Time: April 13, 2011 Source: The Banker
The year of 2011 just began and it is the second post-crisis year for the global economy. The EU and US economy is gradually recovering. After suffering the great attack of the subprime crisis, the finance and banking sectors proactively search for new development models under the increasingly strict regulations around the globe. Since China outperformed Japan and became the second largest economy in the world, the Chinese banking sector still enjoys an overall favorable macroeconomic environment. However, if the sector does not change its relatively simple profit structure, its future development will be uncertain as overseas banks are making vigorous efforts to explore stable profit-making channels to recover their competitive edge, and the monetary policies in China are being redirected.
As an early established joint-stock commercial bank in China, Industrial Bank (IB) is the first Chinese commercial bank to adopt the “Equator Principles”. It has persistently been seeking innovation in products and businesses. For this reason, and particularly against the backdrop of the Chinese banking sector undergoing transformative development, IB is highly praised among the sector for its product innovation, development planning, etc. For this reason, the magazine interviewed Mr. Li Renjie, President of IB, who will discuss and share with the whole sector his profound insights on the adjustment of credit structures and innovation of products and businesses by commercial banks and how should commercial banks respond to the overall environment of macroeconomic policies to adapt to the current transformation of monetary policies.
The general development trend of the banking sector
The Banker: Since the end of 2010, with the increasingly intensified measures to control prospective inflation, the market has been faced with sudden changes, tightened liquidity and restricted credit scale. What can a commercial bank do to cope with the situation? What overall development planning does IB have in 2011?
Li Renjie: First, we should see that liquidity tightening is unavoidable and it is to “rectify” the over-easy monetary policies of the previous years, it's a return to the “normal” state. Against the backdrop of tightening liquidity and restricted credit scale, the responding strategies of commercial banks can be generalized in the following three aspects: Firstly, to consolidate the business foundation, accelerate liability progress and manage liquidity in an effective way. Here, the stress should be put on improving customer services, making efforts to extend the basic customer groups, accelerating the progress of various liabilities, especially core liabilities with strong stability, and preventing liquidity risks in an effective way. Secondly, to reasonably control the credit scale and development pace, optimize credit orientation, strengthen pricing control and improve the rate of return while preventing interest rate risk in an efficient manner. On the one hand, commercial banks should strictly follow and implement the national macroeconomic policies and the spirit of those policies and comply with financial regulatory requirements, reasonably control the credit scale and development pace and increase credit investment in industries supported by the state for strategic purposes: small and medium enterprises (SME), industries related to “Agriculture, Rural Area and Farmers” and residents' consumption, etc., so as to support the development of the real economy. On the other hand, banks should grasp the tendency of market interest rates to rise, intensify the pricing management of loans, and improve the rate of return on bank credit assets while efficiently preventing the interest rate risk. Thirdly, accelerate the innovation process, actively develop non-credit business, particularly various emerging businesses, and make efforts to broaden income sources while improving the integrated service capacity of banks. At present, the macroeconomic situation in China is generally stable and favorable, and the real economy is still in intense need of funds. Under the circumstance of strictly restricted credit scale, this demand must turn to other channels. This is a good opportunity for banks to develop non-credit businesses. The key lies in that banks should be able to grasp opportunities to actively innovate in terms of their approach and method, so as to meet the demands of customers for financial services through diversified channels and models. During the process, of course banks should stress intensifying the management of compliance risks and ensure that innovative businesses conform to laws and regulations.
As far as IB is concerned, we have also carried out our business planning around the above three strategies this year. With regard to the management of liquidity, IB puts the development of liabilities, especially core liabilities, at its operational top priority. Starting with the persistent development of basic customers and creating specialized products, IB intends to drive the sustainable, stable and rapid growth of core liabilities through improving its overall service capacity. With regards to credit supply, the newly-increased credit is aimed at SMEs with high profits, retail loans, “medium-sized leading banking customers” matching the bank's strength, emerging products under strategic support of China and industries related to “Agriculture, Rural Areas and Farmers”. The credit demands of large customers are to be met through direct financing to the largest extent. Meanwhile, IB is trying to optimize the structure of stock credit assets to make way for the developing assets businesses with controllable risks and high returns. With regard to the non-credit business, IB encourages all operating branches to proactively extend business innovation and extend non-credit assets sources under the precondition of compliance to laws and regulations. Meanwhile, the bank vigorously develops emerging businesses such as investment banking, wealth management and assets management, and optimizes business and earning structures in a sustained manner.
