Interview: “ICBC China incoming chairman Yi Huiman hints at broad organisational restructuring to strengthen risk and controls”

The following is the full transcript of the interview with Yi Huiman, the incoming chairman of the Industrial and Commercial Bank of China (ICBC China) in a first interview given to any media with Emmanuel Daniel, chairman and editor-in-chief of The Asian Banker on 30 May 2016 on the day before the board approved Yi as chairman of the largest bank in the world.

ICBC China is the world’s largest bank with more than $3 trillion in assets, 490 million retail customers, 20,000 branches and 400,000 employees.

In a wide ranging interview, Yi outlined his priorities for the bank, based on its own 3-year plan, but also outlined his own focus on reorganising the bank and strengthening the balance sheet.

Features of the interview include:

• He insists that the bank is amply able to manage its lending exposure to State-owned Enterprises (SOEs) and rising non-performing loans
• He hinted an organisational restructuring to take place within ICBC to streamline risk based decision making in the 20,000 branch, 400,000 employee and 4.9 million customer bank
• He outlined his focus on specific business lines to strengthen the quality and diversity of the bank’s balance sheet
• He emphasized that there will be no let-up in growing the bank even larger in the future, albeit with stronger liabilities and fee income.

Emmanuel Daniel (ED): The Asian Banker has had a long relationship with Industrial and Commercial Bank of China (ICBC) dating back to 2003, when Jiang Jianqing became chairman. This was long before the IPO or any of the major banks in China.

Yi Huiman (YHM): First of all, a warm welcome to you. We know that you are an old friend with a lot of communication with ICBC. Today, 30 May 2016, is very special in terms of timing.

Key achievements of ICBC

There are three key achievements of ICBC under the leadership of Jiang. First, during the past 10 years, ICBC has garnered many achievements. We measure ourselves against our global peers using international performance indicators. This has been possible because ICBC and the Chinese banking industry have benefited from the opening up of China’s economy. All of my colleagues have participated in this process in the last 10 years. Since the IPO, we have transformed ourselves from a state-owned commercial bank to an international bank. We also play by the rules of international commercial banking and we are trying to play it well.

Second, under the leadership of Jiang Jianqing, the bank has continuously reformed its business operating model and innovated on the way it controls and manages risks. The major change since the IPO is on risk control and management at the conceptual and business application levels. Banking is a high-risk business and the management of risks is of the highest priority for the bank. We try to apply international risk management know-how and tools to manage our risks. ICBC has performed well in managing its risks in the last 10 years.

Thirdly, in the past 10 years, the bank has shifted and continuously reformed its business model to make innovations to its business operations. In the past, we relied mainly on interest income and maintaining our net interest margins. We are trying to diversify our business and product lines, and have been very successful in cultivating greater diversity in our revenue-contributing business units.

In the past, we have also been a bank that held a lot of assets, but now we are trying to more rationally manage these assets. By so doing, we hope that the different business units will continue to contribute to the bank’s performance. I trust that when you compare the annual results of the bank before and after IPO in the last 10 years, it will impress you even more.

Misconceptions on non-performing loans

ED: From a global perspective, the story of the bank’s progress that you have just explained is not very well understood. One aspect, for example, is the nonperforming loans climate in China. International markets are very concerned about the relationship between the big four banks and state-owned enterprises (SOEs).

In covering the way you will drive your strategy, some of these aspects will have to be clarified. Being a research publication, which tracks banks from an operational point of view, we are very impressed with your cost-to-income ratio. It is actually one of the lowest for a bank of your size. On the other hand, it is also very interesting that your contribution of fees to total income has a lot of potential to increase further. Looking at the growth of your retail business, we are very interested to know how you are going to keep up with the competition that has been increasing.

A number of smaller Chinese banks have raised the contribution of fees to their total income, but largely by setting up trust companies and from shadow banking, which is not necessarily healthy. We notice that in your top line numbers you have avoided some of these mistakes.

YHM: The concern about asset quality and bad debt in the Chinese banking industry is an issue that has attracted global attention, and people are overly pessimistic about that. They have a different understanding of what the Chinese banking industry is going through and the direction of China’s macroeconomic development in the future.

We also understand that because of this pessimistic attitude of the external world toward the Chinese economy and Chinese banks, currently the bank’s P/E ratio and price to book ratio are a reflection of market sentiments. That pessimistic attitude is neither precise nor rational. Each and every economy around the world will have to experience and endure different cycles. Each will experience ups and downs.

Ever since I started to work at the headquarters of ICBC, I have noticed that people are continuously having a pessimistic attitude about the Chinese economy. However, the current gross domestic product (GDP) growth rate of China still stands at 6.7%. This is not a low level compared to other countries around the world.

