Time: 4 o'clock, June 26, 2013
Memoir:
Host: Ladies and gentlemen, welcome to the communication teleconference of Industrial Bank (IB) for investors. Next, let's ask Dong Bin, Board Secretary of IB, to preside over the conference.
Tang Bin: Good Afternoon, all investors! I'm Tang Bin, Board Secretary of IB. I will preside over the teleconference on this afternoon. Next, please allow me to introduce the guests from IB attending the conference. At the conference site in Fuzhou, we have Mr. Li Renjie, President of IB, Mr. Li Jian, General Manager of the Financial Planning Department, and Mr. Zou Jimin, General Manager of the Risk Management Department. At the conference site of Shanghai, we have Mr. Zheng Xinlin, General Manager of the Institutional Banking Department, and Mr. Wang Shengming, Risk Director of the Assets Management Department. There are also some other officers-in-charge of relevant departments of IB attending the conference. Next, let's first ask Mr. Li Jian, General Manager of the Financial Planning Department to answer questions raised by investors recently. Later, we will exchange ideas with investors centering on the following three aspects: first, the liquidity management of banks, second, the institutional business of banks, and risk management and asset quality of banks. Here, I remind all of you in particular, today is June 26 and in actuality, the first half year will come to an end soon. Therefore, for the half-year data that all of you care about, we will have exchange and discussion with you at the half-year performance introduction, which will be held soon. The conference on this afternoon will center on the themes of “liquidity, institutional business and risk management”. Thanks!
Now, let's ask General Manager Li Jian to give an introduction to the operation and liquidity management of IB.
Li Jian: Good afternoon, all investors and experts! IB attaches great importance to liquidity risks and has preliminarily established a whole set of relatively well-established management and control systems in areas including management structure, risk early warning, limit management, pressure test, and management information system. During the business operation, we make prompt adjustment to the business strategies and assets-liability policies based on prospective judgment over the market liquidity, increase the pressure test intensity, strengthen the management of liquidity indexes, and make active adjustment to the cash flow gap by resorting to capital and price leverages and other means, thus achieving prior prevention, in-process monitoring and post control for liquidity risks.
In terms of specific management measures, on the one hand, we resort to FTP. IB sets down the FTP and offer tactics in a reasonable way based on the cash flow gap report and external financial market situation. Through price guidance, we control the current financial sources, the amount of funds used and the term structure. On the other hand, by setting the business line liquidity indexes, we break down the liquidity risks to each business line and facilitate the balanced development of assets and liabilities among all lines.
From the perspective of financial sources as well as the structure and matching of fund uses, the bank has established the management systems for long-term capital pool, medium-term capital pool and short-term capital pool. With regard to the long-term capital pool, the financial resources for fixed assets and long-term investment are matched mainly through equity of shareholders and issuance of subordinated long-term debts. The medium-term capital pool is mainly matched through deposit and loan businesses, managed by establishing the indexes for institutional asset-liability proportion, and assessed by enhancing the daily mean loan-deposit ratio and incremental loan-deposit ratio of business offices. The warning level of 95% is set for the institutional asset-liability proportion to ensure the mutual matching of resources and uses of medium-term funds. The short-term capital pool ensures the daily excess reserve within the safe section and the security of short-term payment by managing the excess reserve and increasing treasury bonds and policy finance bonds which are cashable at any time.
From the perspective of liquidity indexes, IB's RMB loan-deposit ratio was 59.33% by the end of May, far lower than the regulatory normal value of 75%; RMB liquidity ratio was 28.40%, higher than the regulatory normal value of 25%; and RMB excess reserve ratio was 2.5%. All the above indexes met the regulatory requirements. Since June, IB has kept the daily excess reserve and excess reserve ratio at a reasonable level. The daily mean excess reserve of the bank was RMB 51.4 billion, and the average excess reserve ratio 2.69%. In the meantime, the bank has sufficient pledgeable bonds, and under the current market circumstance, the transactions in the inter-bank market are mainly based on pledge-style repo. By June 25, the balance of pledgeable bonds of the bank reached nearly RMB 67.9 billion. In general, all liquidity management measures of the bank can be effectively implemented now, and the whole bank has sufficient liquidity reserves.
