Best emerging markets bank:
ICBC
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Also shortlisted: |
A flurry of under-appreciated financial reforms in China has forced large banks to shift their business models in a fight for profitability and to ensure the future of the universal-banking franchises amid disruption threats.
Financial disintermediation, stronger bank and non-bank competition, rising NPLs and partial interest-rate liberalization are challenging traditional business models. What’s more, banks have less pricing flexibility over loans and deposits with a greater role for market forces.
Over the last few years, ICBC has earned the unique distinction of being the brokers’ consensus banking pick in China, thanks to its efforts to diversify fee income by developing asset management, investment banking and consumer finance. In addition, it has been an industry leader in digital banking, wholesale finance and risk management.
Much of its successful transformation can be attributed to long-standing chairman, Jiang Jianqing – who wins Euromoney’s outstanding contribution to global financial services award this year.
As a state-backed institution benefiting from funding and market advantages, key indicators of ICBC’s financial health – from its market-leading tier-1 capital, to operating income and deposits – have been largely taken for granted by analysts and investors.
No longer. As China moves from an export-orientated economy to a domestic-consumption driven market, with services playing a greater role in GDP, the country is embracing a more dynamic and competitive financial system to allocate capital. While some less-efficient, large state-owned and private companies in China have monopolized credit, crimping SMEs loan-access in the real economy, ICBC, say market participants, has struck a delicate balance between risk-taking and conservatism. Its loan growth, unlike its peers, has been stable since 2006, while it has offered more transparency than most state-owned champions.
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Some senior western bankers may scoff when asked about the competition from Chinese banks – citing a lack of sales and trading infrastructure, and product complexity – but they do so at their own peril. ICBC is rapidly building up its institutional business, while still boasting growth rates, profitability and even NPL ratios, to die for.
ICBC’s net profit for 2014 hit Rmb276.3 billion ($44.5 billion), up 5.1% year-on-year, while its net interest margin increased by nine basis points to 2.66%. Thanks to growing its consumer, buy-side and wholesale units, fee and commission income posted 9% year-on-year growth to Rmb147.7 billion in 2014.
What’s more, its overseas units earned a net profit of Rmb18.5 billion, up 34.2%, despite volatility in Europe. Its relationship with Africa’s Standard Bank – a 20% stake in the group since 2007, and the purchase of a majority stake in Standard’s London-based markets business this year – shows a commitment to considered, strategic, overseas expansion.
ICBC has increased its capital-financing prowess, from aviation to metals, across FX, credit and equity products. Its scale is extraordinary. Private banking customers now total 40,000 with the balance of wealth management products at Rmb1.9 trillion, as of end-2014. Its global cash management product line has been expanded to almost 70 countries, with over 4,300 corporate customers. Its global RMB clearing system alone covers 75 countries.
Key credit risks
In the last quarter of 2014, ICBC’s NPL ratio increased by 7bp to 1.13%. Nevertheless, its coverage ratio was a healthy 207% at the end of 2014. ICBC has addressed key credit risks by reducing loans to local-government financing vehicles by one-third in the last three years, monitoring loans in over-capacity sectors and implementing new credit-accountability systems. It has also built up its capital buffers ahead of its peers, with regulatory requirements set to rise in the coming years.
Just as well. With 5.09 million corporate customers and 465 million individual customers, ICBC, the largest wholesale bank in China, is essential to the plumbing of the financial system in the country.
Its multi-layered growth strategy is a far cry from the experience of Japanese lenders in the 1990s, when NPLs were neither recognized nor addressed quickly enough, triggering prolonged credit stresses. What’s more, Japanese institutions then focused solely on addressing their loan books, instead of building new revenues – a stark contrast to ICBC as it surges ahead with new market innovations.
Take digital technology. ICBC now has 190 million internet-banking customers, and almost 1 million point-of-service terminals. Facing strong non-bank competition from the likes of Alibaba, it has built a formidable platform facilitating digital payments, e-commerce, information and investments, outflanking third-party providers by transaction volume and registered users for payment services. ICBC is now one of the world’s top-three credit card issuers at over 100 million.
A sharp contraction in domestic growth, or a private-sector debt crisis, would imperil ICBC’s loan books and interest-rate margins in the coming years. However, its proactive steps to diversify its income, across regions and products, will help the financial institution weather the credit storms.
