Source: Caixin New Century Weekly , Issue 29, 2013 Time: July 29, 2013
At 8 pm on July 16, it drizzles outside the window, and all shops are beginning to put up the shutters. President Li Renjie of Industrial Bank (IB) promptly stepped into the conference room, which looks a bit narrow, at the 26 th floor, the executive floor of the Westin Beijing Financial Street, where an inch of land is worth an inch of gold.
55-year-old， President Li wears slightly silver-gray hair at both temples, which rightly matches his grey business suit and wire-rimmed glasses.
Maybe, he is the president attracting the greatest attention in the Chinese banking industry, now.
Li Renjie has worked in the People's Bank of China Fujian Branch for 12 years. In 1998, he left Great Wall Securities where he served as board chairman and joined IB. In 2002, Li Renjie was promoted to the president of IB Head Office from the president of IB Shenzhen Branch. He serves IB at the position till now. After its official listing and IPO at Shanghai Stock Exchange in 2007, IB has grown into a bank leading the industry from a regional joint-stock bank based in Fujian.
When the reporter of Caixin interviewed Li Renjie in Fuzhou for the first time in 2003, IB just introduced three overseas strategic investors including Hang Seng Bank, International Finance Corporation (IFC), and Government of Singapore Investment Corporation at the price 1.8 times as great as the Price-to-Book Ratio (P/B). Now, the A-share market value of IB is less than 0.8 times as great as the P/B, namely the stock price is equivalent to 20% off based on the net assets. However, this does not obstruct many investors from regarding IB as a bank which will earn much money yet.
First, the investors in the early years have received great profits thanks to the fast growth the banking industry for many years. The total assets of IB was only RMB 260 billion in 2003, not reaching 1/10 of RMB 3 trillion, the total assets of the bank at the end of 2012.
Second, the rate of return on common stockholders' equity (ROE) of IB has kept above 25% for many years, ranking among the top three in the banking industry, and this means more the market-oriented image of IB that always leads the innovation every time. Since the bank releasing the “bank-bank platform” the first time in 2005, to see from inside the industry, IB has developed the institutional business in a perfect way.
We mentioned the documentary fiction, Institutional Opium , published on the internet. The anonymous author coming from the finance industry incorporated the “money shortage” in June (refer to “Banks Cope with Risks” in Issue 25 of the Weekly in 2013) and “Yielding” operated by debt market institutions in a violating manner previously (refer to “Big Mouse in the Debt Market” in Issue 15 of the Weekly in 2013).
The market winner described in the novel, “Lanxing Bank”, which features a shrewd and aggressive style, appears to allude to IB. To the question about this matter, President Li laughed, “I have read two chapters of the fiction, which is much like a historical novel”.
Upon mentioning the embarrassing experience that he was encircled and obstructed at the washing room at the Lujiazui Forum held in Shanghai on June 29. President Li said straightforwardly that there had been no “money shortage”, and hence he also discussed the changes in market pattern brought by market-oriented interest rates. In the more than two hours' interview, President Li gave head-on answers to quite a number of sensitive topics that drew great attention in the industry from the hidden guarantee “rib cartilage” pointed out in the industry, to the solution to risk control and interaction between the banking industry and macro economy. And also, he also beat around the bush to some questions.
“IB has been ready for responding to the possible changes in the market and policies. We are full of confidence.” President Li gave this answer to the threats, including the increasingly narrow interest spread for the institutional business, which may occur in the process of market-oriented interest rates against the regulatory restrictions over institutional business.
As revealed by relevant data, IB's growth rate of institutional business did not reach 50% in 2012, but those of China Merchants Bank (CMB), China Construction Bank (CCB), and Bank of Ningbo (NBCB) were all above 60%, that of China Minsheng Banking Corp. (CMBC) more than 150%, and that of Ping An Bank more than 300%. They seem to be more radical.
For the competition situation where quite a number of banks imitated the “Bank-bank Platform” profiting model of IB recently, President Li indicated, “the ‘Bank-bank Platform' has not been developed to the best extent”, and “what IB fears the least is competition”.
No “money shortage”
Caixin reporter: The problem of “money shortage” in the inter-bank market almost became a topic among the general public, and some banks became the focus of public opinion. How do you think about it?