From the perspective of financial situation, we are very confident. Based on the data disclosed by us, the growth ranked front among similar institutions. In fact, we also increased some provision. It is expected that the financial incomes in the second quarter will also remain stable and the increase of provision will continue. At present, our provision coverage ranks front among similar institutions. Now, it is said that provision and accrual will also apply to institutional assets like other assets. In fact, it has been required doing so in our internal management.
Tang Bin: Thank you, General Manager Li Jian! Now, the time is for investors. There are a great number of investors, today. Some corporate shareholders' representatives of IB are also present besides analysts and fund managers. According to the established practice, please ask questions to the point in a concise way. Each one is expected to raise two questions at most. Please tell your company while asking so that we can make the exchange easier. Let's start, now.
Dacheng Fund: I'd like to ask the management team two questions: First, currently, the market concerns about the problem of “money shortage”, and it can be seen that all banks and their branches are borrowing money from the market at a high cost. How great will the impact of borrowing money at a high cost be to the performance of IB? If this situation lasts for a period, a quarter for instance, how great will the negative influence be? Second, many investors believe or some even interpret the acts of PBC to lower the economic leverage or clear shadow banks are targeted at the small- and medium-sized joint-stock banks represented by IB. I'm wondering how the management team look at the issue. What strategies and models will IB adopt in developing the institutional banking? Thanks!
Tang Bin: The first question will be answered by General Manager Li of our Financial Planning Department, and the second by General Manager Zheng of the Institutional Banking Department. In fact, many suppositions mentioned just now are hard to come into existence.
Li Jian: I have given a brief introduction to the entire management of our bank just now. For the overall asset-liability strategies, generally speaking, we should strengthen the matchmaking between assets and liabilities. This year, we stress on improving our asset-liability ratio and making a reasonable arrange in the medium and long run. In terms of overall strategies, based on the analysis of both internal and external situation and environment, we originally judged that the liquidity in the second half year would sure be tightened. Against such backdrop, we stressed on the match of assets and liabilities. From the perspective of liquidity ratio, from January to May, the liquidity gap kept stable but rose slightly in a month, and the gap was minus 20%-30% in three months, just as most of the data formerly disclosed. Nonetheless, our liquidity gap reached around minus 4% at the end of May. This indicates that we have made adjustment to our strategies to reduce the mismatched part, so the interest rate risk would be smaller to some extent. The significant increase of market interest rate now has certain impact to our original assets and liabilities related businesses. The average interest rate of institutional liabilities on repricing part now will rise by more than 100 BPs. If this situation continues till the end of July, the influence to our profitability would be around 1%, which is relatively minor.
Zhen Xinlin: IB didn't start developing the institutional banking business in the recent two years, and it could date back to 1996. To calculate from the start of providing securities settlement service, a period of 16 to 17 years has passed. Our entire institutional banking is still mainly based on institutional cooperation between banks. During the practice in the recent years, we have also found a differentiated route for banking operation, which is also a great innovation. The monetary market is tense in this period, so the market takes all transactions made in the inter-bank lending/borrowing market as institutional businesses. I think it is a biased understanding. Institutional businesses are general services targeting at the financial market and financial institutions. Based on strategies, a big portion of our institutional asset-liability business is the liabilities in the aspect of providing basic settlement services for banks, for instance third-party depository capital, bank-bank platform settlement capital as well as the liabilities related to the settlement services that we provide to various financial institutions. During this liquidity tightening process, this part of liabilities does not see any changes in price. Second, in the management of institutional asset-liability structure this year, our strategy is to determine the scale of liabilities based on that of assets, and we will only look for liabilities of matched terms in the market with the corresponding assets. Based on current situation, our movement does not deviate from our judgment at the beginning of this year significantly. IB takes institutional banking as a strategy for the differentiated competition between banking institutions, which will not have an inverse change even if the situation that you have mentioned just now occurs. However, adaptive adjustment will be made to the specific tactics in line with the latest regulatory and national requirements (for instance, Document No. 8 issued previously) as well as the particular changes in environment.
China International Fund Management: Good afternoon, all the management team members! The inter-bank liability interest rate goes up quickly. Will this negative influence be reflected in the mid-year report? In addition, your bank also has the problem of mismatched term. If this situation of tight capital chain and mismatched term continue in the second half, will you sell these assets at discounts so as to obtain liquidity?
