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| Jiang: The challenge in the future will be when the Chinese economy and the financial sector become more open to the global marketplace | |
In describing change as a constant, Jiang Jianqing paraphrases the ancient Greek philosopher Heraclitus (circa 540BC – 480BC) – “you cannot step into the same river twice”. For Jiang, chairman of the Industrial and Commercial Bank of China (ICBC), the philosopher’s words best illustrate the upheaval taking place in the world’s financial marketplace today.
It is an observation that can just as easily be said of ICBC. Barely six years ago, one-third of ICBC’s loan portfolio was reportedly non-performing; three years ago, the government stepped in with a capital injection of US$15 billion and a carve-out of some US$85 billion of its NPLs (non-performing loans); with its listing in October 2006, which raised US$21.9 billion in the world’s biggest IPO, ICBC took a leap into the future as a listed company; and as turbulence in the credit markets began to spread last year, ICBC stepped on to the world stage with its overseas acquisitions and became the world’s biggest bank by market capitalization.
Even Lloyd Blankfein, chairman of Goldman Sachs, when he visited Jiang in Beijing in mid-January 2008, remarked that five years ago he could not have imagined the immense changes that have transformed ICBC to what it is today. “In fact, I think the changes at ICBC were discernible even then,” remarks Jiang. “It is one of the most important reasons why Goldman Sachs* decided to invest in ICBC.”
Jiang can speak with confidence. Since 1999, he has been driving the changes at the bank first as vice-chairman and executive vice-president and then in February 2000 as chairman and president, before being appointed chairman and executive director in October 2005 ahead of the IPO. Among the four large state-owned banks, ICBC holds the singular distinction of having had the same official at the helm through its reform, restructuring and eventual listing. That is no mean feat considering that scandals and corruption have forced out the heads in two of the three other state-owned banks.
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| | *Goldman Sachs, Allianz and American Express were the strategic investors ahead of the IPO of ICBC acquiring an 8.45% stake for US$3.8 billion. |
But the title of being the biggest does not rest comfortably with Jiang. “Becoming the world’s biggest bank by market capitalization is unintentional,” he told The Asset in a two-hour exclusive interview. What matters more, he suggests, is transforming ICBC to also become the world’s most profitable and most respected international financial institution.
That may be because although ICBC has raced ahead of the likes of Citi, Bank of America and HSBC in terms of market capitalization, it is largely thanks to the surging, liquidity-driven Chinese equity markets, the best performing in the world at the end of 2007 out of the 90 indices tracked by Bloomberg. Profitability, however, remains a laggard. ICBC shares trade at a price-earnings multiple of closer to 30 times, which is at least twice, if not more, as compared with its international peers. In terms of operating income, ICBC generates only a third or less compared with its international peers.
Jiang is conscious that the world is watching. Ever since ICBC’s listing, the gaze of institutional investors and the media has been a constant. As the largest bank in the world’s fastest growing economy, ICBC is presented with exceptional opportunities to build its franchise. Yet, a history of policy lending, which has damaged the bank’s credit standing, and the more recent unprecedented losses being reported by some of the world’s savviest financial institutions are stark reminders that the business of banking is fraught with risks.
ICBC has certainly been a beneficiary of the strength of China’s economy. And that is a major factor responsible for the bank’s stellar performance especially relative to those in Europe and America. According to the preliminary announcement of its unaudited results, ICBC is set to report a net profit growth of 60%. That would bring its net income to 78.8 billion renminbi (US$10.9 billion) for 2007 compared to Bank of America’s US$15 billion and Citi’s US$3.6 billion, both of which took massive hits as a result of their subprime write-downs.
The strength of China’s market is vital to ICBC’s future as 97% of its profit today is generated from the domestic market. Moves by the central authorities to cool down the domestic economy including setting a ceiling on the amount of loans banks can lend out, says Jiang, is unlikely to have a significant impact on ICBC’s profit momentum in 2008 as it has kept its loan growth to around 10% in the last five years, which is lower than what has been set by the authorities, while its profit growth remains above 38%.
Blazing a new trail
With the opportunity to move forward decisively and build a model Chinese bank in the international market, Jiang is not relying on an international role business model to shape ICBC’s future. “We have never really had a role model,” he explains. “What may be a successful experience to one bank may not be the same to you; the unsuccessful experience of others may turn out to be a success for you. This is because circumstances change and so does the environment and the results may differ. I believe ICBC is pursuing its own best unique model.”