Li Renjie: China's financial system is completely different from those of other countries and the problem of so-called “money shortage” does not exist. Every bank has 20% deposit reserve in the central bank, and the entire financial system also has 1%-2% excess reserve in the central bank. For instance, IB has more than 2% excess reserve. From this perspective, the so-called “money shortage” does not exist. Therefore, the central bank has also given announcement once and again on the non-existence of “money shortage” in terms of gross amount.
In fact, the situation occurred in June can be attributed to the superposition of a number of incidental factors, and it was exaggerated by some mass media intentionally. At the exchange conference of IB for investors held on June 26, I pointed out that this situation was transitory and it was impossible to continue till the end of July. Suppose that, if this situation continues for a long period and the interest rates remain high, then treasury bonds cannot be issued effectively nor policy-based financial bonds can be issued. Consequently, the financing in the inter-bank market, which have witnessed flourishing development in recent years, would become stagnant, and then it might possibly influence the credit pricing of banks. All of these would have an impact to the stability of the macro economy and China's real economy. I believe that the regulatory authorities would not expect such serious consequence.
Why this incidental liquidity tension gave rise to such intense shock? I believe the underlying reason is that there might be some time gap between the transmission of monetary policies of the central bank and the understanding of financial institutions to the central bank's monetary policies to some extent. No adjustment has been made to the business strategies in a timely manner and oversea analysts and media have not shown strong confidence to China's economy and financial system since the beginning of this year. With the echo of some domestic analysts and media, the market atmosphere became very tense for a moment. I think that it is neither rational nor sustainable.
Under such circumstance, it is unavoidable that all of us would become very nervous and would take preventive measures against possible rainy days in advance. Then, we also increased our excess reserve (it means the excess reserve deposited by a commercial bank in the central bank – editor's note) significantly. For example, it is enough for us to deposit a bit over RMB 20 billion as the normal excess reserve, and in addition, the bonds of high liquidity, which is worth RMB 60-70 billion are also taken as the secondary excess reserve. In that period, however, the excess reserve of IB reached RMB 50-60 billion on average. The entire market took the same measure, so the so-called “money shortage” came into existence.
Caixin reporter: The market believes that the central bank hopes to push the deleveraging by financial institutions actively by dint of liquidity warning. How big is the influence of the event to IB?
Li Renjie: From the macroeconomic perspective, after a period of significant expansion of balance sheet, deleveraging is helpful to squeeze out foam in the economy, promote economic adjustment, improve the efficiency of future supply and increase the potential growth rate. It is necessary for China's financial institutions to deleverage and slow down the scale growth to some extent. In this point of view, we fully understand the central bank's intention.
A financial institution should have its own rational analysis over the macroeconomic situation. The market liquidity has kept being relatively loose since the last November. We expected that the central bank would notice the excessively fast growth of M2, so we set the tune at the beginning of this year to adjust our business structure, deleverage and slow down our development to an appropriate extent. From April to May, we held several meetings at the level of the management team at high frequency, including proprietary investment business committee, asset liability and business management committee and president's office meeting, etc., setting deleveraging as an uncompromising task and laying no stress on objectives for expanding asset scale. Originally, the liabilities used to depend on the assets allocation in our institutional business. Now, with the decrease of assets allocation, the leverage is lowered and hence, the institutional liabilities also go down correspondingly.
At the end of June, we also restricted the asset-related businesses to prevent the rush for scale at the end of the month, with a view to squeezing out the “foam”. In that period, nonetheless, we didn't strictly limit the lending, nor took some so-called “technical actions”. While some banks applied to the central bank for prolonging the service period of the payment system IB has never encountered the situation to require the central bank to open a special trading “window” for us.
Caixin reporter: So, IB is not a victim in the event. How do you control the liquidity risks?
Li Renjie: IB has launched the financial market business at an early time, so we are sensitive to the market and have accumulated mature experience, knowing how to manage the liquidity risks. We can learn the information about the entire bank's mismatched assets and liquidity in all sectors at any time, and we have never encountered any difficulty in payment up to now.