Tang Bin: In actuality, your question is basically identical to the first question raised by Dacheng Fund. Now, I remind other attendees not to raise questions that have been answered. Next, let's ask General Manager Li to answer this question.
Li Jian: As we have mentioned just now, at the beginning of this year, our bank planned to make further adjustment to our business tactics, especially starting from April. This is the first year for the implementation of the New Capital Agreement. The original institutional businesses witness rise in the total capital occupation, so the original interest spread may have a low return on invested capital under the current circumstance. Hence, the management team also has the intention to exit those institutional businesses with low returns on invested capital. The entire market is a bit tense from May to June, and till now, so we intensify our efforts in adjusting our tactics. For those institutional asset businesses with low proceeds, we will exit and not operate them again upon maturity, and probably, a total of assets more than 100 billion will come to their maturity. With regard to our returns on invested capital, there is no influence, but it can lend greater support for the current liquidity. After the PBC made a clear statement yesterday, we believe that the market situation will take a favorable turn in the second half year, but it will still be a “tightened balance” in general. In the overall arrangement of asset-liability structure, we still implement our original tactics and continue managing our liabilities in a desired manner. In the meantime, under the current situation of “tightened balance”, all banks are compressing assets. If we can manage liquidity well and have a good performance in liability business, there will be many opportunities in assets related businesses in the future. From a dynamic view, therefore, the year-round profits can fully realized and the plan made at the beginning of this year can be overfulfilled.
Life Insurance Assets Management: Thank the management team for giving me the chance to raise a question. My question is, if all financial institutions are inclined to deleveraging in confrontation with the high inter-bank market interest rate, what impacts will it have to the gross social financing volume?
Li Renjie: We analyze the current situation roughly in the following aspects: First, at the level of national macroeconomy, it is impossible to continue the quantitative easing in the previous years, and to some extend, deleveraging is unavoidable. It does not only apply to enterprises, but also banks. Therefore, just as mentioned by General Manager Li Jian, our management team has intensified our self-adjustment in this year, especially after April. Second, in my opinion, it is abnormal that an exceptionally high interest rate exists in the inter-bank institutional market. In fact, it should be in a tightened balance considering the gross volume of social capital. As the PBC has announced, the gross capital volume in the current market is enough, but the whole banking system is in the process of adjustment made by the central bank to monetary policies. According to our former habit of conduct, if the overall market tightens a bit, the capital will become tense. Take IB as an example. It used to be enough to have a total of excess reserves over RMB 20 billion, but now it needs to be increased to around RMB 50 billion. It is the same across the entire market, and correspondingly, capital becomes tightened. Such tension, in my opinion, is a phased situation. If it continues for a long period, it will be in contradiction with the intent of the central bank. We can do analysis as follows. If the high interest rate persists, then treasury bonds cannot be issued effectively; China Development Bank (CDB) cannot issue bonds effectively, and Agricultural Development Bank of China (ADBC) cannot issue bonds effectively. As a result, the inter-bank market direct financing tools, which have witnessed flourishing development in recent years, cannot be issued effective, either. If this is the true situation, I think it would seriously influence the stability of the national macroeconomy, and have a certain impact to the financing cost of the real economy because it would certainly influence the pricing of loans by all banks. Therefore, I don't believe that this phenomenon will last for a long period and it cannot but be a special phased one. It's a great pleasure to see that the PBC has explained the intention of policies recently and taken certain market measures. We believe that it will become quiet and resume to the normal situation after a period of abnormal phenomenon. The normal situation is the “tightened balance” mentioned by General Manager Li Jian just now. We have performed certain pressure tests inside the bank, and made planning and budget in line with the “tightened balance”. If the interest rate in the whole market is too high, I believe, it is not favorable for the entire macroeconomy. Now, leaders of the State Council have given a clear sign – “use the incremental in a desired manner and revitalize the stock”. In the second half year, we will continue our efforts toward this direction.
Fullgoal Fund: First, the strategy for the development of institutional banking. Second, are there any corresponding corrections made by IB to the business growth and corresponding income growth planning? Thanks!
Tang Bin: In actuality, the first question has been discussed just now, but we still ask General Manager Zheng Xinlin of the Institutional Banking Department to answer it briefly. For the second question, our considerations in the second half year, I'd like to ask General Manager Li Jian to give a brief introduction later.
