An Exclusive Interview with Tao Yiping, the Governor of IB: A light bank moves after deliberation

Time: 5/6/2017      Source: 21st Century Business Herald

（http://epaper.21jingji.com/html/2017-05/08/content_61663.htm）

April 28, Shanghai. At the moment when Industrial Bank (IB) announced the annual report of 2016 and the financial report of the first quarter of 2017, Tao Yiping, the governor of IB, received the exclusive interview by a journalist from the 21st Century Business Herald.

This is the first time for Tao Yiping to receive a media interview after he took the post of the governor of IB at the beginning of last year.

The year of 2017 represents the 10th anniversary of IB listing, and also the 30th anniversary of its incorporation. Born in Fuzhou, a city at the southeast corner of China, IB is now a shareholding commercial bank with the largest asset scale in China. Its struggling growth story and differentiated operation strategy form a featured example that has witnessed and recorded the growth and transformation of the banking industry in China.

When the first batch of shareholding banks in China, including IB, are gradually mature, the banking industry now faces great challenges: the macroeconomy enters into a New Normal; the banking industry no longer enjoys high-speed growth in the past “ten golden years”; asset quality is facing great stress. As the Macro Prudential Assessment (MPA) has been implemented, inter-bank business and investment business are monitored in a more strict way, the interest rate spreads keep shrinking and the development mode of “soaring development by occupying territories” is no longer applicable, the banking industry urges for transformation.

Under the challenges of slumping macroeconomy and financial de-leverage, how will IB carry on its legend?

The spring wind was blowing out of the window, and Tao Yiping, a hearty and agile 54-year-old man, said, “The future development will be available for the one who has the most distinctive feature, understands the market best and manges and controls risks best.”

In his opinion, short-term challenges are inevitable. But looking afar, opportunities are more than challenges. The ability of effectively tackling current challenges and seizing medium- and long-term opportunities becomes a test for banks. To surpass other competitors in this critical moment, a bank has to be more sensitive to the market, operate in a more characteristic way and lay a solid management foundation in terms of risk and cost control. Facing temporary pressure, IB will still shine if it insists on its practical operation and powerful innovation.

The operation is stable and progressive

21st Century Business Herald: The year of 2016 represents the first complete year after you became the governor of IB, how would you comment on and interpret the overall operation of IB in 2016?

Tao Yiping: When I review 2016, although the macroeconomy is gradually slow and stable, the financial market and bulk commodity market are fluctuating. The continuous shrinking of interest rate spreads in traditional business and the concentrated exposure of credit risks bring great challenges for banks. Facing these challenges and changes, we always believe we should adapt ourselves to changes and change to win. We have actively adjusted the business and income structure, foreseen the future, moved on step by step. Our performance is better than we and the market expected.

We summarize the achievements of 2016 with “five breakthroughs”: First, the asset scale exceeded RMB 6 trillion and achieved a new height. While maintaining our first position among all shareholding banks, our asset structure was further optimized. At the end of 2016, our overall asset risk weight was 62.48%, down by 2.21% on a YOY basis, while the intensive capital management achieved great results; Second, we made new breakthrough in managing and controlling asset quality. The non-performing asset rate was lower than the third quarter of last year. The clearing and restructuring of year-round non-performing asset accounted for 33%, the year-end non-performing rate was 1.65%, the provision-loan rate was 3.48%, the provision coverage was 210%, all leading the industry; Third, the contribution from retail business achieved breakthrough. The net income of retail banking exceeded RMB 30 billion, and the revenue accounted for 20% of the total, and the function of “anchor” and “security pad” was gradually seen; Fourth, the income of intermediate business achieved breakthrough. The amount of debt financing instruments for non-financial enterprises underwritten throughout the year exceeded RMB 400 billion, the income from intermediate wealth management business exceeded RMB 10 billion, the scale of asset custody exceeded RMB 9 trillion, and the handling charges and commissions accounted for almost 25% of the total revenue; Fifth, the “expansion” of client base achieved breakthrough, the number of financial clients and core retail clients was 10% more than that at the beginning of the year respectively. Inter-bank clients have covered all sectors of the financial industry and our partnership has been deepened. We still maintain our leadership in the industry.

21st Century Business Herald: What do you think of the breakthrough in the income from intermediate business?

