It’s 9.40 on a Friday morning and the softly lit banking hall in the Central Business District is almost deserted. A man dressed in T-shirt and shorts bends over a desk filling in a form. The whole front desk is manned by just a clerk, while the lone security guard stares blankly ahead. And, for a good 20 minutes, not a single other soul walks in. Only the drone of traffic from the busy street outside disturbs the tranquility.
This is the Singapore unit of Industrial and Commercial Bank of China (ICBC), the largest bank in the world by market capitalisation. The name would have rung few bells beyond China before it was listed back in 2006, following what was the biggest ever IPO in the world. Less than three years on, with the likes of AIG and Citigroup on their knees, major Chinese banks like ICBC, Bank of China (BOC) and China Construction Bank (CCB) are being watched more closely by the market.
With relatively unimpaired balance sheets, relatively high capital adequacy ratios and double-digit earnings growth, will these banks expand more aggressively in overseas markets when so many others are in consolidation mode? Will they emerge as a new global force in banking? What do they plan to do in Singapore?
To be sure, the slow customer traffic at the local offices of ICBC at 6 Raffles Quay is a far cry from the packed and bustling banking halls of the local units of other foreign banks like Citibank and HSBC, and the branches of the three local banks DBS Bank, United Overseas Bank (UOB) and OCBC Bank (OCBC) scattered across the island. That’s largely a reflection of the relatively narrow scope of the licences that China’s banks have in Singapore.
ICBC Singapore only has a Wholesale Banking Licence from the Monetary Authority of Singapore (MAS). Its rival BOC, the third largest in the world, has operated in Singapore since 1936 and currently has a full banking licence, but only five branches. CCB has an offshore licence, according to information on its website.
However, ICBC’s understated presence belies the rapidly growing business it has been doing here, says its general manager Xu Li in a recent interview with The Edge Singapore. According to him, the volume of trade finance, letters of credit and remittances done by the Singapore unit grew three-fold last year to US$10 billion (RM36.9 billion). Opened in 1993, the Singapore unit is the first of ICBC’s overseas forays. ICBC also serves its wholesale banking customers in Singapore at two other locations, Chinatown and Lucky Plaza.
Xu says ICBC Singapore is now considering seeking an expansion in the scope of its licence, and eyeing a slice of the retail banking market. In China, the ICBC group has a network of 28,300 branches, everywhere from Shanghai to Shantou. And, there is usually a crush of humanity in a typical branch in major cities and towns, with an incessant electronic voice calling out queue numbers. Even so, competing with the likes of Citigroup and HSBC in the retail banking space outside of China would have seemed like pie-in-the-sky ambition just two years ago.
That changed after the worst banking bust in perhaps a century severely battered some of the most established global financial institutions. “At the height of the crisis, when Lehman Brothers collapsed, there was tight liquidity — so interest rates shot up to 200 or 300 bps above Libor,” Xu says. “When it emerged that the banks in trouble were European and US ones, in a matter of a few days, all market players wanted to place money with us. They didn’t care about the interest rate. They withdrew their money from European and US banks and reduced their business with them.”
Xu declines to reveal the amount of fund flow into ICBC Singapore from Western banks, but he says other Chinese banks benefited similarly during the panic. And, the whole episode has left China’s largest banks brimming with confidence about their position in the global market. ICBC now has a market capitalisation of US$199 billion, while CCB has a market value of US$130.2 billion. That’s more than three times and two times respectively, the combined market values of Citigroup (US$13.7 billion) and Bank of America (US$24.9 billion).
Expanding beyond China
The formidable financial heft of China’s big banks, however, only reflects the large scale of their home market, where services, products and regulation standards are widely seen to be lagging behind more developed markets. “[Chinese banks] are still at a learning stage,” says Liu Xiaochang, an analyst at Huatai Securities, in Nanjing.
But, they are making progress fast. For instance, ICBC won the The Banker magazine’s 2008 Bank of Asia award. Besides its large domestic network, ICBC also has 126 overseas branches and agencies in 15 countries. The cross-pollination of their overseas experience is also spurring standards at home, with Chinese customers beginning to distinguish banks by their services and products.
