Date: December 14, 2012 Source: 21st Century Business Herald
Keynotes: Within a short period of 100 minutes, Li Renjie shows the reporter the business structure adjustment of Industrial Bank (IB) in recent years and the prospect of organizational infrastructure rebuilding, the exploration in innovation changing based on the actual situation, and the bonus released by business line reform.
On December 3, Fuzhou stood in chilly wind in the late autumn.
As the flight was postponed due to the malfunction of airplane, President Li Renjie of IB came back to the Head Office of IB in Fuzhou around 8 o'clock in the evening. Regardless of one-day tiring journey, he did not have time to have his supper before accepting the exclusive interview of our reporter.
“He doesn't like postponing a thing in the day to the next day,” an officer of IB Head Office said to the reporter.
Wearing a white shirt and V-neck sweater, President Li left the reporter a first impression of a capable and experienced banker. Although it was 9 o'clock in the evening, President Li didn't show any sign of being tired on his face, and he was excited and cheerful during the interview, making gesture every now and then while talking.
Within a short period of 100 minutes, Li Renjie shows the reporter the business structure adjustment of Industrial Bank (IB) in recent years and the prospect of organizational framework rebuilding, the exploration in innovation changing based on the actual situation, and the bonus released by business line reform.
“There is a considerable potential market for the Chinese banking industry. How can a bank distinguish itself from others? It can only grab the preemptive advantages by following the general trend of financial development, tapping potential market and grasping the opportunities to which others haven't noticed,” said President Li with emotion.
Maybe, it is based on the sustained exploration of differentiated business operation that IB has always kept its annual ROE around 25% since 2006.
Market-oriented interest rates: changing based on the actual situation
“Our ROE being maintained around 25% over the past six years cannot be done without the great importance we put on cost/income ratio and capital return ratio.”
21st Century Business Herald: At the end of last year, you predicted that the trend of market-oriented interest rates would be accelerated, and it is in fact what has happened in this year. Which adjustments did IB have made in business structure?
Li Renjie: As a general trend, market-oriented interest rates are unavoidable. Theoretically speaking, against the background of market-oriented interest rates, the deposit/loan interest spread will be narrowed, but in actuality, the two are not necessarily in positive correlation. The level of interest spread has to do with the monetary policy of a country and the economic environment closely.
In the banking sector, IB made preparation for the market-oriented interest rates at an early time, carrying out, for instance, funds transfer pricing management inside the bank and scientific pricing management outside.
Not only IB, all large- and medium-sized banks should take into more consideration to adjust and construct diversified business structure and income structure and reduce the dependence on loan/deposit interest spread. For example, in terms of integrated business operation, such banks have considerable rooms to develop their businesses.
As for small-sized banks, they are at a disadvantaged position congenitally to develop differentiated services. With irreplaceable regional advantages and fixed customer groups however, they can also keep certain interest spread. And this is similar to the community banks of US. Small-sized banks shouldn't develop big customers unnecessarily, and they should put their business emphasis on small- and mini-sized enterprises.
From the perspective of long-term development, the positioning of customers of bank loans will be sunk gradually in the future. It is a fact that large enterprises and companies with high ratings have strong bargaining power for loans and they are more likely intended to issue debts. All banks are competing for small- and mini-sized enterprises, and IB has also intensified its efforts in the area.
21st Century Business Herald: In our research, we discovered that IB showed great enthusiasm in bond investment, and obviously extended the period of bond investment from the average two year to around three years. Meanwhile, the bank increased the allocation of credit bond with high return. Is it based on the consideration of improving the income structure?
Li Renjie: Such adjustment is based on the judgment over and the understanding of the macro-economic situation. In the second half of last year, we believed that the capital cost of the whole society remained at a high level and it was hard for enterprises to seek financing. If the economy continued going down, how to reduce the cost of social financing would become a very important point for the macro-economic control in the next stage. Therefore, the overall level of interest rates will go down. Against this background, extending the period of bond investment appropriately was actually to ensure the incomes of our bank's assets.
In the perspective of IB, therefore, firstly, the proportion of deposits and loans in the total asset liability will certainly drop in the long run. Secondly, in each stage, there are phased strategies, which will be adjusted according to the actual situation.
I made a calculation last week. Over the six years from the end of 2006, the annual growth of deposits of IB was more than 26% on average, that of loans more than 24% and that of asset scale more than 30% and that of after-tax profit more than 40%. It indicates that the proportion of our deposits and loans has kept decreasing, with the profits growing faster than the asset scale, and the asset scale has kept growing at a faster rate compared with the deposits and loans.
In general, banking institutions should correlate their development strategies closely with the general trend of the economic and financial development in China, and work out corresponding plans before taking actions, based on the judgment over the general trend and exploration of potential market. Only in this way can they grab the preemptive advantages.
