21st Century Business Herald 2012-02-01
The temperature dropped to 7℃ in Fuzhou at the beginning of 2012. Though it was a bit cold, President Li Renjie of Industrial Bank (IB), only wearing a thin grey coat, had a busy day but still looked energetic.
In his simple office, this banker analyzed the inside stories about the changes and structural transformation of the bank for the reporter of the paper exclusively. Not only mentioning the achievements made by IB, but also talking about the increasing bottlenecks and challenges faced by the whole Chinese banking industry, President Li always expresses his unique business views in an unintentional way.
“To run a bank, we must walk our own path of development, adopt the business model that fits in with our own characteristics and capabilit ies practically and realistically, and shape our own features and brand. We should never follow what others have said and rush headlong into action,” He holds a firm belief in this point with stubborn persistence. IB has long made preparations for increasing the proportion of market-oriented liabilities and pioneering the adjustment of three large structures.
This was the longest interview given by President Li in recent years, but he seemed to have not given full expression to his views: “There are too many misunderstandings about the Chinese banking industry, and there will be a process of value regression.”
Distinctive Growth Theory
21st Century Business Herald: A year of complication has come to an end, were the macroeconomic situation and state of operation as you expected?
Li Renjie: Finance bears a close relation to the macroeconomic situation. At the beginning of last year, we held a prudent attitude to the overall situation and made a relatively steady plan. The reality was similar to what was expected, but our business performance outperformed our expectations.
By the end of last year, the total assets of IB had reached RMB 2.385642 billion, up 29.84% over the beginning of the year, and the net profits had reached RMB 25.51 billion, up 37.74%. With the weighted average yield of net assets reaching 24.68%, IB kept its asset quality at an outstanding level and steadily decreased non-performing loans.
21st Century Business Herald: Compared with other banks, IB faces inborn disadvantages in terms of head office location, information, human resources, administrative resources, and shareholders' background, but over these years the bank has witnessed remarkable business performance. Which factors have contributed to this success?
Li Renjie: Indeed, we are disadvantaged, so we have to make up for such disadvantages, but how? This is the question that I think about most everyday. With years of continuous exploration and practice, my deepest understanding is that we should find a development road suitable to ourselves in running a bank so we can make the best use of our advantages and bypass our disadvantages, and shape our own features and brand in a practical and realistic manner.
Our features can be seen in many a reas. First, we provide products and services down our own road. We require every business line including our corporate business, retail business, institutional business and financ ial market to have their own characteristic products and services. For instance, sustainable finance and investment banking on the corporate business line, “ Xingyetong ” and agency precious metals trading on the retail business line, and bank-bank platform and Renminbi market trading on the institutional business and financ ial market lines, they all have a definite influence in the market.
Second, regarding assets-liability management a mong the main Chinese banks, we have the most distinctive balance sheet, in which loans only account for a little over 40% of the total assets and corporate and personal deposits only account for less than 60% of the total liabilities. We have gradually cast off the old pattern of a conventional bank with deposits and loans accounting for the majority assets, realizing diversified assets and liabilities.
The third is business model. In developing the retail business, for instance, we did not choose the old model of starting from savings, but grasped the opportunities several years ago and made a fast breakthrough under the momentum of mortgage -based assets.
The fourth is internal management. In our internal framework, for instance, the head offices for business management are set at different regions according to actual requirements. The head office for corporate business is mainly based in Beijing, the head offices for retail business, institutional business and financ ial market mainly in Shanghai, the back-office operation center mainly in Fuzhou, Shanghai and Chengdu, and the head office for risk and financial management mainly in Fuzhou.
21st Century Business Herald: Compared with other industries, banking profits are higher thanks to the favorable interest rate policy of guaranteed profits. This has drawn reproach from society recently. Will such high growth keep going?
Li Renjie: The central bank controls the deposit and loan interest rates, and the profits in the finance world are relatively high. Nonetheless, I believe that the market-oriented progress of interest rates will be accelerated in this year and will sure ly drive the narrowing of the interest rate gap. This is also an unavoidable trend.
However, market-oriented interest rates cannot be achieved in on step. In fact, so-called market-oriented interest rates can be interpreted as the increasing proportion of market-based pricing. For example, the proportion of bonds becomes bigger. Besides the loan s you see, a bank invests a considerable amount of surplus funds into bonds, and this part of assets are completely priced based on the market. In the perspective of liabilit ies, I believe that the proportion of issuing bonds will keep increasing as a liability source of banks. At present, this part still accounts for a small proportion of commercial banks.