Moreover, compared to its global peers, the NPLs of Chinese banks is at a relatively low level—about 1.75% as released by the CBRC (China Banking Regulatory Commission), and the NPLs for ICBC is around 1.66% as at the end of 1Q 2016.

In terms of profit making, in the past three years, although the bank has not grown as fast, we are still making $42 billion every year. Coverage ratio for nonperforming loans in 2015 stood at 156% with a total size of RMB270–280 billion ($41-42.5 billion).

ED: But has your coverage ratio dropped slightly this year, 2016?

YHM: Yes we dropped slightly. The average ratio in other countries globally is between 60% and 80%. Last year, we achieved RMB40 billion ($6 billion) net profit after we wrote off RMB60 billion ($12 billion) bad loans. This year we are trying to use RMB80 billion ($12 billion) to write off our bad loans and by doing that we will be able to mobilise about RMB240 billion ($36 billion) of assets or credit loans, which accounts for only 2% of our total loans assets of RMB12 trillion ($182 billion) And if each and every year we have mobilised RMB240 billion ($36 billion) of bad loans or bad assets, in five years we can mobilise over RMB1.2 trillion ($182 billion).

Based on data, we can come to four conclusions. First, we consider all the risks to be no more than a result of the economic cycle. Second, our risks are no different than that of other Chinese banks. I think ICBC is able to digest all of these. We expect these risks to be controllable in the future.

Balancing the bank–SOE–government triumvirate

ED: Your capacity to deal with your NPL is of no question at all, by the standards of any other country in the world. But I think that what the world is more interested to know is on the relationship between the big banks and the state-owned enterprises (SOEs) and with the government. Here, the real story is not in the numbers but actually in the governance. Setting aside funds to write down bad loans is a very good move. Securitisation is also another option. But it's the governance structure and decision making process that will determine if you be dealing with the issues sustainably at all.

This is not to say I am unimpressed on the governance structure as it stands today on the eve of your appointment as chairman. Actually I'm very impressed that you came from within the bank, and that within ICBC, there is a strong professional management team at the top, which was not appointed into the bank by policy makers, but grew from within the bank.

YHM: I agree that people are more concerned about the relation between the banks, the SOEs, and the government. I think the question that has to be asked is whether or not a commercial bank in China has the right to run itself.

We do admit that the next few years will be tough years and that there will be challenges.I think the biggest misunderstanding of the external world about commercial banks in China is that commercial banks in China are instructed by the Chinese government, and that the government is included in the decision making. Actually in 1995, China launched the law on commercial banking, which states that a commercial bank has the right to run itself as a commercial entity and to be responsible for its own risks.

I think that the Chinese government currently respects that initial right of commercial banks in China, because I myself have been the head of a provincial branch and the head of headquarters for the past 15–16 years. And I have noticed that since 1995, there has been little to no intervention in the commercial lending decision making of a commercial bank by the government.

Now, perhaps people are going to ask next, why is a commercial bank in China trying to lend a lot to SOEs? Is this under the instruction of the Chinese government or not? I think that this phenomenon has to do with the institutional arrangements in China. In the past three decades of reform and opening up, the Chinese government tried to further improve infrastructure in the country. For instance, to build more high-speed railways, many infrastructure construction programs were initiated by the government. Largely because we have that mechanism, infrastructure construction in China is doing well. The debt ratio of the Chinese government is relatively low compared to other countries around the world.

Another concern about SOEs is that people may think that SOEs enjoy a preferred lending rate from the banks, when actually we provide the same lending rate to both SOEs and private business. Also, the loans of ICBC to SOEs is continuously being reduced. Currently, SOEs and SPVs (Special Purpose Vehicles) backed by government account for a 30% of our loan mixture. We have greatly reduced the portfolio because we noticed that the Chinese government is also trying to reorganise the SOEs, trying to get some of the SOEs to be listed, and encourage modern corporate governance therefore our lending position will be dictated by these market decisions.

As to your question about shadow banking in China, the Chinese government is keeping a close eye on that. The elite are well educated and have the know-how to deal with this, or China cannot achieve its progress today. What is very important about the financial sector developments in China is that as long as the issue receives emphasis from the government, it will be properly addressed. In recent years, the authorities have been trying to better understand and keep a closer watch over trust companies, and asset management as a new form of finance.

Reimagining ICBC

ED: The most important question I have for you is, "What priorities have you given yourself as you enter your new role? What are the top 3–5 most important goals you've given yourself?"

YHM: Through the years, we have been a well-planned bank. We have our 10-year strategy and a 3-year plan, and our business operation follows that strategy and plans. In the past years, we have given priority to the following, and these priorities will still continue in the future, namely, to develop our retail banking business, asset management business, as well as investment banking business; and to use information technology to further boost our bank's business development.

