CEIBS 6th Annual China Bankers Forum Explores "The Transformation of Banking Models"

Sep 10, 2012, 11:43 ET from China Europe International Business School

BEIJING, Sept. 10, 2012 /PRNewswire/ -- The impact of globalization on China's banking sector, the need to transform based on the lessons of the most recent crises, the role that technology will play in that transformation and the advantages of universal banking were among the topics high on the agenda during the first half of today's 6th Annual China Bankers Forum 2012. Hosted by the China Europe International Business School (CEIBS) and Caijing, the event explored the broad theme of "The Transformation of Banking Models". The second half of the day explored issues such as the internationalization of both China's banking industry and the RMB, and the role of private finance in providing loans to small- and medium-sized businesses, along with a look at the ground-breaking financial reforms currently being piloted in Wenzhou.

During the morning session IMF Deputy Managing Director Zhu Min, in his keynote speech, made the point that 80% of the fluctuations in domestic banks are now influenced by global movements, a recent and significant change brought on by globalization. There are also increased linkages between the stock markets across five continents with the correlation between Latin American and Asian markets increasing from 40% eleven years ago to 82% today. "Changes in the global market sometimes have an even bigger impact on the balance sheet of domestic banks," Zhu said to an audience of about 300 from the banking industry and the media, citing findings from recent research. Before the financial crisis of 2008, he added, external shock had a 30% impact on emerging markets. Today, the impact has doubled to 60%. For developed economies, the increase was from 30% to 40%. "This means the impact of external shock on fluctuation in domestic markets has greater influence. Global competition and fluctuation are key challenges for bankers these days. So they need to pay attention to the trends, see where they are vulnerable to global changes and figure out how to operate both domestically and globally," he said.

China Merchants Bank, according to Executive Director, President and CEO, Ma Weihua is well aware of the challenges it faces as a result of both domestic and external changes and is looking towards technological advances to help it better serve clients' needs and maintain a healthy balance sheet. Ma was one of the speakers in session one, and explored the topic of "Challenges and Opportunities in Transforming China's Banking Sector". "There will be explosive growth in mobile payments in the next few years and we will need collaboration between IT and banking," he said. "Now, 90% of our business is done via the internet. We don't have as many outlets as big banks but with technology we can grow very fast."

One of their goals is to become China's first bank to eliminate physical credit cards by combining their use with functions on mobile phones. This is a long way from the early days when skeptics doubted whether China Merchants Bank could make the credit card business profitable in a country where consumers tend to shun debt. On the contrary, Ma said, the credit card business has proven to be very profitable, especially with younger consumers. China Merchants Bank knows how important it is to keep transforming in order to meet consumers' needs. Transformation is vital in order to maintain profitability, he said, especially with changes in the banking landscape. In addition to changing consumer needs, he cited the economic slowdown – which has naturally impacted the banking sector – increased competition from other non-financial players, as well as interest rate changes which have eaten into Chinese banks' profits. "In the past we had more than 3% interest rate spread. Today, (with the changes) clients don't want to put money in banks," he noted. "In the future, deposits will be less important, the revenue model for China's banks is changing. Banks will have to make money differently than they did in the past."

The changing landscape was also strongly emphasised by Managing Director of Financial Services Asia Pacific, Accenture Sushil Saluja. He shared his views on "New Explorations on the Universal Banking Model", telling the audience that Chinese banks that wish to remain profitable can learn a lot from the recent crises, enough to leapfrog their international peers. He suggested that Chinese banks:

  • meet clients' immediate needs and also provide them with more complex offerings,
  • focus on credit risk,
  • appreciate the importance of capital strength and the impact of Basel 3 and other recent regulatory changes,
  • invest in and leverage digital technology,
  • and focus on increased efficiency and agility, while being selective about their approach and speed of expansion both regionally and domestically.

In his address, Chief Executive Officer for Asia Pacific, BNP Paribas Eric Raynaud came out solidly on the side of universal banking as the way forward for China's banking industry. His topic was "The Development of International Universal Banking System and Its Implications on China's Commercial Banks". Citing what he said was the IMF's argument that the recent crisis could not be blamed on any specific banking model, he said he was convinced that universal banking is the business model that offers the best synergies and services to the economy. "It's wrong to see universal banking as part of the cause of the crisis," he argued. "On the contrary, balanced diversification represents a key stability factor; universal banks have a unique capacity to absorb external shock better than specialised entities can." Specialised institutions, he added, had been most severely affected by the crisis because of their heavy reliance on the wholesale market for funding. Raynaud stressed, however, that diversification has to be paired with risk management that takes a global view and excellent corporate governance.

