OREANDA-NEWS.  May 03, 2012. With conventional deposits accounting for 60% of the total liabilities and loans for 40% of total assets, the balance sheet of Industrial Bank (IB) can be called “distinctive” among other similar banks. After the protection of interest rates now in force is cancelled, the bank may encounter overtaking opportunities. At the same time, whilst the whole banking industry still adheres to the concept of depending on large enterprises and quite a number of joint-stock banks are making concentrated efforts in developing businesses targeting small- and mini-sized enterprises due to limited funds, yet IB exerts great efforts attract ing medium-sized enterprises, reported the press-centre of Industrial Bank. 

As a mid -stream bank among all joint-stock banks across China, how will IB change the future situation? Our publication had an exclusive interview with President Li Renjie of IB after the press release for the annual report of the bank.

Preparations for market-oriented interest rates
Although the general public keep s on denouncing the huge profits of the banking industry, Li Renjie believe s that the trend of market-oriented interest rates will be accelerated, and IB has made adjustment s previously in two fields for the coming of market-oriented interest rates.

Li Renjie introduced that the first was the adjustment to the asset-liability structure. At a professional meeting held previously, he mentioned that the conventional balance sheets of banks with deposits and loans as the backbone would be weakened and diversifying off-sheet and structural asset-liability in the future would be unavoidable.

Take assets as an example. The assets of banks which are dominated by loans will be adjusted to diversified assets, including loan, investment and inter-bank transactions, etc. The liabilities which used to be dominated by deposits will also be adjusted gradually in a diversified manner, including deposit, financial bonds, commercial papers, and negotiable CDs, etc. In the future, the off-sheet businesses of banks which used to be dominated by simple letter s of credit and letter s of guarantee w ill also be shifted to wards investment banking, wealth management, and assets management, etc. In addition, with the increasing disintermediation of finance, wealth management oriented deposit and asset securitization would be unavoidable, and the off-sheet businesses of banks would also increase significantly, thus becoming an important source for profits.

Li Renjie also pointed out that, with the development of financial innovation, the relations hip between the conventional credit market, inter-bank market and capital market w ill become closer, and the transfer of various funds between markets, and on-sheet and off-sheet transfer between banks w ill be come more flexible, exhibiting structure-based features. For instance, the transfer of short-term funds of customers between the bank accounts for wealth management on behalf of customers, securities, and precious metal investment and the deposit account.

Just for this reason, Li Renjie Indicated that IB had long already realized diversified liabilities and assets. Specifically, the corporate and personal deposits under the protection of legal interest rates only accounted for 60% of its liabilities, and the loans accounted only for 40% of its assets. It has cast off the old pattern of a conventional bank with deposits and loans accounting for the majority. He believes:“Market-oriented interest rates will have less impact on IB compared with other banks”.

The second was the adjustment to capital pricing management. Li Renjie introduced that, to respond to market-oriented interest rates, IB had started implementing FTP (funds transfer pricing) across the bank, further improved the transfer pricing mechanism, and concentrated control of interest rate risk at the Head Office so as to avoid possible interest rate risks in the future.

Moreover, IB has also begun to improve its business structure, construction of internal institutions and systems, and team building, making preparations for the market-oriented interest rates.

Focusing credit on medium-sized enterprises and decreasing real estate loans

At present, among the corporate businesses of Chinese-funded banks, the large banks are inclined to attract large-sized enterprises on the one hand; the small banks race to attract small-sized enterprises with a view to controlling the pricing right. Nonetheless, IB, standing between them as a medium bank, designs a development route through extending credit to medium-sized enterprises.

Li Renjie said: “IB aims to become a bank focusing on medium-sized enterprises”. To focus on means to give priority to, meaning, IB will try to meet all the financial service demands of medium-sized enterprises, provide all-round support in the aspects of deposit and loan, cash management, and payment and settlement, etc., help them to issue bonds for financing, provide financial consultation services for enterprises with demand for merger and acquisition, and provide IPO guidance for those who intend to list on the market.

Why were “medium-sized enterprises” chosen? Li Renjie analyzed: “The future vitality of the Chinese economy depends on the growth of medium-sized enterprises”. Large-sized enterprises m ay have problems of low efficiency and bureaucracy due to their long management chains. Moreover, banks have only limited bargaining capabilit ies against them, so banks increase their reputation but make no money. The loans extended to small- and mini-sized enterprises often face high risk, and are maybe were more suitable for community banks.

As a medium-sized bank like IB, I believe that medium-sized enterprises will be our best customers. As their financial demands are not merely limited to loan and settlement, IB can meet all their financial needs as much as possible, and the opportunities for cross selling are also available.