Tao Yiping: The proportion of handling charges and commissions in the total revenue is an intuitive indicator on how “light” a bank is. During the recent years, we have made early plans for transformation, especially for constructing an “investment-based, settlement-based and transaction-based” bank, and our intermediate business has made great progress. In the first quarter this year, the proportion of handling charges and commissions in the total operation revenue was raised up to 27.79%. With great development space for intermediate business, it is now a rare opportunity to grow this sector.

As for IB, the first key is to grasp market trading opportunities in different phases or trends, accelerate the circulation of financial assets; the second key is to take the advantage of marketization of interest rate and exchange rate to further strengthen the market-making edges in FICC (fixed income currencies & commodities); the third key is to take the business opportunities in capital market equity financing and enterprise M&A and restructuring, which is brought by the structural reform of supply side; the fourth key is to keep developing traditional intermediate business such as payment settlement, agency, commitment & guarantee and bank card revenues.

21st Century Business Herald: What are the reasons of the change in the asset and liability structure of IB reflected in the performance report? Will this change continue?

Tao Yiping: You may notice from the performance report that some active changes have occurred on our asset and liability structure. Core deposits have increased rapidly while inter-bank assets and liabilities have been optimized. In the first quarter this year, deposits from clients are increased by RMB 190 billion; the inter-bank deposits and asset sales with recourse are decreased by RMB 170 billion; loans to clients are increased by RMB 110 billion; inter-bank investment is decreased by RMB 110 billion.

We made these not only to follow the requirements proposed by the spirit of the Central Economic Working Conference and the national structural reform of supply side, but also to prove our willingness to change and that we can change in appropriate time and move after deliberation. This is in line with our transformation direction and mindset in the next Five Year Plan.

In the future, we will further promote the restructuring of our balance sheet, focus asset business on serving entity economy, venture our assets on physical enterprises and optimize asset structure in an orderly way. As for liability business, we will keep prioritizing on expanding core liabilities as one of the most important tasks, while maintaining and driving the growth of general core liabilities.

We streamline ourselves and move after deliberation

21st Century Business Herald: Since last year, the market and supervision environment has changed greatly. How will IB adjust the development strategy for its traditional and advantageous interbank finance business and what are the key points in the future?

Tao Yiping: Objectively speaking, a large part of our interbank assets and active liabilities are priced based on the market. Under the tight and balanced currency policy and strict supervision by the central bank, the interest rate on the market is raised, which will inevitably increase the cost of liabilities. We have long noticed the change of situation and followed the trend of de-leverage. Since the fourth quarter of last year, we have actively adjusted the asset and liability structure and compressed some interbank assets and liabilities, which have obtained ideal effect.

Now we will more emphasize on growing interbank finance with differentiated strategies, strengthen and consolidate our advantageous position to serve the while market, and promote the transition of interbank business towards investment-based, settlement-based and transaction-based business.

More specifically, the focus this year will lie on strengthening basis, promoting transformation and increasing quality and efficiency. The first step is to establish a marketing system featuring “massive interbank” layered management of clients with the purpose of consolidating the client base; the second step is to manage interbank liabilities in a refined and layered way, stabilize liability scale and optimize liability structure, so as to achieve a stable scale of interbank liabilities and stable but climbing basic core liabilities; the third step is to put focus on investing basic assets on entities and enterprises, aggressively change the business structure of interbank assets to “investment + trade”, so as to maintaining profitability of interbank asset business.

21st Century Business Herald: The Five Year Plan of IB will push the way of transformation towards light capital and high efficiency. In combination with how the plan was executed in the past year and the current situations, how will you specifically implement the plans for transformation and development?

Tao Yiping: The current economic and financial environment is changing. When sorting out the development plan and path for the next five years, we have to highlight three key points: The first point is to actually accelerate the progress of transformation and upgrade. Our development in the future will pay more attention to connotation instead of expansion. We will no longer seek for simple expansion. Instead, we will more focus on the quality and performance of development and maintain the strategy of “light capital, high efficiency”. The second point is to consolidate the basis of development and add more fuel for intrinsic growth. The most important principle is to focus on clients, settle down to provide services, grow with clients and consolidate the foundation for sustainable development. The third point is to standardize and refine the management and stress on responsibility, order and rules.

Specifically speaking, in the next five years, we will root ourselves on serving the entity economy, follow the transformation direction of “light capital and high efficiency” to accelerate the construction of a “settlement-based, investment-based and transaction-based” bank, pay more attention to development settlement business, strengthen the penetration to the whole process of operation of clients, further grow the financial trading business and develop the group in a lighter way. Meanwhile, we will exert the general advantages of the group to provide clients with comprehensive financing services by relying on resources in the diversified financial market.