21st Century Business Herald: Did you calculate ROE in the account for the past six years? After all, in the perspective of capital market, IB has always obtained high returns.
Li Renjie: Since 2004 IB has begun to promote the strategy of “business development matching the allocation of economic capital”. The whole bank would, from the top down, consider which capital consumption model is more suitable in the process of developing business in each business line.
All of you may look at a figure. The ROE of IB has been kept around 25% over the six years, which cannot be done without the great importance we put on cost/income ratio and capital return ratio.
Shadow banking: most remaining in the regulatory framework
“Any economic activity, including the financing activity, should follow the basic ‘game rule', namely the basic accounting standard.”
21st Century Business Herald: Apart from the market-oriented interest rates, all social sectors also pay great attention to the issue of shadow banking in this year. This is a big change in the financial market environment. What do you think of the shadow banking?
Li Renjie: During the reform of the Chinese financial system, it is unavoidable for shadow banking to come into being. The total volume of social financing calculated by the central bank is a huge system. While the proportion of indirect financing by banks decreases, insurance, fund, lease, trust and various private placements all booming in addition to the increase of financing based on capital market equity and creditor's right. In fact, all of them are serving the real economy.
As for the influence of shadow banking, I believe it is generally positive. In the existing financial market system, the regulatory requirements to the indirect financing of banks are obvious, and the abovementioned non-banking financing businesses mostly remain within the regulatory category. This is different from Europe and America.
For instance, equity financing, bond financing or direct investment of insurance funds should all be approved by the regulatory authorities, and operation of trust and fund is also under specific regulation. Though the supervision over private placement is not strict, the regulation can be intensified by way of custody and registration in the future so that its operation can become more normalized and the information can become more transparent.
In a word, the shadow banking mentioned here are mostly under regulation in China.
Meanwhile, any economic activity, including the financing activity, should follow the basic “game rule”, namely the basic accounting standard. For instance, if a bank purchases trust products directly, the trust assets would become the on-sheet assets of the bank itself and should be covered into its on-sheet accounting. Provision and accrual should be made and risk assets should be measured. If these trust products are sold to the end customers as wealth management products, the bank should bear the “liability of seller” and fully disclose relevant information, selling the products to suitable customers.
21st Century Business Herald: Facing the increasingly expanding scale of shadow banking, which business arrangements and adjustments have IB made?
Li Renjie: Why did the asset scale of IB grow at a faster rate compared with our credit scale? The reason lies in that we see the general development trend of the whole financial system.
Different customers have different financing demands. By keeping close contact with various non-banking financial institutions, IB introduced various other financing subjects to provide customers with a variety of financing methods including loan, issuance of debt, and introduction of trust financing. During cooperation, the incomes of IB's intermediate business witnessed corresponding growth.
In conclusion, the long-term cooperation kept with various non-banking financial institutions helped to reduce the capital consumption of IB in business development and also provided a variety of financing channels for the society.
The proportion of credit business in banks will surely go down gradually in the future, and integrated business operation is an unavoidable trend. This means that banks not necessarily have to assume all the businesses solely. For example, the assets under the custody of IB at present exceed RMB 1 trillion, most of which are trust assets. Specifically, the assets managed by Industrial Trust under the control of IB are less than RMB 100 billion, and most are the assets managed by other trust companies which are put under the custody of IB. Therefore, what IB provides is more a financial service.
The concept of “General Institutional Business”: not a passive action
“The institutional business of IB is basically an active action, and market room will appear as long as there is any change in the financial structure.”
21st Century Business Herald: The institutional business of IB mentioned just now has attracted great attention in the market. How does the operation platform of IB form favorable interaction with institutional assets at present?
Li Renjie: First, the institutional business of IB is a general concept, covering not only banking institutions, but also many non-banking financial institutions. Second, in terms of banking institutions, IB focuses more on the cooperation between the operation platform and medium- and small-sized banks to develop its institutional business. A relation of complementing respective advantages exists in this respect.
Now, we have established cooperation with all brokerages and witnessed a considerable volume of business cooperation with non-banking financial institutions in the areas of lease, trust and insurance. In such a cooperation relationship, IB plays more a role of providing banking functional services.
The banking institutional business can be divided into two layers. The first one is “bank-bank cooperation” targeting at medium- and small-sized banks in particular. By providing a sharing network platform, IB offers services required by them, for instance, sharing of outlet and mutual exchange of needed products. Secondly, in terms of some asset businesses and debt business, IB carries out more cooperation with some large- and medium-sized banks. In recent years, redemptory sale and institutional agency payment that every one knew in recent years all came into being as required by the market.