“As for banks like us, medium-sized enterprises are the best customers”. Li Renjie indicated that, along the growth of medium-sized enterprises, their demands for financial services will increase, so banks can carry out more cross sel ling and will get more opportunities to make profits.

Don't do everything to get something. As for the small- and mini-enterprise business, IB d oesn't allow all branches and sub-branches to partake, but we promote such business according to the local situations. Additionally, IB also support s the development of small- and mini-enterprises in our own unique way. For instance, we helped Jiujiang Bank in which IB holds shares to provide special services for small- and mini-enterprises, and we also provided IT system, product design support and access to the payment and settlement system services for many township banks via the bank-to-bank platform, assisting these small- and mini-enterprise banks by way of technical output.

In contrast with the “strategy of focusing on medium-sized enterprises”, IB, a bank that used to be called “half a real estate share” by the outside, has begun to adjust its proportion of real estate related loans since 2008. As indicated in its annual report of 2011 released on 19, the proportion of personal housing loans in personal loans dropped from 79% at the end of 2010 to 67% at the end of last year. If the corporate loans to the real estate industry are added, the proportion of the balance of loans of the total loans dropped from 30.8% at the end of 2010 to 27% at the end of last year.

As for the “cake” of real estate businesses, Li Renjie only indicated a “prudent” attitude, but never mentioned giv ing it up”. He believes that urbanization is a long course in China and commercial banks should participate in it and play their roles. Although the sales of commercial houses have encountered cold weather, banks can still get involved in the construction projects for commercial real estate and urban complexes in a prudent way as long as the costs can be controlled and the price is moderate.

Risk control: move with the overall situation
Now that IB has a “distinctive” balance sheet, it will also have ‘distinctive' income risks. Since the beginning of this year, the returns of various financial assets in the market have witnessed significant decline. To invest a large amount of positions in assets, does IB face the dilemma of a narrowed rate of return?

“An overall view is required in risk control.” Li Renjie said that, in controlling risks, a bank should first see the economic tendency clearly and grasp the structure, rhythm, and orientation of businesses.

It is reported that IB has foreseen the risk of declining rates of return in the future as early as the second half of last year when the rate of return on assets was still high in the market and has begun to make adjustments to the assets businesses since then. Li Renjie indicated IB had done two jobs: First, grasp quality assets. Since the third quarter of last year, IB has purchased some assets with good quality and high rate of return from the market.

Second, intensify maturity mismatches in the asset-liability management to an appropriate extent. In fact, when the rate of return on assets begins to decline, the liability cost of banks will also go down, but a certain period of lag will exist. Therefore, a high rate of return can be kept by intensifying maturity mismatches appropriately. Li Renjie said: IB responded to this round of risks of declining rate s of return and made prior preparations, it is mainly depend ant on a correct judgment of the general trend.

As for the risk control and the layout of bank credit, Li Renjie also has a set of principles based on the judgment of the general trend, promoting and controlling at the same time. In his opinion, the profit points for corporate businesses in the future w ill be concentrated on financing demands in the construction of urbanization, the “cake” of green finance and investment in environmental construction during the “12th Five-year Planning” period, development opportunities of medium-sized enterprises, financial market businesses, and the development of trade finance. But the fields to which loans should be extended in a prudent manner in the current stage include real estate and government financing platforms.

In addition, Li Renjie also shared the experience of IB in controlling banking risks. He believe s that banking risks can be controlled if we could do a good job in the following five areas.

First, grasp the macroeconomic situation accurately. An overall view is required in risk control. At the monthly regular meeting of IB, we first analyze the macroeconomic situation and then the external policies and our business strategies.

Second, business development strategies should match our own management capability. Neither impos ing uniformity nor campaign ing on everything should be carried out in business development.

Third, we shouldn't copy international regulatory standards mechanically and blindly. As for the Basel II and III Accords, we can't simply copy them, but should instead understand and study the principles, models, tools and methods in them, and then we can implement them based our national situation and the circumstances of IB .

Fourth, improve the market sensitivity of risk control. We should change the previous model of collective loan examination and approval in the head office to “professional loan examination and individual responsibility”, so as to avoid the circumstance that “collective responsibility means collective exemption”. Meanwhile, in the aspect of assessment, we should increase ind ices for assessing business development in the risk control department and ind ices for assessing risk control in the business development department so that consensus can be reached and the risks can be embedded into business development lines.

Fifth, attach importance to the capability and culture of implementation. We should do our job in a practical way, and after we formulate regulations, we should stress enforcement.