At this stage of China's reform of its banking sector, he said, universal banking provides the following advantages:

  • economies of scale, resource optimisation and scope which is especially valuable for a country going through internationalisation, and companies going global;
  • and diversification in the system as it will expand the scope of products and provide additional revenue for banks at a time when interest rate liberalization has put some pressure on rate spreads.

"China will continue to surprise us in the next 10 years as it did in the last 30. Universal banking is one of the models China should push; it would meet needs of individuals and institutional clients," Raynaud said in closing, stressing the importance of combining this approach with strong and unified risk management, solid corporate governance, and adequate supervision.

Today's forum was held against the backdrop of the ongoing European debt crisis which has plunged the global economy into even more treacherous waters than the sub-prime mortgage crisis. The international banking industry – the backbone of the financial system – is now under even greater pressure to re-examine its business models, further adjust regulatory standards, strengthen regional coordination and cooperation and improve the governance structure of banks in order to improve risk management.

Though limited exposure to the international market has insulated the Chinese banking sector from these crises, Chinese banks still face many challenges. How can they effectively seize opportunities to strategically promote internationalization? How will the cross sector regulatory system keep pace with the accelerated transformation of business models and increasingly diversified banking activities? Will the pilot financial reform program in Wenzhou, the first of its kind to standardize and develop private finance in China, be a new starting point for the Chinese banking sector? These were among the issues explored at today's event, co-organized by CEIBS Lujiazui International Finance Research Centre, where experts on finance and economy as well as industry professionals provided their views on the current state of the domestic and global banking sectors and offered insights into the future development of the Chinese banking sector.

Throughout the second half of the day, speakers examined the internationalization of both China's banking industry and the RMB, and the role of private finance in providing loans to small- and medium-sized businesses, along with a look at the ground-breaking financial reforms currently being piloted in Wenzhou.

During his presentation, "Internationalization of the Banking Industry," Dr. Wang Yongli, Executive Director and Vice President of the Bank of China, said that while Chinese banks may currently enjoy many favorable conditions for globalization, such as China's large foreign exchange reserve and the internationalization of the RMB, they need to carefully consider their strategies and goals for going abroad. "Don't just go global for the sake of going global," Wang said. "Chinese banks and Chinese companies need to globalize but while we are globalizing, we are actually relying on the growth of China. The ability of China to further improve its systems will also have an influence on the capabilities of Chinese banks in the global market."

Dr. Wang also cautioned that Chinese banks face many challenges in going abroad, including the political, legal, regulatory and tax requirements of foreign countries, as well as exchange rate risks and cultural differences. He also said banks need to be clear about their global business models and market positioning. If they are simply looking to provide services abroad for Chinese customers they just need to set branches according to customer needs, a model which is low cost and easier to control. If their aim is to be a player or a leader in a market then they need to look at acquiring banks in that market, which leads to considerations of whether the acquisition will be approved by local regulators. They must also consider whether they want to be a commercial bank, or pursue other activities such as investment banking, which requires a location in a country's financial centre.

Prof. Ba Shusong, Deputy Director General of the Financial Research Institute, Development Research Centre of the State Council, said regulatory constraints have made for slow progress towards internationalization for Chinese banks, leading many financial institutions to move to overseas markets to obtain licenses for international banking services. The banks can then break through the regulatory constraints by using those licenses in the Chinese market, which is one reason why almost all big banks in China have similar subsidiaries in Hong Kong, as they can more easily obtain asset management and other licenses there. Speaking on "A Review of China's Path of Internationalization after its WTO Entry and Future Prospects", Prof. Ba said that lately Chinese banks are taking more diverse approaches to internationalization. Many are using M&A to expand. He cited ICBC's recent ground-breaking acquisition of the US subsidiary of the Bank of East Asia, which was the first time the US Federal Reserve approved the acquisition of a US bank by a Chinese institution. The move gives ICBC a foothold in the US market. Ba said that internationalization has also included the overseas listings of Chinese banks. "It's not just about raising money," he said. "After being listed Chinese banks must set up good corporate governance and financial disclosure and transparency."