Firstly, we have a good team of macroeconomic analysis, who can make prospective judgment over macroeconomic policies. Secondly, we have an established mechanism to make flexible arrangement and adjustment to asset liabilities and business rhythm. Thirdly, we have an advanced and mature internal control system, with which we mainly, based on the internal FTP, guide internal transfer pricing and external offer. The treasury management function belonging to the Financial Planning Department of the Head Office has a transmission mechanism well-established with the three business lines, financial market, corporate finance and retail banking, which can transmit the changes in the market to the whole system of IB. Therefore, our response to the market is highly efficient.
Caixin reporter: Some said that this “money shortage” was a rehearsal for banks to compete for liquidity against the backdrop of market-oriented interest rates, which might have a greater influence to banks like IB who are sensitive to capital price. How do you think about it?
Li Renjie: Market-oriented interest rates are unavoidable as a general trend. After the establishment of market-oriented interest rates, not merely IB but the whole banking industry will face the reality of narrowed interest spread in the long run.
To see from the existing asset-liability structure of IB, our advantages lie in the considerable proportion of businesses which are priced on the basis of market-oriented interest rates. With comparatively market-oriented interest rates, we have accumulated some experience of pricing based on market-oriented interest rates and established a flexible management mechanism. Second, IB has foreseen the future market-oriented demands, directions and trends of conventional businesses and emerging businesses, so we have made some prior arrangements. Let's see a simple example. The fiscal deposits only account for a small proportion in our liability structure, so the market-oriented fiscal deposits will merely impose a limited influence to us in the future. Third, in a country, credit spread and interest spread exist objectively in a certain period, which are under the influence of many factors, such as the national monetary policies and supply-demand relation. For instance, though America has complete market-oriented interest rates, but the interest spreads of some banks are still very high.
The narrowed interest spread will unavoidably drive the trend that banks will not rely on the conventional deposit and loan businesses anymore and must develop emerging businesses including the intermediate business vigorously. Meanwhile, banks are also required to have higher risk identification capability and pricing capability. Therefore, our bank have increased investment in establishing a reasonable pricing mechanism, building effective risk identification system and pricing system, and training and attracting talents specialized in interest rate pricing and management of interest rate risks for years. Moreover, we have also made great efforts in improving the overall service capabilities of the whole bank, boosting customer loyalty, and intensifying the development of intermediary business. We are fully confident in welcoming the coming of market-oriented interest rates.
A pioneer in institutional business
Caixin reporter: In recent years, IB played a pioneering role in innovation of institutional business for banks, and it is even called the “King of Institutional Business”. This liquidity crisis happened in the institutional market. Does it mean that the different development model that IB has developed is challenged?
Li Renjie: The current business coverage of institutional activities carried out by commercial banks after years of development is very broad, and I think that we should first have a clear definition to the concept.
We divide institutional businesses into three general categories: The internal deposits of corporate groups centralized by non-banking financial institutions including finance companies themselves are now regarded as institutional business. In addition, deposits and channel businesses of exchanges are also institutional. IB has a considerable volume of such businesses as we have realized the so-called all-sector coverage, which means the basic coverage of finance company, trust company, fund company, securities company, and non-banking businesses.
Second, institutional business between small- and medium-sized commercial banks. For instance, the bank-bank platform have over 400 small- and medium-sized commercial bank members, with more than 20,000 networked outlets. In the beginning, the purpose is not for fund flow, but more for service and liquidation. Now, the cooperation at the platform keeps increasing, covering both liquidation service and capital trading. At present, comparatively speaking, those holding a great deal of capital are agriculture-related institutions in China, such as rural credit cooperatives and rural commercial banks, and their capital are relatively stable. Such business is, on one hand, based on the services that we provide to them, and on the other hand, they need to sell capital in the market. Similar to a large number of oversea saving banks, this type of business is actually of a kind of complementary relation.
Third, our capital flow with large- and medium-sized banks. Such businesses may stress more on assets, and we handle them as redemptory sale and institutional refinance. Meanwhile, we also handle some capital flow business with branches of these banks. This part of capital flow is homogenous to a certain extent, so it is not very stable.
In our institutional businesses, we encourage the first two categories in particular. The third category is not our focus and it will be developed according to the need of asset allocation. If it is not required in asset allocation, we will compress the block.
