China’s banks face considerable challenges, notably the trade war and the concern that big lenders will be expected to relax their underwriting policies to stimulate the economy. But you wouldn’t know it from ICBC’s latest numbers: its third-quarter results, announced in October, show the fastest year-on-year increase in five years.
The 5.8% year-on-year growth for the third quarter was well ahead of expectations, and the full-year number is likely to be healthy. Nomura is forecasting 4% growth for the full year, driven mainly by steady loan growth, which by October was up 8.5% on the previous year.
ICBC is the biggest bank in China and therefore a bellwether for the sector as a whole. Its relative success suggests that some of the fears about Chinese banking may have been overblown. The US trade war doesn’t seem to have impacted lending growth, although anecdotally there appears to be weakening loan demand and the adoption of a new loan pricing mechanism will be a challenge.
And there is no sign of asset quality worsening, despite rumours that the big four banks are being called upon to lend more to small and medium-sized enterprises, taking on the sort of lending that second-tier banks normally fulfil.
In fact, ICBC’s non-performing loan (NPL) figure dropped in the third quarter to just 1.44%. Nomura says that ICBC’s exposure to high-risk sectors is instead decreasing, while its share of retail increases.
How is it managing this? A closer look at ICBC’s first-half numbers, which showed domestic renminbi loans increasing by Rmb851.3 billion ($120.9 billion), shows that more than half of that growth was in non-credit financing and investment in local government bonds (Rmb450.7 billion) – safe and steady.
Beyond that, the bank says it has “focused on the needs of key projects related to national welfare and people’s livelihood.”
Loans to domestic projects accounted for 54.9% of new corporate loans: these included the Greater Bay Area, the integration of the Yangtze River Delta, the development of Beijing, Tianjin and Hebei, and Xiong’an New Area (which is in Hebei). These, like the Belt and Road Initiative, are areas the state wants to succeed, and therefore look like reasonably secure places to lend to.
Most of the funding has gone into transportation, public facilities, energy, manufacturing and services, ICBC says.
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Chen Siqing |
The bank has maintained its focus on inclusive finance and says that lending for small and micro businesses increased by Rmb130.1 billion over the first six months of 2019, which is up over 40% and suggests that the big banks are indeed expecting to increase their lending to previously forgotten parts of the economy. There has also been a 12.5% increase in loans for targeted poverty alleviation.
Finally, the bank has tried to implement supply-side structural reform, which in practice means targeting its lending to healthier and faster-growing companies. It says loans to what it calls state-of-the-art manufacturing rose by Rmb47 billion in the first half of 2019, with loans to the services sector up Rmb54 billion, particularly health, education and senior care.
For growth, it is looking to asset management and investment banking. It is a leading underwriter for domestic bonds and is making progress on tech, with 20 million new personal mobile banking users in the first half of 2019, bringing the total to 333 million, alongside 460 million internet finance customers. And it has launched several new products, including a Happy Life mobile banking product for middle-aged and elderly customers.
ICBC is a popular stock, a safe haven in an important sector. According to BNP Paribas, almost 25% of all southbound China flows – that is, mainland to Hong Kong – went in to ICBC stock (through its Hong Kong listing) in the first half of 2019. It received $2.5 billion of southbound purchases in the first seven months of 2019.
It has 627 million customers, 100 million more people than the entire population of the European Union. It has more customer deposits than any bank.
Also, while some might want it to be a bit more lively and take a bit more risk, that has not been ICBC’s style: its 13 consecutive quarters of declining NPLs is a source of some pride; the bank seems to be ditching assets with potential risks rather than growing them. The coverage ratio stood at 192% at the end of the first half and it is still overhauling its risk management systems and corporate governance.
However, it doesn’t seem to be immune from national service. The news that ICBC’s asset management unit would invest up to Rmb3 billion in Bank of Jinzhou, a troubled lender whose shares had been suspended, raised concerns that the bank would be expected to use its balance sheet for the national good even if that wasn’t necessarily in ICBC’s own best interests.
The bank’s stability has not been affected by a change at the top, with Chen Siqing, previously chairman of Bank of China, appointed as party secretary and chairman of ICBC in April following Yi Huiman’s departure to run the China Securities Regulatory Commission.