The Banker: In recent years, both macroeconomic finance and administrative policies underwent rapid changes, alternating between easy and tight policies, but no matter what changes happened in the external environment, IB always makes outstanding achievements. How can IB do that?
Li Renjie: In recent years, IB has kept its businesses and profits growing stably at a fast rate, mainly thanks to the following reasons:
First, IB accurately grasped the general trend of economic and social development in China. To be specific, there are two aspects here, one of which is urbanization. Centering on urbanization, we vigorously developed personal housing mortgage loans, real estate development loans, and infrastructure and livelihood projects relating to urbanization. Thus we have achieved good business results. More specifically, personal mortgage and real estate development loans were mainly issued before 2008 when the housing prices were still rational, and the business focus in this regard was transferred to urban infrastructure and livelihood projects, such as transformation of old towns. The other is energy conservation and emissions reduction. Centering on energy conservation and emissions reduction, we took the lead in releasing and promoting the “green finance” business, for example, energy conservation and emissions reduction loans, and became the first Equator bank in China, harvesting both economic and social benefits.
Second, IB adhered to its differentiated business concept. Making bond innovations and breaking through convention, IB has created a unique development model in respect to assets-liability development, inter-bank finance, retail business, financial markets business, etc., properly grasping the staged market opportunities. At the same time, the bank established a market leading position in the bank-bank cooperation, Renminbi market trading and agency precious metal trading fields, providing strong support for driving the fast growth of businesses and profits.
Third, strict risk management and cost control. As for banks, the business costs mainly consist of two parts: one is risk costs, mainly represented by the losses of non-performing assets; the other is operational costs, mainly represented by various operating expenditures. We have always attached high importance to these two aspects, managed them strictly, and made desirable achievements, thus providing strong support for the growth of profits. In terms of risk costs, the non-performing loans of IB have decreased in a continuous way both in amount and proportion over recent years. By the end of 2010, the ratio of non-performing loans was only 0.42% and the bank's assets quality ranked No. 1 among the major banks across China. In terms of operational costs, the cost/income ratio of IB in recent years has stably stood at around 35%, 2-4% lower than the average level of the industry, and even reached 32.66% in 2010. The bank has kept a leading position among major Chinese banks in this respect.
The Banker: Beneath the short-run up-and-down economic and financial situation, are there any medium and/or long-term changes in certain directions and tendencies, which are more deserving for commercial banks to analyze, study, judge and grasp?
Li Renjie: Yes, although the domestic economic and financial markets experienced great fluctuations in recent years, there were some changes in certain directions and tendencies, and they are the fields deserving of commercial banks research and grasp.
In regards to macroeconomic trends, we still keep to our original judgment – urbanization and environmental protection will still be the main track and engine for the future growth of Chinese economy over the long-term. Based on the “12th Five-year Plan”, the urbanization ratio in 2015 will rise from the current 46.6% to 51.5%. This brings a great number of market opportunities, e.g. construction of urban infrastructure, construction of small towns, transformation of old towns, transformation of shanty towns, employment of urbanized and consumption by rural residents, etc. Of course, different regions and different stages may feature different development emphases. In addition, energy conservation and emissions reduction have been elevated to the height of national strategy and become an uncompromising target and restriction for assessing the achievement of government at all levels. It can be foreseen that energy conservation and emissions reduction industries will enter an accelerating period in China in the coming years. This also contains a great number of market opportunities, such as energy conservation and emissions reduction loans, carbon finance, environmental finance, etc. In both of these two aspects, IB has certain features and advantages. In the coming years, we will further increase investment in relevant fields and try to consolidate and expand characteristic advantages.