We hope that we will, in the next five years, change ourselves from heavy asset and capital into light asset and capital; from an agency of credit and capital to an agency of information and capital; from holding assets to managing and transacting assets; from financing to knowledge leveraging; from a single market to the entire financial market.

21st Century Business Herald: IB is promoting the system reform this year. What's the idea of this reform?

Tao Yiping: This system reform is the “internal combustion engine” that adapts us to the changes in the market and supervision environment and helps achieve the goal of the Five Year Plan. There are two purposes: one is to improve our professional skills and being a professional is always our foundation in the market; the other is to promote market response and service efficiency, which is not required by clients, but by the market.

Specifically, the first is to reform the organizational structure, streamline departments, reduce management levels and make us flat and professional. We have set up four department clusters including enterprise finance, retail finance, interbank finance as well as investment bank & financial market with the focus on redefining business and responsibility boundaries and position function. The second is to separate emerging business sectors, promoting the separation of the client department from the product department as well as traditional business from emerging business. The third is to perfect the business process and supporting mechanisms, such as setting up and improving a risk control mechanism that fits with market development and requirements, while making risks controllable and efficient; setting up a performance measurement and evaluation mechanism based on clients and products.

We expect to redefine ourselves, make us stronger and seize market opportunities through reform, so as to embrace another round of steady development.

Asset quality is stable and fine

21st Century Business Herald: We noticed that, in 2016, the amount and frequency of non-performing assets of IB were both reduced. How do you think the asset quality of banking industry will change in the future?

Tao Yiping: Since last year, the asset quality of IB has been stabilized and improved. On one hand, we always insist on generating profits from asset quality management, especially special assets. The core is to promote “two transformations”, which means the transformation from simple charging-off and transferring to clearing and restructuring, and from passive disposal and settlement to active joint operation. In 2016, 33% of non-performing assets were disposed of by clearing and restructuring, which was raised to 57% in the first quarter this year, far beyond the industry average and we can say we are running ahead of risks.

On the other hand, we insist on active and actual risk exposure and strict risk classification. A positive example is that our occurrence of overdue loan repayment for over 90 days is the lowest in all banks of the same type.

Judging from the entire banking industry, since non-performing assets have been collectively exposed in the past few years and the macroeconomy has reached its bottom, the asset quality of banking industry shows a stable and improving trend. However, the economy and many enterprises still need transformation or are undergoing transformation in the process. We still have a plenty of difficulties and challenges. The control and stabilization of asset quality still cannot be taken lightly.

21st Century Business Herald: Liquidity management is an important task for banks this year. What measures does IB have to prevent liquidity risks?

Tao Yiping: Liquidity management has always been the most important part for operating and managing a bank. We have constructed an organizational structure of liquidity risk management covering the board of directors, the board of supervisors, senior management and executive employees as well as a liquidity risk management and operation mechanism led by the treasurer of the headquarters. The purpose is to build up three defense lines against liquidity risks.

Specifically speaking, the first defense line is composed of frontline business employees who coordinate and implement the asset and liability management policies. Operating units shall operate their business under the given asset and liability index. The second defense line is the FTP pricing management which leads operating organizations to keep optimizing their asset and liability structure by adjusting the price, and maintains the basic balance of fund source and application. The third defense line is the accommodation of funds operated by the treasurer via OTC operation based on the cash flow gap. Meanwhile, we will regularly conduct pressure test and measure the liquidity under light, medium and high pressure. We will also develop corresponding emergency plans and countermeasures to prevent liquidity risks.

This year, we will more emphasize on liquidity management. On one hand, we will encourage operating units to expanding more core liabilities, improve the liability structure and enhance liability stability. On the other hand, we will reasonably control the frequency of asset venturing, strictly control asset duration, adjust the mispairing of assets and liabilities. As a result, the liquidity across the bank is generally stable and all asset and liability business grows in a healthy way.

Keep our core competitiveness

21st Century Business Herald: As the previous “King of Interbank”, IB has been reminiscent of interbank finance as its greatest feature. How do you define the next feature of IB?

Tao Yiping: IB has long been present in the interbank business field, thus making it more influential than its peers. This is closely related to the market-oriented philosophy, differentiated features and outstanding innovation, and is also the greatest feature of IB.

