About IB

Jiang Yunming: The Increasing Difficulties of Commercial Banks are Inevitable Results from Social Progress

Sina Finance, 14:54, July 8, 2014

The “2014 Banking Industry Development Forum and Second Banking Award Ceremony” organized by Sina Finance was held at The Westin Beijing Financial Street Hotel. Jiang Yunming, Vice President of IB, pictured above. (Source: Sina Finance, Photographer: Liang Bin)

Sina Finance, July 8th: The “2014 Banking Industry Development Forum And Second Banking Award Ceremony” organized by Sina Finance was held at The Westin Beijing Financial Street Hotel. Themed at “The Future Way of Banks: Reform and Return”, the Forum will promote discussion around hot topics in financial industry. Jiang Yunming, vice president of Industrial Bank, expressed in his speech that the increasing difficulties of commercial banks are inevitable results from social progress; we have to adapt it and make changes.

Here is the transcript of Mr. Jiang’s speech:

Jiang Yunming: Good afternoon everyone, thanks to Sina Finance for providing such a good communication opportunity for us. And I’d like to specially thank Sina Finance as it is my major financial news source. And as entrusted by Li Renjie, our president, We’re very grateful to your support and help to our businesses at Industrial Bank!

Please let me briefly introduce our bank before we start discussion about the topics. Founded in 1988, this is the 26th year for Industrial Bank (“IB”). By the end of May, the total assets and total liabilities of IB are 3.8 and 3.6 trillion yuan respectively. With about 48,000 employees, IB has over 800 branches and sub-branches all over the key cities and Hong Kong. In recent years, we have effectively carried various operation transforms and management reforms, including advancing business lines specialized transform, setting up three business lines i.e. corporate finance, retail finance and financial market at front office, and matching risk lines specialized transform at middle office, thus improving the normalization and specialty of operation and management by professionalization. Besides the businesses of traditional commercial banks, we also conducted pilot integrated operation. As for now, we have covered multiple business areas such as financial lease, trust, fund, futures and assets management, participating or holding shares in 12 subsidiaries, including share-holding 2 finance companies and 1 commercial bank. An integrated banking group has basically taken shape.

Next, let me talk about the theme of the topic, i.e. “wealth management in the great transformation of finance”. The first is the great transformation of finance. In recent years, there are increased discussions about financial transformation. It is a common feeling that banking business is getting harder and harder. I believe such difficulties are just the beginning and will become the norm in the future, and this is exactly the market environmental in a transformation era. The financial transformation is not promoted by individual organizations, but an inevitable results that caused by the social progress, therefore it is positive and inescapable in general.

Then, what are the reasons for the great financial transformation? I think there are some key words. 1. Marketization. The most significant characteristic and result of financial transformation is the improvement of marketization. The market-oriented principles and practices will dominate in every step such as regulation orientation, admittance criteria, pricing mechanism, transaction behavior and operational management, including several aspects on liberalization of interest rate and exchange rate. In the past, the businesses of commercial banks are pretty simple as interests rate gap is their major revenue under interest rate control. However, after marketization, market will determine the pricing of products. As a result, we have to learn to manage and control bank’s costs with market practicing idea. 2. Informatization. Rapid development has become an important force to propel financial transformation. The constant upgrading of software and hardware facilitates the improvement of various clients service terminal, service platform and model, and the diversity, intelligence and convenience of financial service channel also greatly enhanced clients’ experience. More importantly, such service ideas and method of informatization will become the mainstream and popular financial service in the future. 3. Diversity. It means the diversity development of financial service providers. Although banks are still the major players in the existing financial market, but the service providers are increasing in types and amounts, and a multi-layer capital market is taking form gradually. In the past, there are only two channels for corporate financing, i.e. bank loans and financial working fund (to SOEs mainly). Now more financing channels, including trust, securities, funds and PE, can lend money to enterprises. The social financing structure is diversified. 4. Professionalization. The change of demands for financial service and intensified market competition makes financial institutes to keep improving professional service level and subdivide professions. Such professionalization can be seen in many aspects such as product design, marketing, customer service and operation management. On the other hand, intensified market competition will force commercial banks to abandon original extensive development ideas and actively improve their professionalization, so to build differentiated advantages with thoughtful service, quality products and refined management. As a result, the market environment in the great financial transformation will be shaped by all these factors and change the financial ecology in general.

