The Euromoney 25: ICBC

Euromoney, January 2018

To see the full Euromoney 25 feature click here

It might not sound like much of a landmark, but there was some fanfare this year when ICBC started trading above book value for the first time in years.

Looking at why helps us understand ICBC’s position in a changing China. The country’s financial services industry faces many threats, but most things that have happened in the last year or so have been to ICBC’s benefit.

First, there are China’s attempts to rein in the vast and alarming shadow banking industry. The state has raised short-term interest rates to curb the shadow sector; doing so has given an extra advantage to big banks like ICBC, which have enormous deposits – Rmb19.3 trillion ($2.9 trillion) on September 30 – compared with smaller banks that rely on interbank funding.

More importantly, bad debts appear to have peaked for the moment and are heading down. This is perhaps the single most important indicator for Chinese banks, given the perilously high levels of debt in the broader economy, particularly corporate debt.

Stated numbers show ICBC’s non-performing loan level drifting gradually lower, reaching 1.56% in the third quarter. This reflects evidence that debt is declining system-wide; according to JPMorgan, debt fell in the second quarter for the first time since 2011.

Analysts view official NPL figures with a certain amount of distrust, but ICBC’s management, with chairman Yi Huiman, have always been fairly convincing in arguing that they are on top of bad debts. They have been steering lending away from problematic sectors and towards new private-sector business for years. Interviewed in May, president Gu Shu told Euromoney: “The trend is clear. ICBC has successfully tackled the problem of the deterioration of asset quality, and we can see we have passed the turning point.”

He acknowledges that it looks strange to outsiders that banks serving high-debt China can have an NPL figure around the 1.5% mark, and there is always a question of definition here, but he says this has been a question of knowing when to make timely disposals.

In the first half of 2017, the bank launched Rmb4 billion-worth of non-performing asset securitization programmes based on non-performing cards and personal loans. Gu has said that had the bank not consistently taken measures like this, the NPL figure could have gone as high as 7% or 8%.

But clearly there are still risks. Corporate and state debts are still very worrying and ICBC does have exposure. Also, even if rising short-term rates are good for the big banks, other state measures, such as reduced fees for credit card transactions, are not.

Then there is the question of wealth management product exposure – still the biggest likely cause of a systemic national shock and at the very least unhealthy for the industry.

Gu claims ICBC is conservative in terms of its asset management business and is growing with prudence. The bank says that of its Rmb3 trillion in wealth management, about 80% of the investment assets are in standardized products and the entirety avoids significant risk, even it if reduces the yields the bank can offer.

Still, when your wealth management product suite includes products with names like ‘Lucky bag on lantern festival’ and ‘Double nine serial lucky bags’, it appears there is still a certain amount of speculation expected by the market.

ICBC would not be threatened by the opening of the Chinese domestic market to foreign competition: after taking so long to get to this point, ICBC is unbeatable by any other than its existing peers.

A far bigger threat comes on the consumer and wealth side from the likes of Ant Financial and Tencent, and much of ICBC’s current investment is on big data and artificial intelligence to improve its retail offering – the so-called ‘Mega retail’ strategy.

Internationally, we should expect ICBC’s fortunes to be closely linked to the Belt and Road Initiative. Gu says that ICBC will be a part of BRI, but that it will adhere to commercial terms when lending. In 2016, ICBC extended $23.5 billion of loans to Belt and Road countries and the figure will be higher this year.

Another important point will be the progress of ICBC Standard, largely a markets business, based in London, in which ICBC is now the majority partner in a joint venture with South Africa’s Standard Bank (in which ICBC also holds 20%).

ICBC Standard finally became profitable this year after several problematic loss-making years; it could prove to be crucial to international expansion.

Full article: https://www.euromoney.com/article/b163mw7pmlxxgw/icbc-in-the-good-books?copyrightInfo=true