Instead, Jiang believes that learning and experience are vital. “I pay a lot of attention to what is happening and the issues affecting the financial industry. I also enjoy reading books – autobiographies of bankers and the history of banks. Opportunities to interact with the chairmen and CEOs from other banks, who have become my friends, also provide me additional insights and perspective. I also spend time speaking to my colleagues and the staff of the bank and learn from these discussions. If it is useful, we can then apply it.”
A peek at the books Jiang has read provides a clue as to where he is likely to take the bank forward. The autobiographies of some notable bank chairmen include those from Citi such as Walter Wriston, the legendary Citibank chairman and CEO (1967 to 1984) who saw the world as his battleground and who pushed technological innovation to transform Citibank to become the world’s biggest; and Sandy Weill, a more recent former chairman (1998 to 2006) who is best known for his M&A prowess and for creating the world’s biggest financial services group with the merger of Travelers, which he controlled, and Citicorp in 1998. Jiang also has a set of books on the history of HSBC, a gift from Hong Kong and Shanghai Banking Corp (HSBC) chairman Vincent Cheng, which he has also read. “Citi and HSBC are outstanding banks,” he adds. “They are our good partners as well as competitors.”
It is, therefore, not a surprise to see ICBC stand out among its local peers in the area of technology. Jiang sees technology as vital and a competitive advantage for the bank. Over the past eight years, ICBC has poured close to 5 billion renminbi to modernize its front, middle and back office. “We don’t look at the cost of technology as an expenditure; it is an investment for the future,” he points out. “We have established an extremely robust data processing platform and a huge database. In the second half of 2007, the number of deals processed was around 100 million in a day; during peak periods, the number of deals processed was around 3,000 per second.”
Jiang clearly relishes speaking about the success of ICBC in technology and electronic banking. He points out that in 2007; the 27,000 ATM machines processed some 2.1 billion transactions. ICBC intends to buy and install another 8,000 ATMs in 2008.
The number of transactions undertaken through the electronic banking system is now well over 100 trillion; online banking transactions are now about 90 trillion. “In terms of bank transactions, 37.2% is no longer transacted through the banks. We are coming closer and closer to our objective of transforming ICBC to become ‘the bank at your home’,” he adds.
Tapping new businesses
Jiang’s strong emphasis on technology is also vital to the bank’s push into fee-based activity – critical, if ICBC is to catch up with its international peers in terms of profitability. Fee-based revenue accounts for around 13% of ICBC’s total operating income. In contrast, banks such as Bank of America or Citi regularly report anywhere from 40% to 50%. Part of the gap, of course, is because banks in the West operate on a universal banking basis, which allows them to engage in other activities such as insurance or broker-dealer services, whereas banks in China as of now are barred from this.
In areas where it can now enter, ICBC under Jiang has been expanding aggressively into leasing, mutual funds and private banking. Once the regulations permit, Jiang says that ICBC will also enter the insurance and securities business. “We hope to catch up with our foreign peers in fee income in the next three to five years,” he states.
And ICBC is seeing the early signs of success. Last year, he says, wealth management generated sales of over 1.2 trillion renminbi, a rise of 180% over the previous year. Of that total, sales of mutual funds accounted for 800 billion renminbi. Outstanding credit cards issued increased by 13 million with total annual spending of over 616.2 billion renminbi. “We believe that these areas will continue to grow rapidly and have a bright future,” he notes.
Technological innovation is also vital in strengthening ICBC’s internal controls. Jiang says that among the top banks in China, ICBC has a lead in risk management. “We have a very good credit management system; every single loan is controlled and managed through this system.” ICBC, he says, has now implemented Basel II, adopting the foundation internal ratings-based approach. “The next step is to incorporate the advanced approach, which should be underway shortly,” he adds.
Risk management, Jiang believes, is one of his most important tasks as chairman of the bank. “It is a fundamental issue and certainly one that will affect the overall competitiveness of a bank.” ICBC’s US$1.2 billion exposure to the US subprime crisis, although minimal when compared to its US peers, underscores the need to continually look out for risk management issues. “The subprime crisis has certainly made us focus more on market risks,” he says.
The subprime crisis also focuses the spotlight on Chinese banks such as ICBC and their ability to compete in a more open and far more volatile international marketplace where the rules of engagement could not be more different. The restructuring of the state-owned banks in China in the last decade culminated in the opening of the banking sector in 2006 as required by the country’s accession into the World Trade Organization. ICBC still has a competitive advantage in the domestic market given the sheer scale of its business with about 16,500 domestic branches.