From the perspective of the financial development trend, the general trend of finance market orientation, internationalization and integration remains the same, but the pace may be further accelerated. It will mainly manifest in the following aspects: first, the pace of financial disintermediation will be further accelerated. Improving the social financing structure and increasing the proportion of direct financing has become a basic direction of China 's finance policies. Over the last two years, direct financing developed at a fast rate. The amount of direct financing has reached 35% of the total yearly growth in bank credit in 2010, and the proportion will further increase in a stable manner over the coming years. Second, the market orientation pace for mechanism-based interest rate and exchange rate will be further accelerated. At present, this situation has already become visible. Third, the internationalization of the Renminbi will be further accelerated. With the accelerating development of Renminbi settlement of cross-border trading and the HK Renminbi offshore market, the globalizing pace of the Renminbi will be continuously accelerated. This will have a significant and far-reaching influence on the development of the Chinese finance sector. Fourth, integrated operations will be pushed forward in a stable manner. As influenced by the global financial crisis, at present China is still prudent towards the integrated operation of finance. However, the general development trend has stayed unchanged. Integrated finance operation is an inevitable requirement for intensifying the finance market and diversified development of customer finance service demands.
The main direction of emerging businesses
The Banker: In order to adapt to the sustained and profound changes in the environment, our banks all pushed forward operation transformations one after another over these years. Besides conventional business, they have tried to develop various emerging businesses. What progress has IB made in this respect?
Li Renjie: IB is one of the earliest banks in China to propose strategies for operation transformation. As early as 2004, we specifically set out the “two transformations” of the business development model and profit model as the main track for IB's strategic development. Centering on this main strategic track, in recent years we continued developing conventional businesses and actively engaged in various emerging business fields, made great progress, and formed certain business features in some business fields, for instance, the bank-bank platform, Renminbi market trading, agency precious metal trading, investment banking, asset trusts, etc.
In the financial markets business for instance, we saw the development potential for the domestic financial markets business at an early time. In 2003 IB established the Financial Markets Center in Shanghai, which was the first licensed head office funds operation center in China and is still the only one in China. At present, IB's Renminbi funds trading business enters into the first echelon of the market, boasting desirable market performance in terms of Renminbi exchange rate trading, bond trading, interest rate swaps, etc.
With regard to bank-bank platform business, we have always believed that the Chinese banking market should be multi-layered and diversified and it would be impossible for several large banks to monopolize the market. So we have released an innovated bank-bank platform mainly targeting small and medium-size banks. At present agencies in the network exceed 12,000, with a very good development momentum.
With regard to the business of agency precious metal trading, we grasped the opportunity that prospective inflation was intensifying and residents had a great demand for value increase and maintenance, and became the first bank at home to vigorously act as an agency of the Shanghai Gold Exchange (SGE) for the trading of precious metals. At present, IB is the commercial bank acting as an SGE agency with the most diversified products, largest trading volume and largest customer group. In 2010, the bank registered a transaction amount of over RMB 230 billion acting as an agent of precious metal trading, with over 570,000 signed customers.
In addition, regarding the investment banking and assets trust businesses, IB also occupied a place in the market. In 2010, IB accumulatively underwrote and released 69 issues of short-term financing bonds and medium-term notes worth RMB 66 billion and ranked No. 4 and No. 8 respectively in the market. The amount of assets held in trust broke through the RMB 200 billion barrier for the first time, reaching RMB 227.2 billion. Trust products have become increasingly diversified.
In addition, IB also made substantial efforts in integrating operations over the last two years. Since 2010, the bank successfully established a solely owned subsidiary – Industrial Bank Financial Leasing Co., Ltd. With the purchase of Union Trust Limited specially approved by the State Council, IB became the third bank to hold a trust company behind the Bank of Communications and China Construction Bank.
The Banker: As for commercial banks, it is obviously necessary and urgent to make a transformation and innovation, but the key lies in determining a working direction. Has IB specified a direction?
Li Renjie: Over recent years, all banks in China were pushing forward operational transformation. As far as IB is concerned, there are generally two basic directions for transformation. The first one is to increase the proportion of the retail business and to make the business structure, earning structure and customer structure more balanced and reasonable. The latter is to increase the proportion of intermediate businesses and to reduce the dependency on the conventional profit model based on interest spreads. The two basic directions can be centralized in the development of emerging businesses. The question is where the emphases on emerging businesses are?
Based on the analysis of international mature markets and the proven experience in the development of the banking sector, we believe that the three businesses of investment banking, wealth management and assets management constitute the “three pillars” of emerging businesses for modern banks. This is not only the general trend for the development of the banking sector throughout the world, but also may be the only way for the future of the development of the Chinese banking sector.