21st Century Business Herald: How do you think about the sustainability of the development of institutional business? After the enforcement of the new provisions of “Basel Accord III”, will it play a role of check and balance to institutional assets? Based on the report of the third quarter, the scale of institutional assets decreased. Has the institutional business of IB touched the ceiling?
Li Renjie: I think that the business activities in the institutional area have just been launched and there will be considerable development room and potential. In the early stage, only IB engaged in the area, whereas few other banks set foot in it. Now, many banks enter into the area, competing for the market. Maybe, the share of IB in the market goes down, but the general scale still keeps growing.
Upon the formulation of the standard matching the new provisions of “Basel Accord III”, the risk weight of institutional assets was elevated compared with the previous one. Nonetheless, other new businesses may appear due to the existence of objective demands. The Chinese financial market has a massive capacity and a great number of institutions, and the demands of different financial institutions vary. Such different demands constitute the market lying ahead of us, and they are objective ones that cannot be blocked.
Of course, it's sure that the development may be at a fast or slow pace at different phases. In each phase, we will make adjustment according to the changes of situation. For instance, in 2009 there were sufficient funds in the market. In terms of the return rate, the non-credit part went down faster than the credit part did. As the latter was under the protection of legal interest rate, the proportion of credit went up in this period. As a bank, it would for certain make adjustment to the focus and layout of asset structure in an all-round way according to the rate of asset return.
21st Century Business Herald: In your opinion, which one's stability is easier to control, institutional asset or deposit and loans?
Li Renjie: First, the institutional business of IB is basically an active action rather than a passive one. Second, there will be market room as long as there is any change in the financial structure. Third, to manage the term of assets and liabilities between financial institutions is easier than to manage that for personal customers and corporate customers. Why? The business exchanges between financial institutions are all based on contracts. Seven days are counted as seven days, and a year a year. The terms are fixed, and the contracts have a strong binding force. To the contrary, the contracts on corporate and personal deposits only have a weak binding force. Depositing voluntarily and withdrawing freely is not favorable for the management of terms.
Institutional liabilities can be divided into two types: one is accepted passively, and the other actively. The passively accepted liabilities refer to that many small-sized banks need reserve some provisions in the platform of IB as they make settlement via the platform. These reserves vary with the business volume. More deposits will be reserved upon a good market, and fewer upon a bad market. The part of funds is not in our control, but they are not of a big amount. Hence, we can control most funds by ourselves.
21st Century Business Herald: In confrontation with the efforts made by other banks in the area of institutional business, does IB feel some pressure? For instance, China Minsheng Banking Corporation (CMBC) has also established a bank-bank platform.
Li Renjie: I think that the market room is very big, and banks can promote the development of business each other in competition. This is not bad. Any thing will become mature in competition which will promote progress mutually.
The art of “strips” and “blocks”: bonus after restructuring
“This reform of IB consolidated business lines, combining the “blocks” at the level of branch and “strips” at the level of business line into a matrix management system.”
21st Century Business Herald: The business department system reform of IB attracts great attention in the industry. Could you introduce some progress achieved now?
Li Renjie: It is not accurate to call this reform a business department reform, but we should call it a reform of business lines. As the end of 2012 is coming, the reform of IB has reached all business lines basically. In the future, the reform will be consolidated, improved and completed continuously during the process of implementation. In the past, all banks used to take the branches as the operating units. However, IB consolidated the business lines in the reform, combining the “blocks” at the level of branch and “strips” at the level of business line into a matrix management system.
In fact, such matrix management has been practiced for many years at abroad. Over dozens of years, overseas banks experienced ups and downs, putting stress on “strips” at times, and “blocks” sometimes. In fact, this is a matter of dynamic balance. The stress on “strips” and “blocks” needs to be adjusted and improved from time to time in different periods. It also applies to Chinese banks.
In the past, we used to overstress the role of “blocks”, so it was hard to solve problems regarding business specialization. Of course, the advantages of “blocks” lie in that they are familiar with the regional situation, and different lines in the same area also need to be planned under the “blocks”. But, we stress “stripes” now, which is established on the basis of “blocks” on the one hand, and with a view to make up the shortcomings of the former management giving priority to “blocks” and intensify the management of business lines to improve the specialized capabilities. Under the new framework, management accounting should be implemented in the checking of each product, business line, customer and even customer manager to ensure that the checking is proper. The management model combining “stripes” and “blocks” is indeed helpful to drive the refined management.
21st Century Business Herald: How the reform carried out by the three major business lines of IB, corporate business, retailing business and financial market, respectively proceed?
Li Renjie: IB first carried out business line reform in the retailing business. In the last year, it began to reform the corporate business, and launched the reform of financial market in this year. Meanwhile, the reform of retailing business has also been intensified.
