Industrial Bank (IB) stated in an announcement that its program of issuing tailored additional shares to five strategic investors including PICC had been approved by the regulatory authorities. How should we interpret the program of issuing tailored additional shares which has been in dispute? Can the performance of the third quarter report of the bank clear up all doubts in the market? How should IB plan for its future development? The reporter of China Securities News interviewed the management team of IB at the earliest possible time.
Not drawing blood from the market; letting time clear up all disputes
“We don't ask money from the market!” Tang Bin, director and board secretary of IB, says to the reporter, when explaining the program of issuing tailored additional shares.
In this March, IB announced that it planned to issue not more than 1.915 billion shares at the price of RMB 12.73 per share in a non-open way to raise not more than RMB 26.379 billion all for supplementing its core capital. Specifically, the People's Insurance Company (Group) of China Limited, PICC Property and Casualty Company Limited, and PICC Life Insurance Company Limited respectively entrusted PICC Asset Management Company Limited to subscribe a total of 1.38 billion shares; China National Tobacco Corporation planned to subscribe 409 million shares; and Shanghai Eightrent ZhengYang Rental Co., Ltd. planned to subscribe 125 million shares.
It is reported that, under the restriction of the Measures on the Administration of Capital of Commercial Banks newly promulgated in China, the small- and medium-sized banks at home will face the regulatory base line in which the capital sufficiency not less than 10.5% and the Tier 1 capital sufficiency not below 8.5% as from the next year. This also gives rise to worries among investors about the financing products of domestic banks in various forms. By the end of the third quarter, the core capital sufficiency of IB has moved down to 8.27%, approaching the red line. If the bank does not increase capital, it will have to face the situation where it cannot provide credit support to the real economy. Refinancing must go like an arrow is on the string.
With regard to the selection of financing method, open additional shares, rationed shares and convertible bonds all require the existing investors to pay money, but only tailored additional shares do not “draw blood” from the market. The strategic investors including PICC introduced at this time all have the capital background supported by the state treasury or local SOEs. They signify the recognition of the state-owned business sector to the blue chip shares. Tang believes that it “does not draw blood from the market, but supply blood indirectly".
The five strategic investors including PICC introduced at this time, he also indicates, boast powerful capital strength and outstanding industrial qualification, matching IB in terms of business cooperation and value identification. Specifically, PICC is a famous insurance finance group in China, with businesses covering a number of fields such as insurance, trust, fund, and assets management, which are mutually complementary to the banking businesses. There are broad space and great potential for the group and IB in integrating resources and intensifying cooperation in all fields.
Some analysts point out that introducing strategic investors with outstanding qualification and complementing businesses is helpful to improve the level of corporate governance and bring new vitality. In addition, to attract the external funds to come into the market by issuing tailored additional shares is also helpful to inject new fund sources for the capital market, enlarge the market scale, diversify the investment subjects and boost the development of the capital market.
With regard to dispute over the time and price of the tailored additional shares, a senior executive of IB indicates that the entire banking sector has dropped over 10% since this March, and many banks have dropped below the net asset value or the initial price. The time proves that the price of additional shares is determined at a proper opportunity, but not as claimed by the oppugners, it is chosen at an industrial valley, let alone transfer of interests.
It is also reported that this issuance of tailored additional shares will elevate the capital sufficiency of IB up by 1.5%, which can basically meet the demand of the bank for core capital in the coming two years.
Profits growing six times in the five years after IPO
Maintaining its advantages in the field of institutional business
As a blue chip enterprise, IB cannot evade the two keywords: performance and value. It is said that, over the more than five years after its IPO, IB has witnessed a total of after-tax profits up to RMB 103.6 billion, with the total cash dividends hitting about RMB 15 billion. The net profits in the first three quarters of this year increase six times over the total profits of 2006 before the IPO. The third quarter report of the company continues the good performance, with such indexes as YoY growth rate of net profits, YoY growth of deposits, incomes of handling charges and commissions, and growth of institutional assets outperforming the average level of the banking industry significantly. Tang indicates that this can be mainly attributed to the conventional advantages of institutional business and reform of business lines.
An analyst points out that, because the growth of conventional credit slowed down in this year, all major banks made vigorous efforts to develop the institutional business, thus resulting in the rocketing of institutional assets. In the second half year, the regulatory authorities intensified the regulation over the business, leading the institutional assets of the listed banks in the third quarter to witness a negative growth of 12% on average. However, IB still kept a growth of 4%.
The analyst believes that the growth of institutional business witnessed by the company against the general tendency can be mainly attributed to the fact that it has launched the business early and its team has formed its competitive edges centering on innovation. For instance, IB has connected its “bank-bank platform”, which is an important support for the business of financial market, with the outlets of over 16,000 small- and medium-sized financial institutions around China. This enables the bank to share customer resources and complement respective advantages each other with a large number of small- and medium-sized banks, urban commercial banks and rural credit cooperatives. Meanwhile, the company advantageously provides specialized and flexible institutional business, which is easy to establish cooperation with institutional customers on the basis of equality and mutual benefits.
Business reform, the biggest “bonus”
As analyzed by the management team of IB, the increase of deposits and intermediate business can partly be attributed to the reform of business lines promoted by the company in the last year, namely the reform for specializing the corporate finance system, deepening retail finance system, and lining the financial market system, to achieve the purposes of improving professional capability, enhancing inborn power, and intensifying standardized management by carrying out overall reform in the organizational structure, system and mechanism.
In order to illustrate the preliminary achievements of reform, Tang takes the business of corporate loan as an example: In the past, branches used to depend on customer managers to attract deposits and extend loans with their social network. After the reform of business lines, specialized backstage support will be established for retail, corporate finance and financial market, and more financial businesses such as non-credit and investment banking can be added relying on the natural relations between conventional credit businesses and enterprises. In this way, IB improves the profitability of individual credit and saves the cost of market development.
As introduced by insiders, the progress in reform of line specialization is usually a process that a bank transforms from a conventional one into a modern one, and this means the change in the bank's positioning and philosophy. Conventional banks give priority to deposits and loans, while modern banks give priority to customers and products. Apart from improving the specialization by substituting individual marketing with team marketing, the reform will also break through the management system of sub-branch, branch and head office so that the entire bank can consider matters from the perspective of business line, and those with professional capabilities who hope to develop business can have opportunities and rooms, thus bringing the power for inborn growth.
Meanwhile, the reform of business lines makes it possible for the company to allocate its capital among a variety of businesses, products and customers reasonably according to the capital income. This is also the only way for capital-intensive and low-consumption model that IB has always pursued.
Tang indicates: “We can say that business reform is the biggest ‘bonus'”.