Following the lead of clients
At the same time, however, Chinese companies are beginning to spread their wings and move offshore. Among the Chinese banks, ICBC has been the most active the past year in planting its flag in strategic locations. Becoming the best bank, Jiang explains, is part of the strategy to “follow our clients”. Chinese companies’ recent offshore moves are different from before. “Previously, many of our clients expanded their global network in sales and in procurement,” he explains. “So at that time, ICBC only had to provide foreign exchange services to them within China. Now, more and more of our clients are going overseas to set up factories, subsidiaries and even acquire foreign companies; we are seeing the emergence of Chinese multinationals.”
ICBC has matched the expansion of Chinese enterprises offshore with its own, starting with a US$10 million investment in February 2007 in Indonesia acquiring a 90% stake in Halim Bank, which has since been renamed ICBC Indonesia. After the summer, the pace of acquisitions picked up and in August 2007, ICBC announced that it was paying US$586 million for an 80% stake in the Seng Heng Bank in Macau. But it was in October 2007 that Jiang’s ICBC unequivocally made clear its global aspirations when it signed an agreement with the Standard Bank Group in South Africa to acquire a 20% stake for US$5.46 billion. It was ICBC’s biggest M&A yet and the biggest Chinese investment into Africa.
ICBC has also applied to open branches or subsidiaries in the US, Russia, the Middle East and Australia in a whirlwind of overseas initiatives. It secured the licence in February 2008 to open a branch in Doha, Qatar, becoming the first Chinese bank to open a branch in the Gulf Cooperation Council.
Jiang explains that the push offshore is not just driven by clients going offshore, the internationalization strategy is also aimed at diversifying the bank from its predominant domestic exposure today. ICBC will then be better able to insulate itself from domestic economic cycles and reduce risk. “Within the next few years, our goal is to raise revenues from overseas operations to at least 10% of the total,” he discloses. “Although it may not seem like a lot, it is not going to be an easy target to achieve. ICBC’s domestic business is also growing quite rapidly.”
The rapid growth of the domestic business is not the only reason why it won’t be easy. In the cut-and-thrust world of international banking, ICBC will need to tread carefully. It does not have to look far to understand why. Bank of China, a rival state-owned bank, which is regarded as the most international among the Chinese banks, has had the largest exposure to the subprime meltdown to the tune of US$7.9 billion, the biggest in Asia reported so far.
Jiang, however, is confident that ICBC will be able to execute its overseas expansion successfully. “We have a strong management and a deep bench of senior management talent to carry out and implement these acquisitions. We also have a dedicated department responsible for identifying and executing M&A.”
Jiang says that ICBC is very specific with regard to its offshore M&A efforts, which have to be in line with its banking strategy. For example, it’s M&A activity is concentrated mainly in emerging markets because the growth rates in these markets are likely to be more attractive than in the developed markets. Secondly, he points out that M&A has to also be in line with its commercial objectives especially in meeting the banking needs of its clients going overseas.
In the developed markets, the preferred route is via setting up branches. “The risk is less in these markets and so is the capital exposure,” he adds. “But the pace of growth in these markets is likely to be less. We need to wait for a longer period to achieve our investment return objectives. For some markets, it can take as long as three to four years.”
Testing times to go global
No doubt, ICBC is entering another important phase in its transformation as it strengthens its position as a leading bank in China and takes its place among the world’s most important financial institutions in the future.
The strength of the Chinese market in recent years has certainly boosted its efforts for now. But that is not a given as the Chinese economy becomes more open to the outside world and as competition intensifies. Its push to go offshore is at an early stage and the results of the bold moves will only be seen in the years to come.
But Jiang, having spent the last eight years battling through the reforms and restructuring, is confident that ICBC has mapped out the best strategy which is unique to the bank’s needs. “The health of a person is very much dependent on whether he or she wants to be healthy – building up the body’s immune system. External factors cannot help you nor even doctors; you have to depend on yourself,” Jiang believes. This stoic resolve to blaze his own trail hints at both the confidence and the understanding of the demands of running a large bank in China such as ICBC – balancing between the political and economic expectations. And he may well be in a unique position, not unlike Walter Wriston and Sandy Weill at Citi, to transform ICBC decisively as it enters the brave new world of global banking.