Transformation for steady development
21st Century Business Herald: In order to adapt to the trend of market-oriented interest rates, what business adjustments has IB made?
Li Renjie: Risks should be taken into consideration when pricing interest rates. Our risk tolerance is relatively moderate, so we do not propose to engage in high-risk high-rewards business. Our team and mechanisms are inclined to serve SMEs which are relatively mature.
IB has put forward a medium -sized enterprises oriented strategy, i.e. medium -sized enterprises are our main clients. We are a medium-sized bank, so medium-sized enterprises suit us the most. Of course, we should also target small enterprises, but not businesses with high-priced funds. Our asset price will not be raised so high. Everything has a degree. If an enterprise does not have a good performance, raising the interest rate too high would be to kill the goose that lays the golden eggs.
21st Century Business Herald: At the end of last year, Premier Wen Jiabao criticized some present situations severely regarding the relation between finance and the economy in Jiangsu, and he required financial institutions not to invest in money with money and not to regard enterprises as the “flesh of Monk Tang”. How do you think the finance sector can handle its relation ship with economic development better, and how it can improve services to the real economy?
Li Renjie: A financial enterprise is in the first place an enterprise, not a charit able institution. It is natural for banks to collect fees suitable for the services it provides. However, it is not acceptable and wise if it increases the price of funds and services additionally and treats enterprises as the “flesh of Monk Tang” making use of its non-equal position with clients in the aspects of information and resources, etc. We should uncompromisingly oppose and prevent such behavior.
Currently, indeed some enterprises take money from industry for speculation by investing in money with money. There are subjective factors of the business owners, and objective causes including more austere industrial environment, contracted social funds, and pervading inflation expectation, etc. We realized this problem at a very early period last year. Such business with both high yields and high risks are not what IB wants. We ensured our bank did not touch them, and meanwhile attach ed great importance to preventing our clients from the risks of being involved with them.
21st Century Business Herald : Real estate loans have become a business with high risk. After this sector goes down, what business will IB depend on to supplement the gap ?
Li Renjie: Since 2002, the Chinese economy has experienced a long round of continuous and fast growth. Imports and export s against the background of globalization were some of the driving factors, but more importantly it mainly relied on the progress of urbanization. Urbanization must contribute to the development of real estate, so there was unavoidably an asset re-pricing process. Due to many factors such as urban management systems, excessive dependency of some local governments on land finance, insufficient active action, and incorrect guidance of public opinion, the housing prices indeed kept rising at a rate which is too fast. The state has realized this problem. With great determination, both the central government and local governments at all levels are taking various effective measures to solve the over-heated real estate market. I believe that real estate will return to a healthy development track through effective regulation and control.
Urbanization is the main trend for the economic development of China. It is impossible for a bank not to participate in it. However, IB mainly got engaged to a large extent in the process in 2005, 2006 and 2007. Afterwards, when we realized that real estate prices were not reasonable, we made timely structural adjustments actively. Over recent years, the proportion of our real estate loans has dropped significantly. Based on repeated investigations and pressure testing, we are very confident in the quality of assets in this area. Based on the data at the end of last year, the non-performing rate of loans relating to real estate only accounted for less than 1/3 of the average level across the whole bank.
Real estate loans and financing platform loans have also brought some problems. With unfavorable flow performance, those business deposits fluctuated rapidly. Therefore, our transformation and structural adjustment last year were intended to develop towards manufacturing enterprises and industry while stressing flow performance. We vigorously promoted business such as trade financing and cash management, and driving deposits grew steadily. Because the deposits of manufacturing enterprises were close ly linked to our business, the settlement-Oriented deposits greatly made up the former business gap. Last year, we posted a better performance than similar banks, with deposits increasing steadily each month. Across the year, liabilities increased RMB 4.5 trillion, up 29%.
21st Century Business Herald: Which areas are the non-deposit/loan businesses of IB concentrated in?
Li Renjie: The adjustment of client structures inevitably bring s about business adjustment. Over the last few years, besides the original conventional deposit and loan businesses we consciously increased the proportion of emerging businesses, such as wealth management, investment banking and assets management. For example, to the Ministry of Railways - a big customer of IB, we have granted some loans, but not in great amounts, in fact the majority is bonds, including bonds we invest in and underwrite, and the se belong to the field of investment banking. As for enterprises with high ratings, we encouraged them to issue bonds last year.