We are also aware of the tragedies caused by climate change on the external environment, and along with other issues that I'm going to consider, such as how we will further address new customer demand.

For instance, in our retail banking business, currently we have about 500 million retail banking clients. People who were born in the 1980s and 1990s are now becoming consumers in society. Because this young generation is not inclined to go to the physical outlets of the bank, the bank has to change itself to continue meeting the needs of these clients, otherwise we will lose them.

ED: What is your opinion on nonbanks in this business? And what is your opinion on nonbanks using technology to compete with you in this area?

YHM: Banks will try to learn some of the advantages of these nonbanks. We do not think they will cause a fundamental or major challenge to us. In the future, the bank will try to make its services more open, more accessible, more intelligent. I think all those need to be done in order to satisfy the needs of these young clients. We have to transform our traditional banking model.

ED: In this regard, I am curious, what is your personal management style?

YHM: Our management style will also have to be changed to be able to meet the new needs of the clients. As mentioned earlier, the bank will further strengthen its risk control and risk management to become more competitive in the changing global and Chinese economy. We will have to apply more big data and information technology to further improve our risk monitoring and risk control. This whole process will have to be modified and updated so that we will be able to effectively control risk.

ED: In our assessment of ICBC, we noticed that you control your risk very well within China, but we're very curious about your risk management controls outside China. You are highly exposed to new countries and recently, you have some operational risk problems in places like Spain, for example. What is your opinion about the risks that comes from outside the country?

YHM: It is true that ICBC is experiencing rapid growth in its overseas market, and we consider our risk control in overseas markets as doing well in relation to our business growth, except for the Spanish case, which is a separate issue. The bank will have to position itself carefully. The overseas market head will have to decide which businesses we are going to focus on and which businesses we are going to avoid.

Also, we are sharpening our client strategy because the type of client you choose decides what kind of risk you are going to manage. Currently, in the overseas market, ICBC focuses on meeting the needs of two types of clients: the global Chinese enterprises, and the better-qualified domestic clients in the countries we operate. We will also try to abide by the regulatory requirements of both China and the host countries of our business.

Strengthening the organisation

ED: What did Spain teach you?

YHM: The bank is drawing three lessons from the Spanish incident. One, the Spanish incident will encourage the bank to further strengthen its AML procedures and to further improve our compliance capability. Our second lesson is the bank should try to further study country risks in its internationalisation steps, though we will not say much about the Spanish incident for now, as it is still ongoing. The third lesson is we are thinking of further improving or modifying the organisational structure of the bank.

Like all other Chinese banks, ICBC has a five-tier structure. We have a headquarters, and we have four tiers of branches and sub-branches under headquarters. These five tiers will also to some degree reduce the enforcement of the group's strategies. This structure may be relatively competitive depending on the quality of the economic environment. If the economy takes a downturn, ICBC might try to modify or enrich this organisational structure, and make us able to achieve our growth strategies more effective.

For that purpose, the bank may reclassify its businesses. We will have our branches or outlets conduct the relatively simple businesses, but we will have a flat decision making for the relatively complex businesses. In that way, we will be able to further improve ourselves no matter the business climate.

The fourth goal of mine is, in the future, we will try to build more profit-contributing units to further improve and rationalise the profit-making model of the bank.

Earlier, I mentioned that the bank has to innovate, so it has dedicated itself to the changing needs of its 500 million regional clients. We have also noticed the changing needs of our more than 5 million corporate clients. In the past, corporate clients had traditional needs like opening an account or getting bank loans.

At present we provide a package of financial services to these corporate clients like capital markets, equity financing, global markets, as well as forex. As the bank may fall short in understanding corporate clients, in the future we will have to better understand their needs so that the services and products provided by the bank are market-leading. This is also the core philosophy in building our profit-making units. If we cannot succeed in that, then it will be very difficult for us to keep and build on our corporate plans in the long run.

ED: Actually, previously we've never heard of your strategy for corporate clients. Chinese corporates used to be the low-cost manufacturers of the world, but today they are going up the value chain. And we don't know if Chinese banks are meeting that need in a sensible way.

YHM: Just yesterday, one of our corporate clients in Guangdong acquired a European company, and the total amount of that project was $5 billion. Many western and Chinese banks are bidding and competing to provide services for that project, but ICBC finally won by virtue of our package of services and the client’s satisfaction with us. That is a very successful example.

We also focus on the innovation and transformation of ICBC's corporate banking business. As I understand, currently, the loans to corporate clients at ICBC account for less than one-third, and the remaining two-thirds is provided to corporate clients in other forms of services.

