to a certain scale, with management of all areas, having become regulated and information disclosure become standardized, we can help them to issue debts and make an IPO. The enterprise will further develop after the IPO, meaning mergers and acquisitions can be considered for the next step. In that context, we can provide annexation loans or syndicated loans services.
To sum up, the public banking service methodology needs to be changed, and this is also where the changes of future public banking services lie. I guess this is not only a feature of the public banking services next year, but also the direction of future public banking services.
“The Industrial Bank is not half a real estate stock”
21st Century: Analyzing the Industrial Bank's loan orientation from the historical point of view, how can we find the focal point from the general economic trends?
Li Renjie: The general idea I proposed is to make the industry and orientation arrangements according to the general trends of China's economic development. For example, we always believe that urbanization is the one of the main driving forces of China 's economic development, so we invest quite a lot of resources in urbanization construction, which will also be one of the primary business directions in the future.
However, the urbanization orientation has different modes in different stages. For example, during the early stage when individuals buy houses, the inputs of mortgage loans tend to be larger. It once accounted for more than 30% of credit assets, and the number is still above 20%, which is larger compared to other banks of the same type. Having made mortgage loans, there must be some development loans to support them, whose proportion also used to be high, and now it has declined to below 10%.
21st Century: Given the decrease of mortgage loans and development loans, do you just choose to abandon the urbanization orientation, or do you need to find a new focal point?
Li Renjie: We will not abandon it. China's urbanization level was only 46.6% at the end of last year, which is below the global average. Urbanization will still be the main driving force of China's economic development for the next several years. However, it is inappropriate to simply consider urbanization to be real estate. Urbanization means how to increase the city's capacity to absorb a new population and improve the urban expansion ability.
We have little in doing general real-estate development cooperation. But many aspects of the urbanization process needs to be improved, which is exactly what we are still doing.
21st Century: Maybe this is why there were discussions in the market saying the Industrial Bank is half a real estate stock.
Li Renjie: I absolutely disagree with this proposition, which is too narrow. The business development of the Industrial Bank first takes into account the general trend of China 's economic development, and its finance serves the economy. We believe that urbanization has been the general trend of China's economic development these years, and that it is the main driving force for economic growth. Therefore, large amounts of resources need to be invested in this area.
21st Century: Do you mean that there is an issue here of “first-in, first-out”?
Li Renjie: Exactly. The understanding of risk varies from person to person. That is to say, even when others are not aware of something, as long as I find it to be good, I'll put it into action, and I don't care what others will say. When people rush for it, I may then exit slowly.
Specifically, we had large investments in mortgage loans from 2005 to 2007. In 2008, we actually felt that the prices of the real estate market were growing too fast, so we slowed down the pace, did some weight-loss exercise, and at the same time adjusted the structure of the newly-developed urban renewal project.
The Relativity of Risk
21st Century: The economic fluctuations have increased the credit risk. What do you think about the expected bad debts of government financing platform and real estate loans?
Li Renjie: Many people, based on their experience and foreign analysis, are worried that their will be a large amount of non-performing assets after China's huge credit inputs of more than RMB 9 trillion last year, namely the real estate bubble and bad debts of the government financing platform. This makes sense to some extent. But I always make a concrete analysis of a concrete problem. We cannot take it for granted with just one simple thought. The existence of potential risk does not necessarily mean there is real risk. The China Banking Regulation Commission has discovered this potential risk in time, and has arranged risk prevention activities by giving risk warnings, which to me is an excellent job.
Indeed, certain individual projects may have insufficient funds for loan repayments or non-implementable claims in the general trend of 2009, and some specific projects may lack standardization, but this does not prevail. Judging from the actuality of the Industrial Bank, we are still very confident about ourselves. After this year's risk investigation, our situation is generally very good, and there are no inevitable problems.
21st Century: On which areas do the Industrial Bank's financing platform loans focus?
Li Renjie: The concept I want to mention is that the regional financing platform is not necessarily in trouble, and there are good ones. The financing platforms we are basically focusing on, is the east coast developed areas, and we don't do much in the western areas consisting mainly of post-disaster reconstruction projects in Sichuan . These projects all have sources to repay loans, which are either central transfer payment or provincial counterpart support. We don't do other types of projects.