Zheng Xinlin: Just now, I have mentioned the position of institutional banking in the future development of IB and the transformation and integration that we face now. So, I wouldn't discuss it in detail. Generally speaking, institutional banking business covers the entire business sector of the financial market. As a highlight in the differentiated business operation of IB, the general strategy will remain unchanged. We will make timely adjustment to some tactics based on the external regulatory environment and requirements of national policies. In addition, we have started research in this regard and initiated the implementation.
Li Jian: As to whether the income planning needs to be adjusted or not, currently, we can realize and overfulfill the plan drawn out at the beginning of this year even under pressure based on the incomes in the first half year and prediction on the incomes in the second half, so no adjustment is required. Thanks!
Zhong Zheng Cai Fu Asset Management: First, the durations of IB's notes in institutions and asset-liabilities on beneficiary right to trust. Second, how much is the institutional liability cost of the company? If such liability cost continues for 1-2 months, what influence will it have to the financial performance? Thanks!
Tang Bin: Your questions are both about institutional banking, targeting at the institutional business model and incomes. Now, let's ask General Manager Zheng of our Institutional Banking Department to answer the above questions, and General Manager Li of our Financial Planning Department to give some supplementary comments.
Zheng Xinlin: I'd like to first make an introduction to the redemptory notes for sale, the residual period for redemptory beneficiary right to trust for sale, and data on the residual period of liabilities. The residual period of our notes is usually around three months, and that for redemptory beneficiary right to trust for sale around nine months. Settlement-related liabilities generally account for a proportion of 15% in the total liabilities. Now, under the circumstance of very tight liquidity, the liability proportion and price will not see significant changes. Excluding the above-mentioned parts, the residual period for the remaining institutional liabilities is around four months. As a whole, the allocation of our asset-liability terms is reasonable.
Li Jian: There are more than RMB 170 billion of institutional assets coming to their maturity respectively in June and July, and the re-pricing of assets is also very soon. The general terms of assets and liabilities match with each other basically. All of you worry about whether the business structure pressure of IB is greater. A faster adjustment can be made to our business structure. As long as we can make correct adjustment, we are confident in the liquidity management, cost control and incomes.
Zhong Zheng Cai Fu Asset Management: How much has your total liability cost risen recently? If it continues for 1-2 months, what influence will it have to your financial situation?
Li Jian: Now, major changes are mainly happening to short-term businesses. We have talked about the influence to the entire financial situation above. If the current situation persists till the end of July, the influence to our incomes is RMB 500 to 600 million, which account for around 1% of our gross profits. So, we can stand the overall influence.
Guotai Fund: IB has witnessed a good performance in deposits by May and has accomplished the year-round task. Document No. 20 of the State Administration of Foreign Exchange was issued at the beginning of May, and foreign exchange went down sharply. If this situation persists, is there any risk for the deposits to get away in the second half year? Another question is about the asset quality. On the whole, macroeconomy remains in the downward pattern, now. Although our non-performing ratio in this first quarter was only 0.49%, our performance was not bad among the listed banks. Then, how will we treat the possibility of increasing non-performing assets in the future?
Li Jian: The foreign exchange business witnessed some blowout development in the last year. Therefore, the PBC also took some measures, and it returns to the normal state gradually in this year. The entire foreign exchange business is completely market-oriented, featuring a small interest spread, so its financial contribution to banks is limited. Although the scale in this area reduces, its financial influence is not significant. For deposits, under the current circumstance, it's sure that quite a number of banks will dispose some assets and engage some wealth management. Accordingly, ordinary deposits will reduce to some extent, but the sources of other liabilities will increase correspondingly. Therefore, it will not have significant influence to the position and liquidity of banks. Thanks!
Zou Jimin: The real economy still faces great difficulties in this year, and the pressure of the banking industry regarding asset quality is still quite severe. As a result, we have made a corresponding plan and arrangement at the beginning of this year. The general goal is to take various mighty measures and keep the stability of asset quality as a whole.
Nomura Asset Management: First, it is a question about liquidity. Has IB had net borrowing or net lending in short-term capital recently? How do you think about the fact that Shibor still remains at a high level and does not show a tendency of fast drop after the PBC expressed its attitude yesterday? Second, just now you have mentioned that our institutional business will be adjusted according to the changes in regulatory requirements. Then, why do we still have a high confidence in accomplishing the year-round business objectives, and where is our confidence in the second half year from?