Institutional business and financial market business have become the conventionally advantageous businesses of IB. First, the reasons lie in that we have launched such businesses at an early time and developed them in a sturdy and reasonable rhythm. In 1996, we initiated our institutional business with securities capital liquidation, the business volume of which has ranked top three in the whole market for many years. On that basis, we have gradually training and organized a professional team and enriched our product families, extending from securities-bank cooperation to bank-bank, bank-trust, bank-insurance, and bank-finance cooperation, and expanding the business to the fields including exchange capital trading, agency of precious metal, trading of derivatives, and assets management. In this way, we have formed a comparatively complete and strong large financial market sector of high market competitiveness.
Second, we adhere to the development of “board institutional business and wide range”, with relatively balanced and diversified business structure. In terms of customer structure, we have basically realized the full coverage of banking institutional businesses, securities company, trust company, fund company, finance company, insurance company, financial lease company, and assets management company, with relatively balanced customer bodies and categories.
Third, adopting strict risk management and control, we have always adhered to the separation of front, middle and back offices, and established well-structured fire wall and risk isolation system. In the latest two years, to support the reform of business line specialization, we further embedded the risk management team and window, and adopted matrix-based management, thus further improving the sensitiveness, specialization and effectiveness of risk management. The institutional business has witnessed sound and sustainable development generally.
As a bank with acute market nose and business innovation capability ahead of others, we will stick to the business feature in the future, continue the development of institutional business and financial market business as a strategic focus.
Caixin reporter: A big problem for institutional assets and liabilities is believed to be the avoidance of regulation, which in fact magnifies the leverages of commercial banks and increases risks. How do you think about this?
Li Renjie: As to institutional business, some people regard it a good thing, but some others do not think so. I agree with the opinions of some insiders, that is, the businesses related to assets and liabilities are too single-formed in the Chinese banking industry.
According to some people, deposits and loans are what banks should do, and it seems that those banks developing other businesses are goofing around. It is totally wrong. In fact, for banks in the international community, the proportions of both deposits and loans are not high. In Industrial and Commercial Bank of China (ICBC), the largest bank in China, the proportion of loan business also keeps going down. For years, banks have increasingly diversified assets and liabilities, which are objectively required by the economic and financial development and also reflect that our original subject design is not suitable any more. We should look at the assets and liabilities of banks in an all-round manner, but not believe that all of those engaging in business other than loans are shadow banks and intend to avoid regulation. For example, the bond trading, which mostly happens in the institutional market, is on-sheet and under supervision, and it is subject to the international accounting standards. So, we should not make simple interpretation just based on the literal meaning of words, and demonize it solely based on our imagination.
The increasing diversification of asset businesses is the objective demand of economy for financial services, and it also, to some extent, reflects that the original accounting statistics was not detailed enough. For instance, wealth management, as indicated Chairman Shang Fulin of China Banking Regulatory Commission (CBRC), is in fact creditor's right based direct financing. A commercial bank should no more than make it more standardized, disclose information in more transparent and normalized manner, introduce appropriate products to suitable customers, classify customers in a reasonable way, and make reasonable assessment over risks of customers. For customers, they should bear risks themselves as the buyer.
For commercial banks, in the future, the proportion of loans will keep going down and their business incomes will become increasingly diversified. We are full of confidence in welcoming this general trend. The future investment banking, wealth management, and asset management represent the major directions of emerging businesses and we have made many institutional arrangements. So, we believe that we will have a better performance in the future competition.
Caixin reporter: The “bank-bank platform” is created by IB as a characteristic and advantageous model. However, Ping An Bank released the Gold Orange Alliance; Minsheng Bank launched the Asia Financial Cooperation Association; and Bank of Nanjing launched the joint investment program with inter-bank market capital. My question is where the irreplaceable “moat” of the bank-bank platform is as an innovative program. Has the bank-bank platform been developed to its best?
Li Renjie: When all banks show confidence in our model, it means that the model is of commercial value. In such a big market, we cannot make progress without competition. All banks can develop the business. We can wait to see who has the core competitive edges, but cannot give it up because many others also get engaged in it. Some banks also wanted to do it years ago, but failed. As our bank has practiced and accumulated rich experience in the area for years, I'm very confident in the business.
