Date: May 16, 2012 Source: Directors & Boards
Under the deepening reform of financial system at home, it's sure that emerging businesses, with the main pillars of wealth management, investment banking and asset management, will see a period full of opportunities for a new round of quick development. Banks should, based on their own comparative advantages, endeavor to become the ‘shadow CFOs' of enterprises and become the wealth management planners for private customers.
Both the drastic changes in external environment and the requirements of its own development indicate that 2012 will be a year of great reform for Chinese finance industry or the eve before tremendous adjustment. Considering whichever of the following: the systemic reform for market-oriented interest rates and RMB internationalization which comes nearer; the multi-level and multi-functional adjustment to and trial of the financial layout of China; or the financial risks which are ready to make trouble, there's no doubt that China's banking industry needs to define the development ideas to face the challenges of great transformation in the future.
In the late spring of 2012, the reporter of Directors & Boards had an intimate talk with Li Renjie, Director and President of Industrial Bank (IB), and attentively listen ed to this insightful banker with over 30 years of experience in the finance industry talking about his views on the transformation and innovation of the banking sector. “The fittest survive. Under the deepening reform of financial system at home, it's sure that emerging businesses, with the main pillars of wealth management, investment banking and asset management, will see a period full of opportunities for a new round of quick development. Banks should, based on their own comparative advantages, endeavor to become the ‘shadow CFOs' of enterprises and become the wealth management planners for private customers.”
Serving the real economy in a steady and progressive manner
Directors & Boards: With the furthering macroeconomic transformation and upgrading, it becomes increasingly obvious that the existing financial system is not fit for nor matches the progress. What new requirements are put forward for the finance industry in order to better serve the real economy?
Li Renjie: Since last year, leaders of our central government have iterated that the finance should serve the real economy. In fact, in the middle of last year, we also stressed similar views, pointing out that the situation–the real economy encountered great financial difficulty, but a massive amount of funds left the real economy and were used to invest in money–was greatly abnormal then.
Specifically, first, economy determines finance which then serves the economy. It is the most fundamental relation between finance and economy. Finance cannot separate itself from the real economy, become excessively virtual, and get indulged into its own realm. It is bound to be the responsibility of the financial sector to solve the difficulties encountered by the real economy. Last year, both the government at all levels and the media paid great attention to the fund price and charging issue of the banking industry. In essence, it lies in how we can treat the relation between the two in a correct way. Second, China's financial industry generally provides effective services to the real economy at present, and this differs it from the financial industries in Europe and America the greatest. The financial systems in Europe and America obviously have problems. Although an eas ing monetary policy is implemented, the funds cannot flow to the real economy. Because banks themselves have to offset their bad debts and increase the capital adequacy ratio, as a matter of fact, the monetary policy has a tightening effect. This problem does not exist in China, so the monetary policy can still go through the financial industry and reach the real economy effectively.
Directors & Boards: After the central bank declaring that the basic conditions for accelerating the opening of capital accounts have become mature, Wenzhou Comprehensive Financial Reform Pilot Zone has been established and Shenzhen released a range of major financial innovation initiatives. The floating range of RMB exchange rate gets doubled now and a range of major breakthroughs in the field of finance both from top down and from bottom up emerge one after another like spring tides. How do you think of this situation?
Li Renjie: Under the theme of serving the real economy, China is incubating a financial reform or pushing forward the reform step by step, hoping to make major breakthroughs. A series of institutional adjustments to release the administrative control properly are exciting. For instance, the expectation of the financial industry becomes increasingly near, and the market-oriented interest rates may see breakthrough within this year. Wenzhou Comprehensive Financial Reform Pilot Zone has been established, one more example. A range of prospective institutional explorations are worth of expectation, e.g., the internationalization of RMB. The central government hopes to better meet the development needs of the real economy with a range of financial reforms and adjustments.
In the perspective of the banking industry, the external risks are still great at present, and in general, the financial system of China is internally healthy, but there are some unstable factors. Therefore, on one hand we should work jointly to push forward reform, and on the other, we should make steady progress and consolidate development. It is more suitable to push forward a major institutional reform in a relatively steady environment, both internal and external.
Adhering to the market-oriented, integrated, and internationalized orientation
Directors & Boards: Last year, the performance of the whole banking industry was desirable due to interest spread and other factors. Will this trend continue this year?