Against the background of great financial transformation, commercial banks’ operational behaviors at micro level will have to change along the change of clients demand and market environment, then what shall we do to better management wealth?

First of all, we have to change our operational ideas. From the perspective of banks, the major operational mode is taking deposits, lending loans and gaining revenue from the interests rate gap. It also has to be responsible for the quality of assets and assumes bad debt losses. It was not an easy job for bankers actually. There are a lot of people saying that “the primary task for bank’s president is taking deposits and for chairman is seeking capital fund”. Why is that? Because there is the constraint of loan-deposit ratio, you cannot lend loans without deposits. Why we have to keep looking for capital fund? Because under the traditional operating mode, the on-sheet assets of banks keep expanding, the newly added capital fund can be used up quickly to meet the requirement of 10.5% capital adequacy rate. And that explains why there are always banks are improving capital funds and shares. It might be another story in the future. With an effective transformation from high capital consumption business at present to low capital consumption business, banks may no longer need to raise capital fund every 2 years or pay all of its efforts in taking deposits. By creating products with banks’ quality assets and selling to clients, investors will have the opportunities to enjoy the benefits and assume the risks of loans as banks do. In such a mode, banks may raise the necessary money for loan by selling products, instead of solely relying on deposits. By doing so, the fund flow will be speed up and efficiency will be improved, which is also the benefits for the real economy brought by marketization progress. From the perspective of clients, wealth management has been providing more investment options for ordinary clients thus good for the value preservation and appreciation of wealth. For example, individual clients had no opportunities to finance enterprises in the past. At present, they can finance enterprises indirectly via banking products. Taking a loan with 7.5% financing cost for example, most of the revenue goes to investors except for a bit management fees charged by banks. From the perspective of market, by connecting financing demand and investment demand, wealth management business facilities the effective use of capital and real economy development. In short, that means the direct connection between fund users and fund demanders, which enable investors to monitor the flow of funds and pay attention to the operation of business. Operated well, investors can enjoy investment revenue; operated poorly, they can monitor the operation of such enterprises.

The development ideas of wealth management under great financial transformation. 1. Banks must have differentiated products. In regarding to products design, the products line must be diversified and reflect differentiation. Although the balance of wealth management products sold by domestic commercial banks has exceeding 10 trillion yuan, and the products system is pretty rich with various types of term, revenues and structures. However, these products are very similar in general and lack of differentiation. For example, there are principle guarantee and non principle guarantee products, but under the regulation of compulsory cashing, many non principle guarantee products are no different with guarantee ones. According to the principle of proportioned profits and risks, the real risk of products has not transferred. In the future, those products may be further subdivided by products design, and the revenue level shall be determined by risk premium level of different products. For example, products similar to YuE Bao are low earnings and low risk products because it invests in monetary market tools. Some of trust products may have high earnings and high risk as they are leverage products. At the same time, clients shall also be subdivided during assessment of merchantability. Clients who understand risk identification may enjoy higher earnings, while those don’t probably just earn a bit higher than deposit rate. For this reason, commercial banks shall incorporate various products such as high earnings, low earnings, high liquidity and low liquidity to diversify its product lines. 2. Comprehensive sales channels. The ability to sell across channels will become a key factor in influencing the wealth management business in the future. As to IB, besides over 800 outlets with sub-branch and several hundred outlets with community banks of its own, what’s more important is over 33,000 agency outlets that connected by “bank-bank platform”. These outlets distributed widely across China, especially rural areas, becoming an important driver of IB's existing wealth management business. Along the deepening of cooperation between banks, the value of these service channels will be even more enhanced. At online side, the online channel is also one of IB’s advantages in developing wealth management business. As the upgraded version of “bank-bank platform”, the Money Manager has become an important platform for IB to develop wealth management business and explore internet finance. The products of agency sales has been extending to funds, securities, insurances and trusts from banking, forming an important supplementary to offline sales. Another established brand is Manager Wallet. The balance now has reached 50 billion yuan since its release in March this year. The convenience and fast features have generally been recognized by investors. We believe we are better positioned in selling products than internet financial company. We can sell low risk monetary fund products online, and some high risk products offline, while providing online reservation and offline sales and investor education. By doing so, we can incorporate online network and offline outlets in advancing sales of products. 3. Quality service. Essentially, financial industry, commercial banks in particular, is in service industry. Service ability and quality is therefore of vital importance. Commercial banks shall be more considerate for clients, and optimize their internal procedures from the position of clients. 4. Refined and standard management. The sustained development of commercial bank’s wealth management business cannot do without its refined management internally, including system building and support, risk prevention and control, resources allocation and other aspects. All financial products carry risks, and losses will be 100% if risks are not controlled well. So we have to be careful and standard in risk management. In respect of IB, we have arranged risk management specialty reform on the basis of business lines reform. Risk management team or staff has been deployed at various business lines at head office and branches as well as operating units. For example, we have established risk management department for financial market under financial market line. And according to different characteristics of businesses, risk approval officials have been sent to assets management department by risk management department for financial market to review and approve risks of agency business. Risks will be really managed only if professionals can work on their profession. We have always been strict to wealth management business and manage the off sheet assets according to the requirements for on sheet assets, ensuring a legal and stable development of wealth management business. Although banks bear no product risk for agency business in legal terms, but there is reputation risk to consider. For example, if products sold by us always went into trouble, then clients would certainly not buy products from us again.

