The continuous growth of profits in the banking industry brings both returns to shareholders and accelerates the consumption of capital, and the new regulatory rules further intensify the pressure. Compared with other banks, the low loan provision ratio of Industrial Bank (IB) causes the market to call into question IB's future profitability.
“It is totally unreasonable to worry about the loan provision ratio. The China Banking Regulatory Commission (CBRC) is researching policies, and is hopeful that commercial banks will be allowed to include the reserved part exceeding the 150% provision coverage rate into supplementary capital”, said President Li Renjie of IB when he received the exclusive interview of the Paper. If such policies are released, the problem of loan provision ratio can be solved in an appropriate way.
“A high loan provision ratio would lead to abnormal provision coverage”
21st Century Business Herald: According to the comparative statistics of a relevant institution, by the end of the third quarter of 2011, the loan provision ratio of IB had reached 1.34%, which fell far behind the rate of 2.5% which must be reached by 2016 for a bank of non-systemic importance provided in the Guiding Opinions on the Implementation of the New Regulatory Standards in China's Banking Sector issued by the CBRC in April 2011. Outsiders are afraid of the big pressures faced by IB in credit cost accrual over the coming years.
Li Renjie: Such worries are not reasonable. In terms of the management of modern commercial banks, each bank should determine its development strategies, risk policies and preferences according to its own situation. The currently defined uniform loan provision ratio of 2.5% disregards the differences of different banks in risk control capability, customer admittance, and quality of assets, etc. This will lead to a strange phenomenon in the capital market. Banks with unfavorable asset quality may have a high share value due to its high loan provision ratio.
To tell you the truth, globally the Basel III and II Accord do not have such a concept. In my own opinion, it is correct that CBRC originally stressed provision coverage and provision sufficiency. Provision s should be made in line with non-performing loans. One refers to sufficiency and the other coverage. It should be practical and realistic and vary from one to another. This is also the dynamic provision insisted on by the CBRC all along.
21st Century Business Herald: However, it is the current regulatory requirement, what measures will IB take in response?
Li Renjie: We currently don't make sufficient provision according to the given loan provision ratio of 2.5% mainly for the following two reasons. First, reach ing the rate is required by 2016, so there are still five years ahead, this deserves further observation and dynamic adjustment.
Second, if we made provision s of 2.5%, other indices would become abnormal, and the provision coverage would even reach as high as 600%-700%. This is very unreasonable, and we can't find such a case anywhere in the world.
In addition, the implementation of a 2.5% loan provision ratio also requires the settling of some problems regarding supporting policies. In the aspect of taxation policies, for instance, the pre-tax deduction standard for loan impairment provision is currently 1% of newly-increased risk assets in the year. Hence, we suggest increasing the proportion appropriately.
For another example, if the banking regulatory policy provide d that the excess reserved part of the provision can be included in supplementary capital, it can eliminate the impact of the excess reserved part of the provision on capital sufficiency appropriately . If the excess reserved provision is not counted as capital on the one hand, nor profit on the other, this is a kind of waste of shareholder equity.
21st Century Business Herald: The market worries about the loan provision ratio of IB mainly because other banks have high provisions, but IB has a comparatively low provision.
Li Renjie: There are several kinds of provisions for banks. One type is that a bank with a relatively high non-performing rate originally has a high proportion, so it may reach the required loan provision ratio quickly . Another type is that some banks are engaged in businesses with both high risks and high profits, small and mini enterprises are more inclined to belong to this category . When the prices rise, the provisions should be raised consequently. These businesses are not the primary focus of IB.
The Chinese Basel III Accord should not take a sweeping approach
21st Century Business Herald: The Chinese Basel III Accord includes four regulatory tools: capital sufficiency, liquidity, leverage ratio and loan loss provision. Their implementation will be postponed to the second half of this year. What do you think of this?
Li Renjie: Really it is as it should be. The Basel Accord summarizes the experiences and lessons of the international banking industry over dozens of years, so it is definitely useful for banks' operation s and management, and preventing risks. To go to the global platform, Chinese financial institutions should certainly observe the universal rules of the game. However, not all Chinese banks should follow this standard. Take large banks for instance, they should catch up to the rhythm and progress of the Basel II and III Accords, but for rural credit cooperatives it is unnecessary.
The regulatory authorities should have different measures according to the business situation, business complexity and regional extension of various financial institutions, and different institutions should have different levels of conformity.
As far as IB is concerned, our basic tactic is to follow the Basel II Accord and pay attention to the Basel III Accord. We should know the development trends of others and understand their purposes, risk management methods and tool systems. Based on our business development, we must learn, understand and use these tools, methods and frameworks selectively.
21st Century Business Herald: The international regulatory standard has risen higher following localization in China. What are the attitudes of bankers?
Li Renjie: The international regulatory standard need s be come localized, but during the process, lets not raise the standards further. Such behavior would definitely influence the development of the Chinese banking industry, and impose excessive pressure on the Chinese capital market. (Reporter Zhang Yizhi of th is Paper also made a contribution to the article)