Interview: “It is important for the bank to expand beyond Beijing”

• Yan Bing Zhu, chairman of Bank of Beijing, traces how the bank has emerged as one of the leading SME and consumer banks in China
• The bank aims to become a comprehensive financial solution provider
• Yan envisions the bank to expand beyond Beijing to scale up its business and diversify risk

When China started the process of opening and reforming its banking and financial system in the 1990s, urban credit cooperatives were founded to cater to the financial needs of thousands of individuals and small and medium-sized enterprises in urban areas. This segment was largely overlooked by the large state-owned banks. The first institution of its kind was founded in Henan province in 1979, and by 1993, there were over 4,800 of such institution nationwide, with total assets of Rmb 187.8 billion ($28.8 billion) and over 123 thousand employees. In 1995, the authorities began to further reform this segment of the financial markets by consolidating the thousands of urban credit cooperatives at city level to form city commercial banks

As one of the first five cities granted to do the test run, along with Shanghai, Shenzhen, Tianjing, and Shijiazhuang, Beijing consolidated 90 urban credit cooperatives in the region and formed City Cooperative Bank in 1996, it later changed its name to Bank of Beijing in 1998. With 25% share controlled by local government, and 75% held by minority collective and individual investors, Bank of Beijing started on its journey to explore the form of mixed ownership with modern corporate governance. According to the bank’s chairman, Yan Bing Zhu, “it is the diverse ownership structure and introduction of modern corporate governance that helped Bank of Beijing to grow so fast.”

For much of its existence, Bank of Beijing focused on serving the local economy, especially SMEs and local corporations in the region, serving over 100 thousand SMEs. As the exclusive bank to open pension and medical insurance account for local residents, the bank has issued over 16 million medical insurance cards by the end of 2014. Yan said, “Although it requires more attention for the bank to manage the risk and uncertainty of serving the SME and retail sectors, they are the most dynamic group in the local economy, providing Bank of Beijing great opportunity to grow rapidly.”

Strategic partnership and going public
The first big challenge that the young bank faced was dealing with legacy bad debt and non-performing loans (NPLs) of the 90 urban credit cooperatives that it had inherited. In 1997, a financial scam was discovered in a branch at Zhong Guancun that resulted in a direct loss of RMB 6.7 billion ($ 1 billion). At that time, almost one third of the bank’s total assets of RMB 20 billion ($3 billion). It took Bank of Beijing 10 years to completely write off the debt on its balance sheet.

The bank required more capital investment to take it to the next level. In 2003, the Chinese authorities began to encourage overseas investors to take strategic stakes in Chinese banks, to enhance their capital base as well as corporate governance. Recounting that period Yan said that Bank of Beijing was the target of many foreign banks because of its strong management team, large customer base and geographical advantages. The initiative was also supported by the Beijing government and then mayor, Wang Qi Shan, who encouraged Bank of Beijing to go public and take on high quality capital investment to help it grow. Among many potential investors, Bank of Beijing finally chose ING because of the many common values that both shared. From Yan’s point of view, the strategic investors not only brought in advanced market and professional knowledge, but also enhanced the bank’s corporate governance to meet international standard, thus increasing investors’ confidence in the bank.

Yan compared the strategic partnership to a happy marriage, which showed the depth and breadth of relationship between the two parties. In 2005, ING spent Rmb 1.78 billion ($ 270 million) to acquire 19.9% of shares of the bank. With the 5% share held by International Finance Corporation (IFC), Bank of Beijing became the first city commercial bank to reach to 25% share cap of foreign investors set by China Banking Regulatory Commission (CBRC). Meanwhile, ING surpassed the shareholding of the Beijing State-Owned Assets Management (12.89%) and became the largest shareholder of the bank. In 2007, Bank of Beijing successfully went public in Shanghai Stock Exchange. By end of 2014, the first three shareholders were ING 13.64%, Beijing State-Owned Assets Management 8.84%, and Beijing Energy Investment Holding 5.07%.

At the end of the third quarter of 2015, Bank of Beijing’s total assets amounted to RMB 1.79 trillion ($0.29 trillion). Net profit was RMB 14.2 billion($2.29 billion), with annualised return on average assets and annualised return on average equity 0.86% and 13.88% respectively. NPLs remained low at 0.92% , making Bank of Beijing one of the largest and most financially stable city commercial banks in the country.

The next phase of growth
In its next phase of growth, Bank of Beijing’s goal is to become a comprehensive financial solution provider, providing the full suite of financial services, from insurance, consumer finance to asset management. The bank established the first consumer finance company in China, Bank of Beijing Consumer Finance Co., Ltd. By the end of 2015, the outstanding loan balance amounted to RMB 19 billion ($3.06 billion) and a customer base of over 800 thousand. The bank has 100% ownership of Bank of Beijing Finance Leasing Co., Ltd, and over 50% ownership of Bank of Beijing ScotiaBank Asset Management Co., Ltd, Bank of Beijing Nong An Rural Bank and ING-Bank of Beijing Life Insurance Co., Ltd.

It is geared towards serving the more technologically savvy “e” generation of customers. To keep up with the evolving trends of financial technology, Bank of Beijing is transforming itself from the traditional banking model to an offline-to-online “O2O” platform integrating its physical touchpoints with its digital channels. As at the end of October 2015, the bank has established 10 so-called intelligent branches with another seven to be constructed. Total number of digital banking customers has reached 40 billion, these account for about 93% of the bank’s non-cash transactions.

Aiming for sustainable growth
Yan envisions Bank of Beijing not just as a local bank, but establishing its presence and reputation around the world. “Given the current trend of economy regionalisation both in China and around the globe, it is important for the bank to expand beyond Beijing and even to overseas market to scale up its business and diversify risk.” He said. So far, the bank has expanded to over 10 first level cities, including Shanghai, Shenzhen and Xian, three rural banks in Beijing, Ji Lin and Zhe Jiang province and two overseas representative offices in Hong Kong and Amsterdam.

On the other hand, to cater to emerging business areas such as internet finance, Bank of Beijing has implemented a strategic business plan to leverage off the capabilities of its subsidiaries covering insurance, consumer finance, leasing and asset management, to provide one-stop financial solutions to its customers via a O2O platform. So far, the bank has established 10 so called intelligent branches with another 7 to be constructed in the near future.

After 30 years’ rapid growth, China’s economy is now undergoing a profound structural transformation to a more sustainable growth model, and Bank of Beijing is also doing the same. “Looking forward, we should be more focus on the area of green finance and clean technology to benefit our young generations, and fortunately, many of our SMEs clients are from these two sectors. Bank of Beijing is willing to be involved, and provide our services to these customers.” Yan concluded.