Li Renjie: At present, it is still the main development trend that the finance becomes market-oriented, integrated, and internationalized. In particular, the process for market-oriented interest rates and disintermediation of finance is accelerating. The proportion of conventional credit businesses goes down while that of the market-priced financing goes up. Hence, it is unavoidable to narrow the interest spread gradually. Although the money became tight and interest spread went up in the recent two years due to various reasons, it is impossible to become a normal state. Also, due to macroeconomic control, the market fund price jumped up. Meanwhile, because of the strict control over the loan scale, various credit businesses grew significantly against the upsurging social financing demands. These phenomena could not last for a long time, either.
Directors & Boards: However, the domestic banking industry has become heavily dependent on interest spread to make profits.
Li Renjie: A healthy financial system should be diversified. At present, the businesses of the banking industry at home become increasingly convergent. It is abnormal that all large, medium and small banks provide identical services and adopt same operating modes. A major challenge for the Chinese banking industry now is the heavily homogenized operation. In essence, the banks remain at low-level competition. Hence, banks can hardly meet the diversified and real-time demands of customers, and this is not favorable for banks to build up their core competitiveness. To run a bank, we must take our own path of development, form our characteristic business strategies, and improve our core competitiveness. Meanwhile, we should look at and interpret the development of Chinese banking industry in an objective, practical and rational manner, so as to have a correct understanding of the development of China's banking industry. In the future, “the fittest will survive ”. All banks must study and judge the external economic and financial situation and tendency of regulatory policies accurately, making full preparation for future market changes and striving for transformation and innovation.
Directors & Boards: As the economy goes down, there are still considerable potential risks in the fields of real estate credit and local financing platform loan. How do you think of t his?
Li Renjie: China's economy is still favorable basically, and there will not be any serious problems. We should hold an objective attitude to analyze from different aspects the risks which attract extensive attention, such as the risks in the loans related to the government financing platform and real estate loans.
As for risks of the financing platform, when the platform-based loans developed to a certain scale, the central government and financial regulatory authorities began to attach great importance to the issue, pointing out possible risks and intensifying risk control. It is in favor of the regular development of government bonds and risk control of banks. Nonetheless, pointing out possible risks and intensifying risk control do not mean that the platform-based loans have encountered risks. They are two different things. In my personal opinion, the risks in platform-based loans are generally controllable, and we don't need to panic at mentioning such risks. IB has always been prudent in extending platform-based loans. We mainly select those customers with powerful financial strength and high credibility, and we attach great importance to the primary repayment source. Up to now, the platform-based loans of IB have been in good quality and there's no bad loan. Moreover, after rectification, over 94% of them are loans covered by cash flow at present.
As for real estate loans, the real estate market will unavoidably return to a healthy development path with the effective control of the government. Urbanization is the general trend for the economic development of China, and it is impossible for banks, the main distributors of financial resources in the market, not to participate in the process. As far as IB is concerned, we mainly got engaged in real estate loans from 2005 to 2007. Afterwards, we made structural adjustment actively in a timely manner. In recent years, the proportion of our real estate loans went down significantly. Based on repeated investigation and pressure testing, we are very confident in the quality of real estate loans. In 2011, the non-performing rate of loans relating to the real estate accounted for less than 1/3 of the average level of the whole bank.
Building three horsecars and transforming into a “shadow CFO”
Directors & Boards: You have mentioned that the fittest would survive, and banks must make prospective planning and push forward transformation and innovation. As the CEO of a listed joint-stock commercial bank, where do you think is the point banks can exert great efforts for transformation and innovation?
Li Renjie: Since 1970s, the financial industries in major western countries have been in furious competition. With financial tools witnessing continuous innovation, the financial management regulations have been lessened gradually. From separate operation to mixed operation, banks have gradually evolve d into financial department stores, and the profiting model has been transformed from the conventional loan and deposit businesses into the investment management consulting businesses led by financial consulting, with non-interest incomes account for 40%-70% in the earning structure. Compared with international commercial banks, Chinese commercial banks still remain at the primary stage, and the conventional deposit and loan businesses are their main income sources. Based on the mature experience in the development of mature markets and banking industries around the world, the emerging intermediate businesses mainly include three sectors: wealth management, investment banking and asset management.