Up to now, the reform of the three business lines and the adjustment with regard to the corresponding risks and financial affairs has been implemented basically, and the following job is mainly the running-in between “stripes" and “blocks”. Of course, there will some new problems in the process of implementing the follow-up works, and further improvement is required.
21st Century Business Herald: While carrying out the reform of business lines, at which position does IB put the sub-branches which hold customer resources?
Li Renjie: Now, the sub-branches of IB can be divided into two categories. The first ones is integrated category. For instance, in a city with a large area where a branch situates, if the corporate business is concentrated in the branch, it cannot cover the entire city in terms of area. Therefore, it is necessary to establish corporate business teams in sub-branches in the city. In terms of physical outlets, these sub-branches also handle corporate business, and the persons in charge of corporate business usually serve as the presidents of their sub-branches concurrently. Nonetheless, the assessment of corporate business has nothing to do with sub-branches.
The sub-branches of the other category are engaged in retailing business purely. The numbers of sub-branches of the two categories are almost the same. The business focus at the level of sub-branch will be further inclined to the retailing lines.
As it turns out, the fruits brought about and bonuses released by the reform of business lines are considerable. And as shown by the disclosed information, the business growth of IB has kept a good momentum.
The "blue sea” of green finance
“What we settle on is the long-term returns, and in particular, after the scale effect is established, the cost can be contracted and the incomes will go up correspondingly.”
21st Century Business Herald: “Green finance” is the direction advocated by the banking sector. Could you describe the prospect of green credit of IB?
Li Renjie: At present, the gross business volume of “green finance” is not big, but it keeps growing at a high speed. The financing scale of “green finance” has kept growing at an annual rate of over 200% since 2005.
Urbanization and industrialization constitute the primary impetus for the economic development in China. In the process, a range of restricting factors including the tolerance of environment and resources will appear gradually. As long as our government attach importance to these factors and treat them as key issues which influence the fate of our country, it will unavoidably bring a massive market of energy conservation, emission reduction and environmental protection.
Up to now, IB has entered into the blue sea for seven years, founding preemptive advantages in the field.
21st Century Business Herald: In fact, the purpose of a bank to implement any strategy is to make contribution to the bank. How do you assess the incomes brought by “Green finance” to IB?
Li Renjie: Over the past seven years, we have actively advocated the business concept of “sustainable development”. Under the guiding of this concept, from the launching the first energy-efficient financing program and carbon finance, to taking the lead in promising to follow the Equator Principles and to setting up an institution specialized in sustainable finance, IB has taken a leading position in the industry in such aspects as market concept, social influence, product research and development, technical regulations, service fields and organizational guarantee, and exploring a “green-to-gold” path of sustainable development.
By the end of this November, IB has provided green finance based financing loans of nearly RMB 200 billion to around 1,000 enterprises. The projects supported have saved 23.0554 million tons of standard coal across China each year, reduced 66.1855 million tons of carbon dioxide, and 43,600 tons of sulfur dioxide, utilized 14.6629 million tons of solid waste in an integrated manner, and saved 255.7906 million tons of water. The annual emission reduced in the projects is equivalent to shutting off 151 thermal power plants of 100 MW or stopping running the 70,000 taxis in Beijing for 45.5 years.
It should be mentioned that the business of green finance brings IB a variety of benefits regarding product design, corporate governance and enterprise brand. To be specific, we can benefits from such fields as carbon emission, energy conservation and emission reduction, treatment of water pollution, and emission right.
To sum up, the business of green finance did not make significant contributions in the early years, but in recent ones, it has made outstanding contributions. There are considerable potential rooms in the market. In my opinion, there are still considerable potential opportunities for the Chinese banking industry, but it depends on whether we can discover, pay attention and cultivate them.
21st Century Business Herald: With regard to profit contribution, how does green credit perform in terms of asset quality and income? What major advantages does IB have in developing “green finance”?
Li Renjie: According to the standard for regular loans, the quality of loans in the area is desirable as no non-performing assets exist. In the next year, IB will give priority to guaranteeing the smooth progress of “green finance” in internal resource allocation. For instance, in the aspect of loan scale, we will satisfy the demand in the area under the same condition.
In this regard, IB provides not only financing services, but also a range of services committed to assist the establishment of sector environmental protection standards and help the borrowing enterprises to meet the relevant environmental standards. In the early period, IB made great investment in training and lecturing, among other things. Nonetheless, what we settle on is the long-term returns, and in particular, after the scale effect is established, the cost can be contracted and the incomes will go up correspondingly. In other words, this is to “cultivate the capability of differentiated competition” that I have always advocated.