As medium-sized enterprises, in addition to the conventional deposits and loans, we should help them manage their wealth when they have surplus funds and serve as their financial consultant when they may get involved in industry mergers or restructuring. Now, the financial service demands of many enterprises keep ex panding. If an enterprise is sensitive to the market, we may also help it hedge and provide currency exchanging, etc. If a group is formed inside an enterprise, the group itself also requires aggregation of funds, which is cash management.
Facing the platform loan
21st Century Business Herald: Under the influence of the RMB 4 trillion investment stimulus program, all banks increased considerable financing platform loans. Over the last two years, government financing platform loans have been under close supervision. Currently, how m uch of these types of assets has IB cleared up?
Li Renjie: When the development of government financing platform loans reached a certain scale, the central government and finance regulatory authorities paid great attention to the situation, pointed out possible risks and required the strengthening of management. This is completely correct, as it is favorable to the regular development of government bonds and for banks to prevent and control risks. Nonetheless, it is not equivalent to such risks having actually occurred, they are two totally different things.
IB has always been prudent in government financing platform loans, so we mainly choose subjects with large financial strength and high credibility, always attaching great importance to the first repayment source. Up to now, all the government financing platform loans have been of good quality, and not one non-performing loan has occurred. Moreover, after rectification, over 94% of loans are covered by cash flows at present.
21st Century Business Herald: Could there be platforms that do not cooperate ?
Li Renjie: The overall situation is good. Our local governments have low liability levels overall, and the integrity construction of local governments has seen significant progress over recent years. Basically, there will be no malicious evasion or rejection of liability. I believe that the risks of government financing platform loans are completely controllable.
21st Century Business Herald: The capital market worries about the risk of uncollectible debt regarding financing platform loans, and relevant policies successively issued by the state also seem to prove this.
Li Renjie: In my opinion, we have viewed the liabilities of financing platforms and local government as too serious a problem. At present, the state is gradually taking many comprehensive management measures for local government financing. First, the measure of “reducing the old and controlling the new” is being taken against platform loans. The loans to launched projects will go down gradually along with the completion of project construction, but we should prevent imposing uniformity in all case s and drawing back all funds in one go, such actions may cause “abandoned projects”. In addition, we should impose strict control over newly-launched projects. Second, we should explore issuance of bonds by local governments, create new regular financing channels, and strengthen the restriction over the liabilities of local governments through market forces. Third, we should push forward reform in financial management system s and make adjustments to the financial power and administrative power of local governments. Fourth, we should drive covering the liabilities of local governments into their budgets, strengthening supervision through performing legal procedures.
In my point opinion, our Chinese government can mobilize many resources unlike the small governments of large societ ies abroad. In fact, China has a big government. Apart from the fiscal budget, there is still a big part outside the budget. In some places, for instance, the funds raised by selling land are not covered in budgeted revenue. In addition, the state-owned assets settled and many of the profits submitted by the state-owned assets are not counted as revenue. If local government s can make good use of such funds, I believe that they ha ve the full capability to repay debts.
Of course, another important point is that no banks can establish new financing platforms. The reason why the contradiction emerges now lies in that we expanded the platforms too widely in that period. Otherwise, there would not have been those problems.
21st Century Business Herald: Currently, the A-share capital market generally gives a low evaluation to banking. What do you make of this?
Li Renjie: After joining the WTO, the Chinese banking industry has stood the trial of “dancing with wolves” by way of market-oriented reform, introducing strategic investors and share structure reform for listing, greatly improving the operation and management level and competitiveness.
Maybe because the market excessively interprets the risks faced by banks, the implementation of the Chinese “Basel III Accord” will put forward higher capital requirements, or the investment mood and behavior of investors is not yet mature enough. Currently banking shares are generally evaluated low at present. Even if, based on the static data at the end of 2011, the P/E ratio was only 6-7, and the P/B ratio was generally a bit over 1, or even approaching 1. The average P/E ratio at the A-share market was 12-13, and the P/B ratio approached 2. However, banking shares only reached about half of the average level. I think it is very unreasonable. The capital market at home is high on hype and is fond of extolling stocks with “stories”. Nonetheless, listed banks often have standardized corporate governance and transparent information disclosure, so there is no “story” to uncover. These banks are large but have little space for hype, and as a result, their share prices don't go up.
