Go into a big-city state bank and it looks conventional enough by modern standards – big bright space, a big bright digital number sign indicating which customer is up next, big flat screens promoting the latest products, long shiny counters with stacks of forms and, oops, …what are those rows of seats all about?
They are about waiting, it turns out, a finding easily confirmed by the big digital number sign: it has not changed in the last 20 minutes. Then the visitor notices that, while there seem to be ample staff hanging about behind the glass-enclosed counter, only one or two of the seven teller windows are open.
It's not lean and mean in China, as banks have come to know the term in the West – where more customers spend more time with automated tellers than with the old-fashioned people kind. Mainland banks have hundreds of thousands of employees – Agricultural Bank of China (ABC) had over 600,000 at one point, deployed at the bank's 60,000 branches, since cut back.
Industrial and Commercial Bank of China (ICBC) does not have that many staff, but it is China's largest commercial bank and one of the top 10 commercial banks globally in terms of assets. Total assets topped RMB5trn (US$602.41bn) by mid 2003, spread across 22,000 branches in China. At that point it boasted 400m personal accounts and more than 8m corporate accounts. It claims to be "The market leader in all major areas of banking services in China" and at one point ranked 10th largest globally measured by Tier 1 capital.
All very impressive, but then a central bank survey leaked in October told a different story. The People's Bank of China looked at 37 commercial banks in Beijing and rated them for corporate governance, internal risk management, product innovation, staff and management quality.
The big four state banks – ICBC, along with Bank of China, ABC and Construction Bank of China – all ended up at the bottom of the heap. Only one Mainland bank made it in the top 12 (11 others all being foreign) and that was China Merchants Bank – often trumpeted as China's first joint-stock bank.
Since the survey results got out, some Mainland bankers have complained that foreign banks have had it too good, enjoying special privileges domestic players do not have – as one Bank of China senior executive grumbled. And worse was coming, he feared, warning that foreigners now permitted to take minority stakes in Chinese banks could eventually be allowed to take controlling stakes.
The reason, of course, foreign lenders were allowed to buy small stakes in the first place was precisely because regulators sensed state banks were not reforming fast enough to head off full-scale competition in 2006, when offshore banks should be allowed to do anything domestic banks are licensed to do under WTO rules.
Thin edge of the wedge
So in 2002, the China Banking Regulatory Commission tried a variation on the "If-you-can't-beat-'em-join-'em" theme. Instead of maintaining a strict hands-off policy for foreigners, in the hope that state banks could train up as tough high-street fighters, the regulators changed the rules and allowed foreign banks to take minority stakes to get some technology and skill transfer going. The sure alternative, they felt, was to watch foreign banks, then allowed in on a piecemeal basis, gradually cream off the best customers, corporate and private, leaving the hapless state monoliths with the dregs.
Certainly, foreign participation promises to fix gaps Chinese banks have in abundance – transparency, risk management, product development, customer service and so on. Another upgrade driver will be the imperative to restructure, as state banks aggressively pursue planned public listings.
Only comparatively recently pulled from a sea of non-performing loans by government bailouts – state lenders were allowed to off-load bad assets onto new asset management companies – banks have been running up new NPLs – even in new businesses relatively unscarred by past practice, like car loans. According to state media, auto-related NPLs were running as high as 30% at some banks by mid year.
With auto-sales growth down sharply (from very high levels), carmakers have been trying to cut inventories back by price slashing, inducing a sizeable portion of new car owners to stop paying off loans for vehicles they bought at higher prices. The emergence of a credit bureau system, which will track customer borrowing activity nationwide, should eventually help contain the problem on the consumer side. (No surprise, the biggest bureau booster is foreign, Standard Chartered Bank, which depends on credit cards for the biggest portion of revenue.)
But the car loan problem provides a vivid example of how a situation can get out of hand so quickly in China. Only in China could an auto market register lightning year-on-year growth of 76%, as it did in 2003 – after a whopping 50% increase the year before.
As foreign institutions move in and buy stakes (as HSBC has been doing more aggressively, recently acquiring a near 20% of Bank of Communications after its first foray two years ago when it bought an 8% stake in Shanghai Development Bank), these Mainland banks should score higher on PBOC's next performance rating.
But what happens when HSBC, Citibank and others are allowed to be full players in 2006? Will HSBC simply take control of their Mainland assets and fold them into a much enlarged China network, or hold onto the assets as additional storefronts for their products and services? Or perhaps get into asset trading, first building up their properties and then selling them, as private equity firm Newbridge Capital plans to do with Shenzhen Development Bank?
The rules on foreign stake holdings have to be loosened before that question can be definitively answered, but before we get there, count on more state banks, like fifth-largest Bank of Communications, developing partnerships with foreign players. That PBOC competition is starting to look like serious business.
Despite their lousy ratings on the PBOC's Beijing performance scorecard, the big four all reported rising profits in the first nine months of this year. China Construction Bank (CCB) reported a 21.5% increase in operating profit in the year to end-September, RMB49.94bn (US$6.1bn) – not bad considering it appears closest of the four to an IPO. But the happy story comes with a huge footnote: The big event of 2003 for CCB was splitting a US$45bn government bailout with Bank of China. With all the talk about its impending share offer, management had to warn prospective shareholders that they could not count on that happening again.
Earnings at the unbailed-out Industrial and Commercial Bank year-on-year grew by exactly the same percentage over the period, to RMB57.9bn (US$6.98bn). But with no handouts from Beijing, its NPLs stood at nearly 20% of its loan book.
Given the government's efforts to cool the economy, forcing lending to taper off, full-year numbers were expected to go down accordingly. But analysts worried more about what would go up. With the boom in lending that marked the first half of the year, NPLs seemed sure to rise. Plus ca change….