Numbers are solid and money is flowing into the system, but ICBC (Industrial and Commercial Bank of China Limited) must avoid the temptation to drift from its conservative approach to risk.
ICBC is the biggest and the most closely watched of China’s banks, a barometer for Chinese banking and the ebbs and flows of the national economy. With a trade war escalating, it is a tricky time to be that proxy.
Business is fine so far. ICBC’s half-year results, reported in August, showed first-half profits up from Rmb153 billion ($22.3 billion) to Rmb160.4 billion year on year, with most other metrics, from bad loans to net interest margin, steady. Full year numbers for financial 2018 may prove to be better still, as China has poured money into the banking system and sought to support businesses a reversal of the previous tightening approach and a consequence of the US-China trade war.
In the longer term, that trade war is clearly going to have an impact. It is probably partly for this reason that ICBC has said it will raise up to Rmb100 billion of preference shares to boost its tier-1 capital adequacy ratio. Chairman Yi Huiman says the bank is stress testing companies exposed to trade tensions, although at this stage he expects to maintain stable margins and asset quality.
What ICBC is facing is not just a test of its mettle in a global trade war but a test of its discipline. Until recently the position of regulators and government had been to curb credit, reduce leverage and manage risk. Now, thanks to Trump’s trade war, China has reversed course and started pumping cash back into the system. An undisciplined bank might take risks with credit that will inevitably lead to bad-loan problems in an economy where growth is slowing.
But ICBC has, in recent years, shown itself to be prudent and smart around risk, unlike some smaller banks in China. Its 1.54% non-performing loan ratio is steady and will need to stay that way (the overall banking industry is at 1.86%, although few believe that number accurately represents the true picture). It has also been comparatively quick to write off bad loans and will dispose of Rmb220 billion of non-performing lending this year, according to Yi.
The financial year 2017 was the first under new leadership at ICBC, following the departure of chairman Jiang Jianqing. His successor, Yi, is given to a poetic turn of phrase. His statement to Euromoney includes the observations that “time is weightless”, “time is the most faithful recorder” and, best of all, “the soul would have no rainbow had the eyes no tears.” Beneath all this, however, the priorities are the same. Yi says ICBC has focused on serving the real economy, cutting overcapacity, deleveraging, controlling financial risk and seeking innovation – very much the same things that Jiang and ICBC president Gu Shu, have talked about for several years. Yi says: “We will repack our luggage for a new journey,” guided by a new three-year plan, but actually the new journey has much the same priorities as the old one: a sustainable, leading bank, tied in to the progress of the Chinese real economy without being distracted by its occasional frivolities.
There is always a question of just how much innovation China’s big four banks are able to bring to bear, when compared with the revolution that has happened in retail payments through Ant Financial and Tencent. But there are signs of success at ICBC, which made a net increase in individual retail customers of 38 million during financial 2017, the highest for years. WeChat and Alipay may have stolen its lunch to an extent, but ICBC is still growing credit card customers, with 88.59 million by the end of the 2017 fiscal year.
Clearly no assessment of a Chinese bank can ignore the Belt and Road Initiative, and ICBC now operates in 45 countries and regions. ICBC, as the nation’s largest bank, is expected to be involved and is doing the right things by its leadership, issuing BRI green bonds and establishing the Belt and Road Interbank Regular Cooperation Mechanism.
In 2018, BRI began to take shape with tangible projects rather than just talk, but at this stage the biggest commitment of funds still seems to be from the policy names (Silk Road Fund and China Eximbank) and the multilaterals rather than the commercial banks.
At this stage, ICBC appears to be holding true to its commitment that it will only be involved in BRI projects where the funding is done on commercial terms.
Another key development over the last 12 months was the launch of the Inclusive Finance Department. The bank says it is committed to supporting small and micro businesses, agriculture, rural areas, business startups and poverty relief.
But still ICBC talks more about risk control than any expression of outbound growth or domestic opportunity. “The bank has always regarded risk prevention and control as a must-win battle,” says Shu.
The challenge for ICBC in the year ahead is to keep that risk control intact in the face of a trade war, while still finding other ways to grow.