Exploration chang es based on the actual situation
21st Century Business Herald: It is reported that IB formulated and implemented a new round of five-year development planning last year. What are the main thoughts for the plan?
Li Renjie: The basic idea for our new round of five-year planning is to formulate the plan based mainly on the changes in future development. In the coming years, the finance industry will mainly develop in a market-orientated, globalized and integrated direction. Specifically, three areas deserve our attention. First is marketization, mainly the market-oriented development of interest rates and exchange rates. This process will be accelerated. Second, is financial disintermediation. Mainly, the development of direct financing will be accelerated, and asset securitization may be re-launched. The third, is financial deepening, or to put it another way, the further financialization of economic development.
These development tendencies will have a big influence on the conventional deposit and loan businesses of banks and compress the room for market development and profit. Hence, the speed, benefits and quality of banks will return to the regular state. If any bank fails to make the transformation as soon as possible, its development road will unavoidably become narrower and narrower.
In recent years, IB has always paid close attention to these changing tendencies, actively explored and practiced business transformation, having an increasingly clear concept. Our general direction is:
First, in the aspect of conventional businesses, we will enlarge the client target net, mainly developing the business for medium and small clients and retail clients. As for large clients, we will mainly meet their demands through direct financing.
Second, in the aspect of business extension, we should employ the core basic function of our bank, that is, the function of payment settlement, and extend our business fields by way of new payment settlement methods and platforms. We will actively engage in the field of third-party payment.
Third, we will concentrate our efforts on developing emerging businesses including wealth management, investment banking, and assets management, etc.
21st Century Business Herald: In future development, how will IB make the best use of its advantages and bypass its disadvantages?
Li Renjie: There is a basic main line for the changes in the future banking business environment, i.e. marketization. During this process, IB will not fall behind but rather have certain advantages. We can see from the overall balance sheet of IB that the proportion of conventional deposits and loans only accounts for a small fraction. In other words, the legal deposit/loan interest spread protection proportion is small, and we originally have a high proportion based on market-oriented pricing. Over these years, therefore, we have made many preparations in internal management. For instance, the implementation of overall FTP is to transfer pricing. In the future, the management of interest rate risks will be centralized to the headquarters. In addition, in terms of institutional mechanisms, system construction, talent teams, etc., IB has made full preparations, so we have a stronger basis, greater capability and more experience to adapt to the increasingly market-oriented environment. We must bring such advantages into full play.
21st Century Business Herald: IB regards emerging businesses such as investment banking, wealth management and assets management as a strategic focus in the future. Currently is there the suspicion of “credit scale evasion”, and how will IB prevent the risk of “shadow banking”?
Li Renjie: The development of emerging businesses such as investment banking, wealth management and assets management and the appearance of “shadow banking” are after all depend ant on the demands of economic development for financial services, and also have to do with the macroeconomic control over the recent two years to some extent. The credit scale is limited, but the social demands for financial services are strong, so it is impossible to keep demand down.
I'm pleased that the People's Bank of China has paid close attention to the problem. It is gradually weakening the control over loan scale s and strengthening the control over the total volume of social financing. It is a correction direction. The control of loan scale is too conventional. How can we control the total volume of social financing only by controlling the scale of credit? As long as there is any economic demand, it will show itself in other forms, like in loans or issuance of bonds. For instance, there are many fields where banks cannot make investments. However, insurance funds can invest while banks do a lot of intermediary work. Therefore, it is more proper to control the total volume of social financing.
Of course, now what all of us worry about is the “shadow banking” which is under no supervision. Some institutions engage in buying and selling assets through so-called innovation, but never keep accounts either of yours or mine. As a result, the accounts aren't there. This really requires intensifying supervision. Generally speaking, however, the financial innovations at home are far from enough, and there is not a large amount of these types of innovation.
We should adhere to the most crucial principle in the supervision over innovations, that is, conforming to the international accounting standards. This is the fundamental “rule” that a bank must follow in developing diversified businesses, both on-sheet and off-sheet. As long as we follow this “rule”, everyone can understand relevant innovations, risks are measurable, exposure is coverable, and provision and accrual are sufficient, there would be no big problems and risks. Hence, we should bravely encourage innovation. (Reporter Zhang Yizhi of the Paper also made contribution to the article)