Of course, there is still great room for further improvement and development of the bank-bank platform. For instance, in the future, the state will promote the deposit insurance system, so the cost of deposit will be possibly higher. With the narrowed interest spread, it may not be to simply pursue the amount of deposits in the future because, with more deposits, you have to bear more cost. Meanwhile, the pressure for the use of funds and that of capital will become greater. Nevertheless, if you have a strong capability of wealth management and asset management and could provide customers with desired wealth management and asset management services, customers can have higher proceeds on the one hand, and the bank can have lower costs including cost of funds, operation cost, and capital cost, and attract more customer sources on the other hand. Therefore, there are great potentials of wealth management for the bank-bank platform. Upon mature conditions, we will not exclude the possibility to have the business sector separated and to establish an independent company for its operation.
Early warning of risks
Caixin reporter: For the fast increasing institutional assets, some insiders worry about the existence of “drawer agreement”, namely a commercial bank that sells its institutional assets provides “implicit guarantee”, but its head office does not have actual control over the risk exposure. As the president of IB, do you have any worry about this problem?
Li Renjie: We cannot exclude the existence of “drawer agreement” on some businesses in some specific period. However, I believe that it is only a special phenomenon in the specific period rather a universal one, and it will disappear soon.
First, now large- and medium-sized banks all engage the Big Four accounting firms in auditing, and we have done so for 10 years. We engaged Ernst & Young (EY) previously and now it is Deloitte & Touche (DTT). They also do auditing for other banks and their audits are strict and professional. If there are many cases that you have mentioned, the auditors will discover them.
Second, we have a stringent internal control and examination system for external guarantee businesses.
Third, for the management of branches, the head office can monitor all transactions. The key lies in the strictness of management and control and intensity of enforcement. As long as the head office sets store by the problem, any case can be discovered. As far as we are concerned, our management and control over the skeleton organizations are vigorous and proper. We have full confidence in this area.
Caixin reporter: Do you have any preparation for possible default regarding the institutional business?
Li Renjie: In the years of development, IB has always attached great importance to risk control and managed various risks related to institutional business and financial market business in an all-round and effective manner, including credit risk, market risk, operation risk, liquidity risk and compliance risk, never encountering major risk losses.
Of course, based on the prudent and sturdy principles, we increase our provision by billions of RMB based on the international accounting standards. This serves as a preventive measure in our internal management.
Caixin reporter: Now, the outsiders are discussing the possibility that the regulatory authorities may enact a range of restricting policies for institutional businesses.
Li Renjie: For this question, I agree with the basic principles set by the new generation of government for economic management. In fact, no matter for economic activities or financial activities, the government shouldn't have too much intervention, nor enact too detailed policies. If such policies are not enforced, not effects will be made. The government should give guidelines in light of the general trends and put forward some requirements on the basic system. For instance, the seller has certain responsibilities and the buyer should bear risks themselves; how to regulate information disclosure, how to make products more standardized, and how to handle the asset securitization, etc. Currently, there is an attitude, namely to manage the non-credit businesses with the concept for credit management.
In my personal view, there will not be specific restricting policies to be issued against the institutional business in the short run. Firstly, this will involve many systemic regime adjustments and cannot be accomplished in one step. For example, the definition of institutional business still requires further clarification. The business cannot be standardized without a clear definition and classification. First, we should carry out in-depth investigation and clarify regimes and phenomena, and standardize it according to different situations.
For instance, the institutional market should be segmented and the lending/borrowing market should be demarcated; the channel business should be further standardized along the path of asset securitization. These are what I have appealed for and prepared for these years. As far as IB is concerned, we have classified institutional businesses inside and established corresponding standardized management requirements.
Caixin reporter: Do you think that the regulatory authorities will support innovations of IB every time?
Li Renjie: The regulatory authorities have always supported the differentiated development of commercial banks. No regulatory official has ever said to me, “you have done wrong and you could only handle the deposit and loan businesses”. As long as we develop businesses in a compliant, transparent and responsible manner, the regulatory authorities will sure support relevant businesses.
Macroeconomic interaction
Caixin reporter: How do you think financial institutions in the banking industry should support the structure adjustment and the digestion and exit of excessive capacities?
