As banking deals go, Taiwan financial services provider Chinatrust advising on China Merchants Bank’s (CMB) nascent credit card operation was hardly a barnstormer. Yet this partnership, sealed at the start of the decade, is the closest a foreign investor has come to playing a direct role in China’s most dynamic retail banking operation.
While almost every other bank in the country has brought on-board overseas investors as part of restructuring plans, CMB has resisted.
“The bank has always been run based on the rules and practices of a real shareholding commercial bank,” said Tang Zhihong, executive vice-president responsible for retail banking at CMB.
“We had already accumulated a great deal of experience along the lines of real commercial banking as practiced overseas so we didn’t bring in any foreign strategic investors ahead of our IPO [which raised US$2.66 billion last September].”
With its rivals busy cleaning up their finances in recent years, CMB has enjoyed a relatively clear run at the retail market. Now, though, foreign and domestic banks are muscling in on the territory. China’s small segment of high-net worth clients are spoiled for choice: Credit cards and wealth management services are being pitched at them from all directions.
Competition is growing but CMB can draw strength from the fact that the seeds of its success were planted long ago.
As early as the 1980s, it was tracking consumer banking developments in Hong Kong. It studied the products offered and, riding the development wave that came when its home city of Shenzhen was named a special economic zone, tailored its own services accordingly.
Consequently, retail deposits stand at 39% of total deposits, trailing only the Big Four state banks. Also, while Industrial and Commercial Bank of China has 18,000 branches to CMB’s 500, CMB focuses heavily on wealthier urban areas.
Tang describes the bank’s typical client as “rich, young and white collar.”
This retail strategy saw CMB emerge as a pioneer in both debit cards (40 million issued as of the end of March) and credit cards (13 million issued in March). New credit card issues in the first five months of 2007 exceeded the total number issued in 2006.
“Compared to other Chinese banks, it does not come out as the best on every parameter. But what is unique about CMB is that is comes towards the top in all areas,” said Charlene Chu, director of the Fitch Ratings financial institutions team in Beijing. “CMB is smaller and more nimble than other banks, which means it can adjust more easily in the operating environment.”
Perhaps this is best illustrated by the fact that CMB didn’t actually have its own heaquarters building until 2001. Now, home is a multistory office building in Shenzhen but when things first started in 1987, the first piece of property the bank spent money on was a base for its IT department.
Without this early investment in technology – and the internet banking platform that sprang from it – Tang doesn’t believe the bank would be where it is today.
“We have been limited in expanding our branch network due to the regulator’s slow approvals process,” he said. “CMB ranks sixth in terms of total assets. However, in terms of transaction volume carried out on the internet, we rank second. Without the development of internet banking, it would be very difficult for CMB to become the sixth-largest bank in the country.”
CMB’s e-banking service, first launched nationwide in 2000, accounts for 20% of the internet banking market. Transaction volume for the first five months of the year came to US$59.5 billion, equivalent to the full-year figure for 2006. A similar level of effort goes into telephone banking, which is consists of a call center in Shenzhen and a credit card call center in Shanghai.
“Our internet and phone banking services offer almost all the retail banking functions: money transfers, remittances, stocks and mutual funds, utility bill and tax payment functions,” said Tang. “Our system is better than that of some foreign banks.”
A key contributing factor to this high level of service is what Yan Meizhi, senior credit officer at Moody’s in Hong Kong, describes as a very positive corporate culture – something she doesn’t see so much at other banks.
“The biggest banks are still full of government bureaucrats who don’t care about making money. Their attitude is that they are doing a favor for their clients. It is a totally different mindset [from CMB].”
Yet CMB’s strong workforce makes for rich pickings in a market where good bankers are in short supply.
In the last few months, HSBC, Citigroup, Standard Chartered and Bank of East Asia have received licenses to run full retail banking operations in China and all have unveiled ambitious expansion strategies. Thousands of staff are required, and this doesn’t take into account the needs of domestic lenders.
“CMB is losing people to its competitors, with both foreign and domestic rivals hiring away staff,” said Yan.
In response, CMB has bumped up pay scales and is paying more attention to the needs of its staff but Tang accepts that these efforts can only go so far.
“CMB’s credit card center has become like the West Point Military Academy for Chinese banks. If they want to develop a credit card business, they have to visit our center. But this also means that our employees have become the most important people in the headhunter market.”
Key positions in the credit card and retail banking divisions at CMB are already occupied by experienced staff from Taiwan, Hong Kong and Singapore. Tang said the bank would also look to recruit from abroad as it expands its private banking department.
The focus on private banking and wealth management services is common to all Chinese banks as they try to widen their non-interest income bases.
“Now the banking system has been largely cleaned up, banks have to focus on their profitability,” said Chu. “Banks that don’t diversify into new areas will have to rely on the traditional lending business.”
In May, CMB received initial approval to become the largest shareholder in China Merchants Fund Management (CMFM). It is now waiting for the state asset regulator to give the greenlight.
“The fund can use the bank as a point of sale, with the branch offices as distribution channels,” said Yan. “The bank can also get custodian business, which adds diversity to its revenue streams.”
CMFM has already worked with CMB on a number of the bank’s wealth management products but Tang is keen to point out that talks on integrating the two companies are still at an early stage.
Nevertheless, he is optimistic about the prospects for the partnership and how it fits into CMB’s wider efforts to continue innovating.
“It is important for CMB to carry on developing as the foreign banks build up their experience in China and the domestic banks make their internal changes. We have to keep changing earlier than the others and it is upon this that our success or failure will be decided.”
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