China's internationalizing banks have also benefited banks in Hong Kong. Dorothy Kwan, Vice-Chairwoman and Chief Executive of Hang Seng Bank (China) Ltd. spoke about "The Role of the Hong Kong Banking Industry in the Advancement of RMB Internationalization". She says there is currently a large RMB capital pool in Hong Kong and that the next step will be to ensure the smooth distribution and usage of this capital. The dim sum bonds that were first issued in Hong Kong in 2009 have led to a more diversified market, and the establishment of RODI, RFDI and RQFII have made it possible for the RMB to flow both in and out of China. Though she expects Hong Kong will continue to play a pioneering role the RMB's internationalization, Singapore and London are also interested in becoming offshore RMB clearance centers. The RMB's internationalization has led to many new opportunities for her Hong Kong-based bank. For example Hang Seng now provides RMB cross border transactions for various sized enterprises. She said Hang Seng was the first to provide favorable RMB lending interest rates and the first to provide RMB syndicated loans. She believes Hong Kong will continue to play a pioneering role in the currency's internationalization.

Regulation and Development of Private Finance was the topic of session three. Domestic banking innovation was the topic of Dr. Gao Shuzhen's presentation on "Development Opportunities for Small- and Medium- sized Banks during the Opening-up of Private Finance." The President of Harbin Bank she talked about how, faced with many non performing assets and bad debts, Harbin Bank nearly became insolvent. By directing its focus solely to microfinance, it was able to turn its business around. The bank had 258 billion yuan in total assets by the end of June this year, and it was ranked #5 in competitive edge among banks of the same category. "We believe small is beautiful," Dr. Gao said. Harbin Bank was one of the first microfinance banks in China, and continues to build on its early-mover advantage. Dr. Gao said the bank's unique IT and R&D systems for risk management and information technology have helped it lower costs and better evaluate the creditworthiness of customers. "Different banks have different starting points," she said. "Thinking of how to lower costs and improve quality of assets is the key."

CEIBS Professor of Economics and Finance Xu Xiaonian spoke about "Deregulate and Enhance the Vigor of Finance" and shared his views on how the market can help financial regulators to mitigate risks. John H. Boyd, Minnesota Banking Industry Chair Professor, Carlson School, University of Minnesota, presented a history of the shadow banking industry in the US which triggered the sub-prime loan crisis that led to the global financial crisis in 2008.

The ground-breaking pilot finance reform program in Wenzhou was the topic of the presentation by Mr. Zhu Zhongming, Member of the Standing Committee of CPC Wenzhou Municipal Committee, Deputy Secretary, Leading Party Members' Group of Wenzhou Municipal Government. Zhu said that a dynamic private finance system can be a source of creativity and innovation for small- and medium-sized businesses (SMEs) that are ineligible for loans from large commercial banks. Private finance accounts for 99% of the loans made to SMEs in Wenzhou, he said, and loans to micro businesses there account for 24% of all financing. Zhu said the Wenzhou government estimates that in 2011 as of the end of August were 120 billion RMB worth of private loans in Wenzhou. The sources of funding are diverse, and include households and businesses who loan out their own savings, as well as those who take out bank loans to invest. He says Wenzhou estimates about 30% of private finance originates with a bank loan.

However there are risks to such lending as there are no legal protections, no regulation or supervision. Illegal financial activities may occur as private lenders seek to make a profit. Also, many investors don't have the expertise needed to properly evaluate the risks of their loans.

Zhu said Wenzhou's pilot program seeks to establish a path to guide private finance into channels where it can be most useful, and to balance development with risk management. It is focused on three areas:

  • increasing investment channels for private finance,
  • introducing private money into banking institutions, including allowing private companies to be the main sponsor in the establishment of rural institutions,
  • providing ways to convert private money into industrial money.

The pilot program has also made steps towards a legal and regulatory framework for private finance including:

  • the establishment of a private loan registration service center,
  • facilitation of direct lending from one private party to another,
  • developing a monitoring system for private financing to monitor and disclose interest rates, tenure and maturity,
  • and improving platforms for credit services and transparency.

SOURCE China Europe International Business School