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China Construction Bank (CCB) exhibits contradictions typical of Chinese banking today. Profits look good, but there are big challenges ahead.
In November 2018, CCB reported a 7.68% year-on-year climb in third-quarter profit, continuing a trend that has been steady all year. The more detailed interim results, announced in August, showed every arrow pointing in the right direction: net profit up 6.1% to Rmb147.5 billion ($21.4 billion) for the half year; earnings per share up 7.3%; and improvements in everything from assets to deposits, net interest income to fees and commissions. The only thing pointing down was the one thing you want to point down, the non-performing loan ratio, now at 1.48%.
So why the dark clouds?
Even if you take Chinese NPL numbers at face value, there are reasons to expect them to come under considerable pressure. Most obviously there is the US-China trade war. That is clearly going to have an impact on mainland export businesses, and some of them will run in to trouble with repayments as a consequence. Also, it will slow economic activity, reducing sources of growth for big lenders.
But a secondary impact is potentially more troublesome still. China had been tightening up the financial services industry, reducing liquidity and keeping a firm hand on risky lending.
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| Wang Zuji |
Since the trade war tensions began, it is tending to move in the opposite direction, easing credit. Banks that extend that credit to the wrong places just because they can will run into trouble in the future. CCB needs to make sure it is not one of those banks. Still, like ICBC and Bank of China, it is already clear that the bigger banks are better positioned to deal with all this than the smaller ones, and are in general better run anyway.
They have deposit bases and low funding costs that nobody else in the country can match. President Wang Zuji and new chairman Tian Guoli, who joined from Bank of China in October 2017 to replace Wang Hongzhang, have plans underway to generate new areas of growth. It is to their advantage that CCB is considered to have impressive management-bench strength; at the results announcements you are most likely to hear chief financial officer Xu Yiming, executive vice-president Zhang Lilin or risk officer Liao Lin, all of them highly capable.
Priorities today are home leasing products, harnessing inclusive finance to promote entrepreneurship, the ‘Retail first’ strategy (chiefly a digital retail strategy), transaction services and an increasingly visible private banking arm.
At the same time – and again the big three banks stand out for this – CCB talks often about strengthening its early warning systems for risks, particularly as it relates to NPLs.
Xu says risk management at CCB is sophisticated, with a dedicated risk metric centre: “Our technique and our expertise are first class and we can export this capability. This is a core capability of the bank.”
It is setting particular store by home leasing – the Chinese term for renting your home, a surprisingly undeveloped area in terms of mainland banking services. It has what it calls the Blue Ocean strategy to develop the area.
“This is a market that is under-nurtured at the moment,” said Xu at the interim results. “In mainland China, the rental market is not as developed as the house purchasing market. We believe it has great potential.”
Private banking also has great potential.
“Because wealth accumulation is speeding up, the number of ultra-high net-worth clients is increasing faster than general high net-worth customers,” says Yang Gang, deputy general manager in the wealth management and private banking department, speaking at a Euromoney private banking event in Singapore. “With the accumulation of wealth and sophistication of the business they are running, they have a higher demand for investment banking and other complex service needs.”
Serving these needs should be lucrative.
The Belt and Road Initiative will present opportunities too, but they are not so clear-cut. Picking the right projects (and resisting pressure to lend on anything other than commercial terms) is going to require extremely sound judgement.
CCB has also committed itself to becoming a modern technology bank and in 2018 set about a five-year fintech strategic planning initiative, which kicked off with the April opening of Jianxin Financial Technology, a wholly owned subsidiary dedicated to financial technology.
The bank has invested heavily in cloud computing, artificial intelligence and big data, and its retail strategy is increasingly about harnessing digital ideas at scale.
CCB depicts itself as well placed for the challenges ahead, with a fortified balance sheet and abundant access to liquidity.