Li Jian: From June 5 till days after June 20, the money market indeed encountered a period of “money shortage”. Nonetheless, after investigating into its root cause, it is actually a period of “lack of confidence” arising from all superimposed factors. During this period, the market liquidity is generally tight, but we didn't have any default payment. For our confidence in the second half year, first, our profit plan of this year is a growth of 15%. Based on our performance in the first quarter, our growth was more than 30%, and we also increased our provision. We expect that the profit growth in the second half year will still keep stable. In actuality, we have confidence to say that we still have the capability to continue increasing our provision. In the second half, we should say that the whole asset-liability structure and scale will remain stable. Now, the liability cost increases, but our asset business will be re-priced gradually. As we have mentioned just now, we would have more than RMB 100 billion of institutional assets coming to their maturity respectively in June and July, and the yield rates of new asset businesses will also increase accordingly. So, our interest spread can still keep stable. Hence, we have confidence to tell you that we are confident in our all-year profits. Thank you.
CITIC Securities: Thank IB's management team for giving us such a good opportunity of exchange. Answers to these specific questions raised above have reinforced our confidence. Now, I'd like to ask some questions in the macro-sense. We see the slogan of “controlling the incremental and revitalizing the stock” raised in the current stage. We have seen many policies about “controlling the incremental”. I want to consult the leaders of IB that, in your opinion, which measures or methods can be taken for revitalizing the stock. We know that, IB has always taken the lead in innovation. We have ever offered many innovative businesses in the growth of incremental. In the process of revitalizing the stock in the future, which new business opportunities do we have?
Li Renjie: It is a general idea to “control the incremental and revitalize the stock”. The management team of our bank also followed the idea in drawing out the business plan for 2013 at the beginning of this year. We anticipate that, as the scale of banking assets expanded at a high speed with the fast growth of M2 in the past years, the situation where fast growth of profits depends on pure scale expansion is not sustainable. Why? First, banks are under the restriction of capital sufficiency, and after the implementation of the new standards of Basel Accord in this year, the scale expansion is under further restriction. Second, from the perspective of the entire national economy, it is impossible to continue the quantitative easing policy for a long period. If there is no adjustment to the structure, pure easing in total volume will sure bring asset bubbles and lead to inflation finally, so it is unavoidable to make structural adjustment. As a commercial bank, IB has always advocated for sinking the service focus for customer groups in the traditional businesses in these years, stressing on development of business for SMEs, small- and mini-sized enterprises and retailing. For large enterprises, we mainly meet their needs with tools including direct financing and bond issuance. At present, the whole national economy faces the pressure of de-stocking and removing excessive production capacities. During the process, enterprise merger and restructuring will witness flourishing development, and this will provide great development rooms for commercial banks. We will act as the financial consultant of enterprises, meet the needs of customers by means of indirect financing and direct financing, and play an important role.
Second, many questions that you have raised just now are about the development model of IB. I believe that our current asset-liability structure tallies with the general development direction of the whole financial system and banking system. As what General Manager Zheng Xinlin mentioned just now, our development strategies will not change in general. Afterwards, it is impossible for commercial banks to return to the past ways. It is not practical to only engage in deposit and loan. Therefore, integrated business operation is become an unavoidable trend for commercial banks. Centering on this direction, for years we have make some arrangement regarding investment banking, wealth management, and asset management, and now, we see some preliminary effects. We believe that our business structure, asset-liability structure and income structure will become increasingly diversified in the future.
Third, our commercial banks should also bring into play our conventional advantage – the advantage in account management. We still have a big development room in the aspects of payment settlement, cash management and mobile payment, so as to respond to the changes and challenges due to the development of new technologies (including the internet finance on the tongue of everyone). I believe that China's commercial banks will still have a good development prospect as long as we make good preparations!
Tang Bin: All friends, our communication is limitless, but the time is limited. An hour has passed soon, and we have answered nearly 20 questions raised by 10 investors. In particular, President Li's consideration of and introduction to the future development model actually serve as a summary for our communication. Today's conference comes to an end here. If investors have any other questions, you may continue to contact our board office of IB by email, telephone, etc. Thank you all again! We're looking forward to seeing you all again at the introduction to the half-year report. Thanks!