This is what IB is based on to go one step ahead in interbank finance, green finance, inter-bank platform, pension finance, investment bank, asset custody, FICC and other sectors and form its unique advantages. Regarding the retail finance that was deemed our “shortcoming” in the past, we achieved breakthrough last year, with the contribution to the total revenue over 20%. This figure will go up to 30% or higher in the future.

In terms of our business capability, IB has three distinctive features, i.e. strong investment capability, strong trading capability and strong settlement capability. This is what we rely on to build a “bank of three types”. Therefore, while growing traditional featured business such as green finance and financial market business, we will put focus on developing new featured business and growth points such as investment, settlement and trading.

21st Century Business Herald: Recently, the Internet finance and Fintech have imposed great impact on the banking industry. How will IB keep enhancing the combination with and investment on Fintech?

Tao Yiping: The era of Bank 3.0 has come and actively embracing Fintech is a trend. IB always perseveres in science and technology-driven strategies, making it not only one of rare domestic banks with independent R&D abilities of core systems of banks, and also the only one that exports core system technologies. We offer custody service of core systems to over 300 small and medium-sized banks.

During the past few years, we have proposed that technologies are now leading business growth and innovation instead of providing support, actively driven the combination of finance with technologies, and achieved some outcomes in terms of core system, on-line financing, intelligent risk control, mobile payment and artificial intelligence. In the future, we will spare no effort in speeding up the construction of smart bank and digital financial group.

The first is system optimization. Based on IB Digital Finance Information Service Company, an independent legal entity, as our platform for innovating in technological finance, we have established the innovative laboratory for technological finance, explored more application in block chains, robots and biometric authentication. We plan to set up a special investment fund to incubate financial technology projects.

The second is precise guidance. Promote the construction of a digital governance platform and big data intelligent cloud platform and amplify the function of big data analysis in making operation decisions.

The third is ecological improvement. On one hand, we will deepen the construction of inter-bank platform and financial ecosystem featuring “one financial cloud plus three major platforms (wealth management platform, payment settlement platform, asset trading platform)”. On the other hand, we will deepen our cooperation with cutting edge financial technology companies and Internet companies to share their technologies and platform and jointly build the ecosystem of financial service.

The fourth is IT sharing. We will build up a platform to share the information of group clients and business and promote integration in terms of client information management and backstage management analysis.

The fifth is combined development. We will promote the application of new technologies in business front line, perfect the O2O service system, take the advantage of off-line physical channels and client resources to keep developing our Internet financial platform so as to connect on-line and off-line resources.

21st Century Business Herald: The domestic economy was changing rapidly and unpredictably in the past year during your service as the governor of IB, especially under the background of domestic economy transformation and financial de-leverage. All these factors have created unprecedented challenges to commercial banks. What do you think of these challenges?

Tao Yiping: During my one-odd-year service in IB, I have pondered over the overall development strategy and successful experience of IB. Now I have personal experience about the operation tenets and corporate culture of IB. As a highly marketized bank, IB can sensitively seize market opportunities, implement forward-looking strategies and rapidly respond to changes. These are our core competitiveness and the reason why we can stand out in the market and be different.

As for the development in the near future, we believe there will be more challenges in the short run but more opportunities in the long run.

Short-term challenges fall into three aspects: the first one is that the fast expansion in size is unsustainable and future banks must refine and improve their connotation to grow. The second one is that under the background of financial de-leverage, the domestic interest rate keeps climbing while the interest rate spreads keep shrinking, even beyond our expectation, thus bringing great challenges to the stable revenue of banks. The third one is that the economic transformation and the shift of economic driving factors will be a long process. During this process, the asset quality of banks will face continuous pressure.

However, there will be more opportunities in the long run. The first aspect is the economic fundamentals. As the domestic economic transformation and upgrade is being pushed forward, especially the structural reform of supply side, the excess capacity will be gradually cleared and emerging industries will develop faster, which will bring a good opportunity for banks to transform. The second aspect is the financial fundamentals. Both de-leverage and strict monitoring will eventually be beneficial for reducing risks in the financial system and stabilizing the financial order, thus purifying the operation environment of financial industry. This is actually a good news for commercial banks in the long run.

Domestic commercial banks are in the critical moment of transformation and upgrade now or in the next few years. Banks will inevitably be diversified. Those banks with faster market response, featured and outstanding operation as well as better management and control in risks and costs can outcompete others. Those banks with slow market response, indistinctive operation and poor management will lag behind or even be eliminated. The ability of effectively tackling current challenges and seizing medium- and long-term opportunities will become a test for banks.