With continuous increase in social wealth and accelerated development of financial deepening, the financial assets of corporate entities and residents increase at a fast rate and the demands for wealth management also become increasingly intense. Corporate businesses do not merely mean to provide deposit and loan businesses. We should change our concepts and endeavor to become a “ shadow CFO” of enterprises, considering their demands for financial services really from the perspective of enterprises. It also applies to the retail business, and customer managers should try to become the wealth management planner s of customers. That is to say, vertical and in-depth development is required based on the conventional businesses either for corporate and personal customers.
How can we manage the financial assets of customers in a desired way? We used to mainly depend on deposits and settlement. Now, we have more complicated products with greater added values gradually, such as cash management, asset custody, investment and wealth management, and hedging. In addition, enterprises have different financing demands at different development stages. How can we meet such demands? We should have corresponding financial service tools. Therefore, either from the perspective of managing assets of enterprises or meeting the financing demands of enterprises, there must be corresponding financial products to give effective support, and also corresponding professional institutions and talent team to operate such products. Considering the relations between the three business sectors, wealth management is the unavoidable result and objective demand to deepen banking services, and to some extent, it serves as the origin and engine of the other two businesses. We can say that wealth management, investment banking and asset management constitute the “three backbones” of the emerging business of modern banks and tally with the general trend that the real economy requires diversified financial services and deepening finance.
In terms of the business structures of some well-known international banks, emerging businesses basically consist of the three sectors in addition to the conventional deposit, loan and settlement businesses. Meanwhile, inside these banks, the corresponding organizational management and responsibility division are also centering on the three business sectors. After the financial crisis, the whole world has been making in-depth reflection and summarization on integrated operation. However, we should clearly know that EU and US do not intend to return to the past ways by making reflection, but they, based on continuous summarization of experiences and lessons, hope to better make up the weak links of regulation, so as to accelerate and strengthen market-oriented and integrated development model in a better way. The general trend for the development of banking sector in the world may be the only way for the future of development of Chinese banking sector. For a very long period, the Chinese banking industry has been prudent to the integrated operation, and even more prudent after the financial crisis. But I believe that this orientation will not change. With the deepening reform of financial system at home in the coming years, it's sure that emerging businesses, with the main pillars of wealth management, investment banking and asset management, will see a period full of opportunities for a new round of quick development.
Directors & Boards: Individualized and distinctive businesses will become important propelling factors for the core competitiveness of the new type of banks in the future. What experiences and practices can IB share with us?
Li Renjie: The basic main line for the changes in the future banking business environment is market-oriented. IB has always paid close attention to the trend of changes in the industry, and actively explored and practiced business transformation in recent years. Now, IB has established certain comparative advantages. We can see from the balance sheet that the proportion of conventional deposits and loans in IB only accounts for a small part. In other words, we have a small proportion under the legal deposit/loan interest spread protection, and a high proportion based on market-oriented pricing. We make great efforts mainly in three aspects: First, in the aspect of conventional businesses, we “sink” our client targets, mainly developing the businesses 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 conventional business extension, we actively bring into play the core basic function of our bank, that is, the function of payment settlement, and extend our business fields, including third-party payment, by way of new payment settlement methods and platforms. Third, in the aspect of emerging businesses, we concentrate our efforts on developing emerging businesses which include wealth management, investment banking and assets management.
IB will implement FTP (funds transfer pricing) in an all-round way inside, further improve transfer pricing mechanism, and centralize the control of interest rate risks in the Head Office. In the meantime, we will intensify the construction of institutional mechanism, technical system and talent team, so as to better adapt to a more market-oriented business environment.
In this year, IB is pushing forward and deepening reform in all business lines, such as deepening reform in the retail business line, starting reform in the business lines of corporate finance and financial market, and launching reform in the risk management system and financial management system. Meanwhile, with increasingly complicated banking businesses, products become more and more diversified, and the collaboration and coordination between departments become increasingly normal. In correspondence, we further consolidate the concepts and perceptions of “unified bank” and “process bank”, do away with the concepts of “division-based bank” and “governance by individuals”, and push forward the accomplish ment of all works in a smooth and efficient manner through the management of systems and processes.