Currently, ICBC does not have a banking license for investment banking. However, in 2015, we earned more than $18.1 billion in our investment banking business, which technically makes us the largest investment bank in China.

Also in 2015, ICBC was number one in terms of mergers and acquisitions overseas. ICBC is the bank that provides the most services for the overseas mergers and acquisitions for Chinese companies. Currently, the staff engaged in our western banking business numbers more than 1,000. This number includes the staff working in Hong Kong.

Balancing an asset-heavy balance sheet

ED: Yes, but you achieved a lot of this by putting these businesses on your balance sheet. Your balance sheet shows that you are asset-heavy. It means you got strong through your very large asset book. Is that wise? What will the balance sheet of the bank look like in three years’ time?

YHM: Indeed, ICBC is already the largest in assets and getting bigger in the future might incur more risk and might consume more of our capital. If the bank is too big to manage, that will present a major problem. However, Chinese banks are different from western banks in that there are a lot of changes taking place on the liabilities side of our business. Currently, more and more retail banking customers are trying to do wealth management instead of deposit. Last year, about a third of our personal banking clients did wealth management and the rest opted for deposits.

We also see an imbalance between the growth in assets and the size of liabilities. Currently, ICBC has RMB12 trillion ($1.8 trillion) in credit assets, but only 4% of which can be secured, securitised.

We will further reduce the rate at which we grow our assets and certainly, we will also try to cut the growth of our credit assets as a component of our total assets.

Nevertheless, total size is not our immediate concern. We will try to keep a closer eye on the quality and structure of our assets, by striking a balance between the total size of assets, the structured assets, and the efficiency of assets, as well as the risk control. We will try our best to do that.

ED: As you are already one of the biggest banks in the world by being asset-heavy, the only way to grow the asset, and to manage that, is to grow the liabilities side as well. But that will also keep on making you a bigger and bigger bank. Do you have any program to reduce the asset concentration of the bank? Is being big important?

YHM: We do not consider that issue challenging because we think that in the future, the rate of increase of assets will be controlled. It is true that the total assets of the bank will continue to grow; however, we are also aware that the mixture of our assets will also greatly shift in the future because we see liberalisation of the interest rate.

Gradually, the financing structure is bound to change with the increase in the total amount of assets. The increase in the country’s capital and bond markets and further diversification of household’s asset allocation will all be reflected on the balance sheet of the bank. As long as we are able to control our risk-based assets, the rest will be controllable.

Future directions

ED: For a global bank, the contribution of fees to your total income is low, relative to other banks in China and elsewhere. Isn't there a temptation to grow the asset management and investment banking business?

YHM: Currently, fee and commission incomes account for a quarter of the bank’s total income. This is actually in correspondence with the current development stage of the Chinese economy. Interest income for us will be above 50%; for fee and commission income, less than 30%.

There are two major differences between us and western banks. The first is insurance income. Insurance income in some financial institutions can be accounted for as noninterest income in other countries. But in China, it is not. Another pertains to securitisation of assets. Western banks further promote the securitisation of assets, then in the balance sheet, assets will be reduced and our balance sheet will grow, and will contribute to more fee income.

Unless there are major changes in the currency climate, or if there will be further major developments in securitisation, or comprehensive development of the banking sector, it will be very difficult for us to further improve the portion of the fee and commission income.

ED: In this regard, is a low-inflation environment good for you, if your focus is so asset centric? There is an important story to tell in your strategy of steering this very big ship. On the liabilities side however, competing for customer base, you actually have to think like any small bank. You need to be nimble and fast. Could you expound more on your strategy on the liabilities side of your business?

YHM: As I have mentioned, our priorities are to further develop our asset management, investment banking, and regional banking. We want to make ICBC into a major bank in these areas. Actually, it is our clients who sits behind the liabilities side of our business. If you want to improve, increase your liabilities, you have to increase your customers. This is the strategy we will always abide by.

For asset management, against the background of interest rates in China, we will try to combine deposits with managed liabilities. The purpose of any liabilities is to make profit, and we will try to better control the total size of our liabilities structure and the cost of our liabilities. We will try to avoid being involved in some vicious competition and will reduce some high-cost liabilities. Fundamental to liabilities increase is innovation on our services and products. Without innovation, it will be costly and the risks will also be high.

ED: Actually, in our awards programs, we punish those banks who compete for market share at a cost to themselves. You seem determined to avoid this common mistake. You have given me a very comprehensive view of your strategy. I am very happy to know how you think, the strategies you have in place is very important for one of the biggest bank in the world. I hope this will be the first of many communication with ICBC, as you steer this big ship, and we will be following your leadership closely. Thank you very much!

YHM: Thank you very much too!