Li Renjie: From the interactive relation between economy and finance, “economy determines finance, and finance serves economy”. First, it is the basic judgment. The contradictions in the process of economic structure adjustment, transformation and upgrading will unavoidably be refracted and reflected into the area of finance, as the saying goes “finance becomes prosperous when all industries are flourishing, and it becomes stable when all industries remain in steady development”. Commercial banks are the most important part to China's financial system, and it is not merely their social responsibility but it more required by their own development to support stable growth, structural adjustment and facilitate transformation.
Structural adjustment first must be the adjustment to the industrial structure made at the national level, and it is impossible to do so just depending on banks.
At present, Chinese enterprises are generally confronted with the problems of excessive production capacities and high liability ratio. Banks should carry out risk pressure test over current stock to check which ones are the weak links upon the economic downturn, and analyze and investigate them one by one. If it is discovered that a link is in problem, we should have an early communication with relevant enterprises and push them to make some adjustment and restructuring. This is also to revitalize stock.
From the perspective of a bank, we propose that commercial banks should strive for becoming a CFO (shadow CFO) of enterprises, and consider their asset-liability management in their point of view. If a commercial bank can think from such a perspective, it actually has an active idea about the development and risks of enterprises.
Naturally, the restructuring needs to be driven by incremental. Banks may mobilize the means including merger loan and leveraged financing, make use of other direct financing tools such as financial consultant, and exercise more the investment banking approaches and concepts to push the restructuring and merger of enterprises, so as to boost the economic transformation and adjustment of industrial structure.
In this process, we also hope that the state may give some guidance in terms of policies. For example, if some enterprises fall into predicament and there are better ones to get it merged, can the income tax be paid after their profits are mutually discounted?
Caixin reporter: Now, the State Council put forward to revitalize stock and encourage incremental, which should both be invested into small- and mini-sized enterprises. Could banks do so in line with the orientation of the policy?
Li Renjie: We should look at loans to small- and mini-sized enterprises from two perspectives. First, banks are enthusiastic in extending loans to small- and mini-sized enterprises either considering the long-run development orientation or taking into account the current system arrangement. Considering the general trend of financial disintermediation, the enterprises of high rating will mainly choose the path of direct financing in the future, so banks' credit based on indirect financing will become more dependent on SMEs, and retail customers. From the regulatory perspective, it is also encouraged by the regulatory policies.
Second, small- and mini-sized enterprises are the most active participants in our market economy. At their different stages of development, enterprises will have different demands for financial services. For instance, at the initial stage, what small- and mini-sized enterprises lack of is capital rather than loan, so they need more the channel financing such as privately offered fund and venture capital fund. Banks may exercise the intermediary role and exert their capability in integrating advantageous social resources to establish a platform for exchange and interaction between small- and mini-sized enterprises and equity investment institutions as well as securities intermediaries and solve the problem of information asymmetry between the small- and mini-sized enterprises and outstanding institutions as a result of the factors such as regional difference, so as to help the small- and mini-sized enterprises to introduce equity investment of low cost and high stability at a faster rate and achieve frog-leap development. Meanwhile, it also solves the problems in the conventional debt financing for small- and mini-sized enterprises due to strict admittance including “unavailability, unbearable cost and insufficient loan term”. Banks should transform from purely providing financing services to providing integrated services and create customized comprehensive financial services integrating financing, settlement, wealth management and consulting according to the characteristics of financial demands at the different stages in the life cycle of small- and mini-sized enterprises. This is to lend substantial support for their development and growth.
Caixin reporter: As the loans to small- and mini-sized enterprises involve high risks, how can a bank identify risks of relevant enterprises in an effective manner?
Li Renjie: From the perspective of a bank, there are three issues to be solved. First, identifying the risks of these enterprises and judging relevant data. It is not enough to depend on the credit reference system of the central bank. We should consider the possibility to have data sharing with water and electricity supply enterprises, and authorities for industry and commerce and taxation. This will be of great help for commercial banks to make judgment over risks.
Second, the business team should take root locally and keep relatively stable. Thus, a bank can really know the customer in question. We usually handle such business in places where we have mature outlets. For instance, the development of rosewood furniture industry in Putian, Fujian is mainly supported by IB.
Third, cost control. The key is to keep the truthfulness of front-end data which can be updated in a timely manner, and it should also depend on the construction of back office system. Efficiency can be improved only by making accurate judgment via the system. The principle is, in fct, the same as that for the management of retail credit.