To be specific, so-called wealth management means that, with continuous increases in social wealth and the deepening accelerated development of finance, the financial assets of corporate entities and residents are increasing at a rapid rate, and the demands for wealth management have also become increasingly intense. The channel and customer relationship management departments of a bank should start with the requirements of customers, propose suggestions to customers regarding their assets allocation and organize relevant products. The so-called investment banking is mainly to meet the financing demands of customers and to provide diversified financing services to customers. It includes financial consultation services in the primary market, such as underwriting and issuance of stocks and bonds, project loans, syndicated loans, structure financing arrangements, mergers and acquisitions, and businesses in the secondary market, such as transactions, risk hedging, interest rate derivatives, exchange rate derivatives, credit derivatives and bulk commodity trading. The so-called assets management mainly means that following the financial demands for customer finance and wealth management and trust assets at the front end, there should be specialized combined investment management at the back end, including a large number of customized requirements for investments and hedging, leverage and arbitrage, risk and return, etc. In terms of relationships between the three business sectors, wealth management is the necessary result and objective demand for a commercial bank to deepen its financial services, and the source and engine for the other two businesses, in some senses. Investment banking and assets management are both for serving the diversified wealth management and financial demands of customers.
In the future, IB will focus on the above three businesses to accelerate innovation and development.
The Banker: After the global financial crisis, all banks hold a more prudent attitude to the development of emerging businesses. What do you make of it?
Li Renjie: After the financial crisis, all banks have been thoroughly reflecting and summarizing the development of emerging businesses and the implementation of integrated operations. However, we should be clear that EU and US do not intend to return to the past by reflecting, but they, based on continuous summarization of experiences and lessons, hope to better fix the weak links of regulation, so as to accelerate and strengthen the market-oriented and integrated development model in a better way. Besides, the main problem in western countries lies in the imbalance between excessive innovation and insufficient regulation. Nonetheless, China is far from reaching such an extent and does not face such problems. The main problem in our country is insufficient innovation and seriously homogenized financial services which can hardly meet the increasingly diversified and differentiated demands. Therefore, we cannot refuse to eat for fear of choking. We cannot get inoculated and take medicine because others fall sick, nor cut the feet to fit the shoes, to adapt to the low-level development of finance by sacrificing social efficiency. This is not a successful institutional arrangement. Therefore, we believe that the market-oriented, internationalized and integrated development trend of commercial banks will not change in the future. The banking sector in China must also develop gradually in a steady and orderly manner so as to adapt to the development trend of diversified and differentiated demands for financial services and continuously improve the integrated service capacity and profitability. Meanwhile, the sector should also establish risk coverage and isolation regulation systems. It's assured that emerging businesses, with the main pillars of wealth management, investment banking and assets management, will see a period of opportunity for a new round of quick development.
In the development of emerging businesses a number of regards need to be handled
The Banker: Generally speaking, the establishment of an emerging business model means the negation and improvement of the conventional business model, and it will unavoidably bring a range of contradictions and conflicts in concepts, processes, systems and mechanisms, etc. Does IB also encounter similar situations?
Li Renjie: Yes, in the process of driving the development of emerging businesses and establishing an emerging business model, there surely will be many contradictions and conflicts. This is unavoidable. Now that they are called emerging businesses, in many aspects no existing experience can be used for reference, and we can only explore in practice. Meanwhile, a period of time is required to understand the emerging businesses. Therefore, it is normal to have contradictions and conflicts.
Based on the experience of IB, such contradictions and conflicts mainly involve the following aspects: First, conflict in risk management culture and risk management model. Previously, domestic banks used to have simple businesses, mainly including deposits, loans and settlements. The system, process and culture for risk management were established mainly in adaptation to the characteristic of loans, especially corporate loans. For instance, there was the separation of credit audits, examinations and approvals of individual cases, hierarchical authorization, a stress on pre-loan, in-loan and post-loan management, emphasis on guaranteed mortgages, etc. This risk management model is not suitable to the development requirements of many emerging businesses. For instance, retail loans involve small amounts and many transactions. If the conventional process of examination and approval for corporate loans is used, obviously it cannot meet the requirements both in terms of efficiency and benefits. The road of centralized and specialized examination and approval must be taken. For example, the financial markets business (mainly mark-to-market transactions) is more significantly different from the conventional risk management model, so it must rely on individual authorization and site control. And also, the businesses of investment banking and wealth management are greatly different from conventional credit business in terms of risk features. Under the precondition of not assuming the underwriting and repurchasing responsibilities, a bank mainly assumes responsibilities of compliance risks and proper sale. This requires reforms in the concept, process and mechanism of risk management.
