Best bank:
Bank of China
Best equity house:
China International Capital Corporation
Over the past 12 months a lot of noise has been coming out of China. It is now commonly understood that for the People’s Republic to realize its enormous economic potential there will have to be serious structural reform. The financial sector has come under intense scrutiny. To change the banks is a major task. These are large institutions employing large numbers of workers. ICBC for example, China’s largest bank and last year’s winner, has 500,000 employees. Trying to get such monstrous institutions to start thinking about the bottom line will take time.
The banks’ quality of assets and non-performing loans receive the most attention. But perhaps most worrying is that nobody really knows how big the problems are. A single number is not enough to encapsulate them. Policy loans made 15 years ago are no longer traceable, and loans that were made only six months ago have in many cases quickly turned bad.
The best bank in China this year is, like the other banks in the country, suffering asset-quality problems, but Bank of China is further down the road than others as it struggles to introduce effective risk and credit management systems.
Despite shifting Rmb400 billion ($48 billion) of bad loans off its books, Bank of China still has 28% NPLs as a ratio of its portfolio.
And these figures have been worked out using international accounting standards. It’s a move in the right direction. Those banks boasting lower NPLs are often reluctant to use such criteria, perhaps suggesting a flaw in their own figures.
With Bank of China expecting to float part of its operation in the coming months, Lui Mingkang, Bank of China’s president, understands the necessity of transparency and strong corporate governance to lure in international investors. And when China’s banks are finally forced to confront foreign banks in open competition, Bank of China will have an advantage over other mainland banks. With 310 overseas branches and offices in 22 countries, including its well-respected investment banking arm, Bank of China International Capital Limited (BOCI), its overseas network is by far the most extensive. It is building up important experiences in facing foreign competition.
BOCI by itself is well respected and was involved in the past year in several high-profile transactions including the $12 billion PCCW acquisition facility. In corporate deposit-taking Bank of China had a successful year. Its renminbi corporate deposits rose nearly 24%, taking its market share to 11.75%. The bank has also maintained its lead in trade finance. Business volume increased to $145 billion, amounting to funding for a third of the People’s Republic’s total foreign trade.
The initial public offerings coming out of China into international markets were impressively large: Petrochina’s $2.9 billion, China Telecom’s $4.9 billion, and China Unicom’s $5.65 billion. Only one investment bank can claim a hand in all of them. Not surprisingly it’s Chinese. Contacts play a major part but credentials are important too. However, as one banker admits: “A bad firm with connections within the government is much better than a good firm without connections.” But with the experience that China International Capital Corporation (CICC) continues to load up on as it works on all of the most important transactions with the strongest investment banks, such as Goldman Sachs and Morgan Stanley, it is quickly establishing itself as a strong firm with great connections. CICC was set up as a joint venture between Morgan Stanley and Construction Bank, and under the close tutelage of the US house it has quickly developed. It was a vehicle that was to focus primarily on the domestic markets but it is now more than capable of searching for opportunities in the international capital markets.