Next, let me talk about some of our practices in wealth management. As early as ten years ago, IB proposed two model change i.e. the change of business development mode and profit mode. After years of efforts, our assets-liabilities structures, business structures and profit mode have changed significantly. As an important aspect of strategic transformation, wealth management business has also improved profoundly.

1. Standardize management and reinforce resources input. For organizational structure, we separate agency business and own business, establish assets management department and put various products creation under unified management, system and accounting. At the same time, we've increased input of financial resources, allocation of human resources and implemented differentiation appraisal mechanism to provide great support to wealth management business.

2. Advantages of group-based comprehensive operation. The wealth management of IB is a picture of “panorama”. During the process of providing financial service solution and meeting client's wealth management demands, IB is able to integrate various financial resources, including banks, trusts, securities, funds, financial companies, rental and futures, to manage wealth management products across multiple transaction market. We can design better wealth management products besides plenty of basic assets sources, otherwise we can hardly meet client’s comprehensive financial service demand within the business scope of commercial banks.

At last, I'd like to propose some suggestions in the development of wealth management business in the future. 

The domestic wealth management business has just started, and there is huge room to develop and also difficulties to overcome. Here are some suggestions for discussion:

1. Build a sound market environment. We expect various financial market players, including financial institutes, commercial banks particularly, clients and mainstream media, can work together to build a positive environment for the sustained development of wealth management business. It means a) various financial institutes jointly build a sound environment for competition and abandon cutthroat competition. b) Investors can understand the nature of wealth management accurately, analyze the risks of products before buying them. The products under wealth management business are not deposits after all. Investors should not relying on compulsory cashing which will make it become soliciting deposits with high interest rate, not wealth management. To break “compulsory cashing” doesn’t mean to avoid responsibilities for financial institutes, but to build a healthy environment and facilitate the development of businesses. Because with the existing of compulsory cashing, the market is unable to distinguish risks and achieve reasonable risk premium, thus reduce the efficiency for financial industry in allocating resources. And as commercial banks have to assume substantial risks, it is difficult for them to develop wealth management business. As a result, investors will lose earnings as financial institutes will not tap into any assets with higher risks. Many people believe that compulsory cashing is a responsible practice for investors. In the long term, it is actually irresponsible as it doesn’t distinguish risk premium effectively. Certainly, development is a procedure. With so many years of exploration in wealth management business, investors will also become more reasonable. We expect media can do more guidance to educate and lead investors.

c) Regulatory bodies at various level may be more tolerate to these emerging businesses in order to standardize the development of wealth management.

2. Strengthening the communication among peers. IB has always attached importance to the communication and cooperation among peers. Seeking joint development shall not be stayed at competition, but consider more to achieve "win-win". Therefore, IB hopes to strengthen cooperation with our peers and create better performance and development in various areas of wealth management.

Thank you!