You don’t get bigger or more stable than Industrial and Commercial Bank of China. The Beijing-based outfit, overseen by chairman Chen Siqing, is the world’s largest commercial lender by assets.
Net profits rose 9.87% year on year in the first half of 2021, to Rmb163.5 billion ($25.6 billion), and by 10.6% on an annualised basis in the three months to the end of September.
Trading income, a key driver of growth all year, jumped 261% year-on-year in the third quarter, to Rmb10.1 billion, with operating income up 9.9% over the same period, to Rmb217.5 billion.
Across the board, ICBC’s numbers reflect the bank’s position at the heart of an economy tipped by the IMF to expand by 8% in 2021, but then to see growth slip into the 5% to 6% range.
Its non-performing loan ratio was 1.52% at the end of September 2021, down from 1.58% at the end of last year. Returns on equity and assets were 11.9% and 1.03% in the first nine months, against 11.3% and 1% respectively for the full year 2020.
In an October 29 report, UBS says “exceptionally strong” average interest earning assets growth of 11.9% in the third quarter (versus 7.2% in the same period at China Construction Bank) delivered a “stronger-than-peers NII growth”. Net interest income rose 7.3% year on year in the third quarter.
There are areas of concern. Net interest margins declined slightly, to 2.09% in the third quarter (according to UBS and Nomura estimates), against 2.15% in 2020.
Most of the big state lenders saw NIMs stay largely unchanged through the first nine months of the year, but UBS says the trend will “gradually stabilise” as ICBC finds ways to cut costs and cope with downward pressure on asset yield.
[ICBC] played its appointed role in supporting society and state enterprises, and even managed to post a small profit
Like its top-tier mainland peers, ICBC weathered the pandemic well. It did not go on a post-global financial crisis-style lending binge. It played its appointed role in supporting society and state enterprises, and even managed to post a small profit.
But new and bigger problems lie ahead.
One is capitalization. On October 29, three regulators, including the finance ministry and the central bank, issued rules regarding the implementation of total loss-absorbing capacity (TLAC) for China’s global systemically important banks.
China has four such lenders; ICBC is the largest. The rules, effective December 1, will provide “a larger buffer for loss-absorption and recapitalization in the event of bank failure”, Moody’s wrote on November 3.
They require a minimum TLAC requirement of 16% of risk-weighted assets by 2025, rising to 18% by 2028. Moody’s said ICBC and its peers would sell their first batches of non-capital TLAC securities in 2022, then maintain a steady pace of issuance for at least three years.
Identity
Another problem is identity.
Most of China’s big banks, ICBC included, spent the 2010s basically getting bigger at home. Overseas, they set up new offices here and there, but avoided splashy inorganic growth binges.
None of them are leaders in any given segment or sub-segment of finance, be it wealth management or investment banking, shipping finance or cash management.
They could – probably should – have led the way in digital payments. Instead, they were overtaken and marginalized by fintech.
There are signs the big banks have figured this out. In May, ICBC got approval to set up a foreign-run wealth management firm with Goldman Sachs Asset Management. The wealth management unit of the Chinese bank will own 49% of the joint venture.
And on October 25, ICBC said it would channel Rmb3 trillion in funding to the energy sector over the next five years. A tie-up with the National Energy Administration will explore ways to transition China to carbon neutrality by 2060.
These are positive signs. China’s leaders want to build a green-and-clean economy based on innovation, technology, a big consumer sector and smart manufacturing.
Banks can and must play a big role in that.
But first they must figure out, beyond being assets and facets of the state, who they are and what they want to be known for. Figuring that out will take time.
ICBC has at least made a start.