21st Century: There are rumors that to resolve the potential risk of regional government's financing platforms, there will be a switch from the RMB 4 trillion stimulus policy to a new return to restraint policies, which means the problem will be solved over an extended period. Will this have a negative effect on the bank's current financial reports?
Li Renjie: There will be some influence, but a small influence. After all, the loans and the interests are still on the books, without being erased or denied. There are just some delays. Secondly, large banks that have many regional financing platform loans now have the ability to negotiate with the government. Furthermore, as I mentioned before, the economy is growing, and the regional government is also gradually establishing an ethical culture. Time will solve the problem. To sum up, this round of regional government financing platform loans has potential risk, but it is not necessarily real risk.
The Innovative Balance Sheet
21st Century: What adjustments have the Industrial Bank made on their asset structure this year?
Li Renjie: Our credit growth for this year is close to 20%, but profits have increased by more than 40%. How did this happen? Besides credit, non-credit is a very important source of our profits. Currently, credit assets, which account for approximately 45% of the total assets, and non-credit assets, which include bond investments and redemptory monetary capital for sale, are all profit making assets.
In the long term, I believe that the balance sheet of China's banking industry will definitely change. Credit assets will still be the primary type, but its proportion will decline. The Industrial Bank long before predicted this trend, so we made early arrangements and preparations in non-credit assets.
21st Century: Everyone is putting efforts into small-sized enterprises, but the Industrial Bank has proposed a medium-sized-client strategy for this year. What's your logic?
Li Renjie: With more emphasis on small-and-medium-sized enterprises, our bargaining power can be improved, which is our strategic layout. Commercial banks like us must do business with all clients, no matter they are large, medium or small, but we need to grasp the clients' features. As for large-sized enterprises, they have small demand for loans, and there are many competing banks, so our bargaining power is lower. As a result, we mainly provide direct financing service to them. In terms of small-sized enterprises, our bargaining power is high, but they have small unit volumes, which will cost us more in labor and resources. Speaking of input and output, medium-sized enterprises may match us better. They have more diversified demand for financial services, which are all within our range. Therefore, the Industrial Bank considers medium-sized enterprises to be a very important client group, and strives to be the leading bank, so we can have a better comprehensive income.
21st Century: Compared with your counterparts, why is your return on asset ratio not very high?
Li Renjie: This is because the proportion of credit out of our entire assets is relatively low, with the proportion of non-credit relatively high. Non-credit has lower degree of risk, so it yields less profit than that of credit and pulls down the whole return on asset ratio. However, judging from the perspective of capital return, ours is high. Loans indeed yield high profitability, but it occupies high risk factors; bonds yield low profitability, but it occupies low risk factors. Likewise, although mortgage loans' list price decreases and it yields low profits, its risk factor is only 0.5, therefore the capital return is not bad.
21st Century: With the country's ever-increasing control over the real estate market, how will the Industrial Bank adjust the corresponding credit structure?
Li Renjie: This year the proportion of mortgages is declining, accounting for approximately 20% of entire credit assets, and it will continue to decrease into the future. For retail banking, non-mortgage loans are increasing. In the future, there will be o ne-third operational loans, one-third consumption loans and one-third mortgage loans. Of course this is not the plan for next year, but we will strive in this direction.
21st Century: In my point of view, the Industrial Bank is not only adjusting the credit asset structure, providing third party custody, and involved in inter-bank cooperation from earlier periods, but is also seeking another path in the liability and intermediary business. This must be a part of your balance sheet theory.
Li Renjie: Exactly. We want to be in the liability business, so we cooperated with the brokers in earlier periods and acted as their fund settlement bank. We then provided third party custody, which correspondingly brought about a large precipitation of funds. Although these funds are not general deposits, they have contributed much to the bank's overall debt levels and comprehensive profitability. As for cooperating with small banks, we have IT technology exports, cooperation in financing products and syndicated loans. This not only brings about intermediary business incomes, but also objectively supplements our insufficient physical branches. At present, the capital constraints are increasingly strong, so we need to seek the most matched client market and new highlight in the public intermediary business. The innovation of our balance sheet has always been consistent.