Second, conflicts in team construction, salary culture, etc. Diversified development of businesses, especially the development of cross-industry and cross-category businesses, makes the talent team of banks more diversified and the differences in position requirements, work features and professional levels between different types of businesses more significant. This makes the conventional and simple team management method and salary system used previously hardly suitable now. For instance, senior researchers, dealers and specialized investment banking talents are greatly different from conventional counter clerks, customer managers and general administrators of banks. If identical management method and salary systems are used, obviously it cannot be applicable. Different profession sequences must be established and matched with different career planning, salary systems, etc.
Third, conflicts brought about by emerging businesses. With regard to changes in the contents of customer services provided by banks, banking services were simple in the past. With the development of emerging businesses including wealth management, investment banking and assets management, the contents of customer services become profuse. Performing the “sellers have duties” obligation is required; intensify the management of product duration, etc. As for the responsibility orientation between different sectors and departments, it requires a gradual smoothing process to ascertain who are responsible for customer relationship management, who are responsible for product launching, and who are responsible for investment management, etc. as well as how they cooperate and coordinate with each other.
The Banker: In the process of developing emerging businesses, which internal relationships need be smoothed? How can they be smoothed?
Li Renjie: To develop emerging businesses, the emphasis should be put on smoothing five relationships:
Firstly, the relationship between the bank and customers. The core principles include the following aspects: The first is to really implement a customer-centered development concept. The benefits and experiences of customers should be placed as a top priority and set as the starting point and the foothold of all undertakings. The second principle is the suitability of services. Customers must be classified in a scientific way and pertinent products and services should be provided to different types of customers. The third is to intensify research and innovation efforts. A product library and rich product lines should be established to provide customers with complete products and services, so as to meet the requirements of different customers in different regions. The fourth is to perform the “sellers have duties” responsibility in a practical manner.
Secondly, the relationship among the financial markets, assets management and the lines of corporate finance, retail finance and institutional finance. The lines of corporate finance, retail finance and institutional finance are mainly responsible for managing customer relationships, establishing rich product lines and forming their own product libraries according to customers' requirements. Products in the libraries may come from the bank or be purchased externally. The financial markets and assets management lines are mainly responsible for launching products and combining management, as well as customizing products according to the requirements of customers and arranging assets well. Metaphorically, the corporate finance, retail finance and institutional finance lines function like a fruit seller, mainly responsible for collecting and arranging customer demand information, maintaining customer relationships, establishing sales channels and selecting various high-grade fruits as required to sell to customers. Where do the fruits come from? They may be planted by the bank itself, or may be purchased from other suppliers. The financial markets and asset management sectors are fruit farmers. Their main task is to concentrate on planting and producing good fruit.
Thirdly, therelationship among head office, branches and sub-branches. The core principle is that the head office, branches and sub-branches should act in accordance with the division of their functions and duties and work with linked coordination. The head office should take the lead in establishing product libraries and extending product lines; branches should organize products that meet the regional requirements according to the actual situation; the main tasks of grass-root business offices is to exert their role as main marketing channels.
Fourthly, the internal relationship between the financial markets and assets management sectors. The general principle is to stress “specialization”. All departments and offices inside the financial markets and assets management sectors should concentrate on their own specialized fields, doing something that should be done but not something that shouldn't be done. They should make great efforts to improve their professional capacity, rather than become large and all inclusive or small and all inclusive, doing all but good at nothing.
Fifthly, the relationship among the front, middle and back offices. Specifically, the first thing is to increase back office resources, including the combination and sharing extent of IT resources, funds clearing resources and research resources, and to make great efforts to build a large back office. Second, a risk and quality control system with reasonable work division and respective focuses should be established and improved. Such a system will cover three hierarchies: concrete business offices, line management departments and risk management departments. Third, for finance management the benefit sharing mechanism should be consolidated so as to promote the cross sales of products in an effective way.