The chairman of Industrial and Commercial Bank of China is more concerned about long-term challenges to the country’s financial sector than the short-term threat posed by bad loans.
Yi Huiman, who took over as chairman a year ago, has presided over a modest improvement in asset quality in the latest quarter, with non-performing loans shrinking 3bp to 1.59% of assets in the three months to March 31.
While he dismisses any talk of an imminent crisis in China, Yi singles out credit risk, interest rate liberalisation and the arrival of internet finance as the three main challenges facing Chinese banks.
“The banking industry as a whole needs to further optimise its business structure, diversify its income sources and enhance its sophistication in the management and cost control capabilities on both assets and liabilities,” Yi said in an email interview.
China’s banks are facing a tough earnings outlook, under pressure from financial reforms and capital constraints at a time when slower economic growth and a structural rebalancing has contributed to a rise in NPLs.
ICBC’s net profit grew just 0.4% in 2016, its slowest annual rate in more than a decade.
“Generally speaking, the banking industry in China is operating smoothly,” Yi said. “Although the quality of assets of commercial banks has shown signs of stabilisation and an upward trend since last year, pressure from credit risk remains relatively strong.”
FINTECH CHALLENGE
Yi also believes banks need to do more to address interest rate liberalisation. ICBC and its peers have seen their margins fall since the central bank removed restrictions on lending rates in 2013. A ceiling on deposit rates also went in December 2015, further boosting competition and squeezing returns.
Last quarter’s results showed ICBC’s net interest margin narrowed to 2.12%, down from 2.16% at the end of December. Bank of China, China Construction Bank, Bank of Communications and Agricultural Bank of China all posted a similar decline.
“After the liberalization of interest rates of deposits and loans, the narrowing of interest rate differential has continued to place pressure on the profit as well as test the operating model, business structure and cost control standard of commercial banks,” said Yi.
The third challenge to the business model comes from financial technology. Internet finance companies have rapidly gained traction in China, with peer-to-peer lenders and online savings alternatives eating into banks’ market share.
“The development of fintech does not change the nature of the financial industry,” said Yi. “However, new technologies such as third party payment, blockchain, electronic money and artificial intelligence have created new challenges for the transformation of the operational and management model of commercial banks.”
ICBC’s chairman dismissed concerns that the new financing options would disintermediate the banks entirely, seeing opportunities for Chinese lenders to use more technology to deliver new products to their vast client base.
“We have been actively embracing the opportunities brought about by the internet to financial services and promoting the development of e-ICBC internet finance,” he said.
ICBC has amassed an internet finance balance of over Rmb680bn, more than any other Chinese bank, according to Yi’s figures. Alibaba affiliate Ant Financial claimed to have Rmb760bn in its Yu’e Bao fund in March 2016.
OVERSEAS EXPANSION
With margins under pressure at home, ICBC’s international business has emerged as an important growth area, with profit growth running at a compound annual rate of 20% over the past five years. The overseas business now accounts for 8.8% of the group’s total assets with an NPL ratio of just 0.6% at end-2016.
“While generating good financial returns, internationalisation has also notably enhanced our market competitiveness and customer services capability,” said Yi.
Yi is counting on the internationalisation of the renminbi and China’s Belt & Road initiative to maintain that rapid pace.
The liberalisation of the currency is a “key opportunity” for Yi, who aims to build ICBC into the biggest bank in the global renminbi business. The arrival of foreign institutions in China’s domestic market also promises to boost demand for cross-border renminbi services.
“We will strive to become the preferred bank of overseas customers to enter China’s financial markets,” he said.
ICBC is also ramping up its exposure to countries linked to the Belt & Road initiative. At US$23.5bn at the end of 2016, the area accounts for only 1% of the bank’s total loan book, but lending is up 35.8% on the previous year.
Yi acknowledges, however, that lending in less developed Belt & Road countries requires careful risk management. ICBC intends to work closely with domestic and foreign peers to share the risks, and has built a “global big data-based risk monitoring system” to track real-time exposure, Yi said.
ICBC’s overseas operations span 410 licensed institutions in 42 countries and regions, with total assets of US$306.5bn. Yi says the overseas institutions combined would rank as the world’s 73rd biggest bank.
ICBC uses its various regional hubs as both trading centres and funding vehicles, which leads to multiple entities tapping the capital markets, often at short intervals.
ICBC has raised US$6bn from US dollar and euro bonds so far this year, with its Hong Kong, Dubai and Singapore branches all acting as issuers.
Rather than an uncoordinated approach, however, Yi says it is a deliberate strategy, with duties and accountability clearly defined. Head office monitors liquidity indicators and regulatory capital requirements for the entire group, and arranges fundraising and capital allocation in line with its operational needs.
“This procedure offers the convenience of seamless cross-border operation, and can help the group to balance liquidity and enhance the efficiency of capital utilization, and works smoothly in actual operation,” said Yi.