“My feeling is ICBC is much, much better than BOC. They have many more branches across the city, many ATMs around the streets and the service is good,” says Kevin Huang, a young professional living in Guangzhou. “I think ICBC, CCB and China Merchants Bank are the best three.”
To leap ahead in their globalisation effort, some banking industry watchers say China’s banks might consider strategic acquisitions. That would mark a shift from just a few years ago, when it was foreign banks that were buying stakes in the Middle Kingdom’s banks to gain a foothold in the fast-developing market. Today, major stakes in ICBC are held by Allianz (which holds 8%) and American Express (1.54%), while CCB’s roster of major shareholders includes Bank of America (17.43%) and Temasek Holdings(5.88%).
But any moves to acquire foreign banks will be done cautiously, says Sherry Lin, an analyst at Credit Suisse, adding that any deals will likely be limited to US investment banking and brokerage operations. “Most Chinese banks have a very realistic perception of what they are capable of,” she says. “Even if they can buy assets cheaply, they may not be able to run them properly.”
A possible break-up of large global banks in the face of the financial crisis could also create opportunities for big Chinese banks, especially if assets become available in markets where they want to expand. BOC and ICBC have stuck to bread-and-butter commercial banking as they ventured overseas. And, they have gone to markets where Chinese companies are expanding. According to May Yan, an analyst at Nomura in Hong Kong, Chinese banks have only really been aggressive in Hong Kong. “They also want to be in Taiwan for political reasons and they are trying to diversify in Singapore,” she adds. Royal Bank of Scotland’s reported intention to sell the Asian operations it acquired when it bought ABN-Amro might potentially interest ICBC which had been checking out opportunities in Thailand and the Philippines but Xu declined to comment.
While China’s financial institutions are in a strong position to pick up bargains in the wake of the carnage on Wall Street, they haven’t done well with acquisitions in the past. Ping An Insurance, for instance, bought a 5% stake in Belgium’s Fortis Bank last year and had to write off RMB15.7 billion (RM8.47 billion) when the bank collapsed. CITIC Securities, meanwhile, had a close call with its proposed investment in Bear Stearns last year. Approval for its purchase of a 6% stake was still pending when the troubled investment house collapsed.
In more recent developments, BOC said last week that it is not bidding for US insurer AIA for the time being. And, CCB chairman Guo Shuqing has been quoted in press reports as saying that CCB is not looking at investing overseas at the moment because of uncertainties about the asset quality of foreign banks.
Challenges ahead
Chinese banks know only too well how poor asset quality can hobble the prospects of a financial institution. It was just a few years ago that the Chinese government injected US$60 billion of capital into ICBC, CCB and BOC to wipe out a significant portion of their non-performing loans (NPLs), paving the way for their public listings in 2005 and 2006. Now, after a few years of breakneck loan growth, some analysts are concerned that NPLs might eventually return to haunt Chinese banks.
According to data from the central bank, Chinese banks extended RMB1.62 trillion in new loans in January alone, mainly for road, power, railway and other infrastructure projects. As at January, total loans were up 101% y-o-y. During his recent visit to the UK, China’s Prime Minister Wen Jiabao himself warned the country’s banks to be careful not to run up more bad debts while stepping up lending to help stimulate the economy.
For now, however, Nomura Securities’ Yan says it might be too early to worry about rising NPLs. “The macro indicators are stabilising. They are turning slightly more positive. This is helpful against NPLs and will delay their emergence.” According to her, the relatively strong flow of credit is helping to buoy China’s economy and prevent companies from running into financial trouble. “We haven’t modelled an NPL scenario of 5% to 6 % for big banks. At most, it would be slightly over 3% in 2010. So it’s not bad,” Yan says.
Still, NPLs remain a longer-term risk for China’s banks, analysts say. Morgan Stanley Research predicts the robust loan growth will fall to more normal mid-teens by late 2009 because of capital adequacy constraints and the lack of investment appetite, especially in the manufacturing sector. And, if economic growth slows, corporate failures and rising NPLs will quickly follow. Yan of Nomura says some smaller banks that lend mostly to small- and medium-sized enterprises may see NPLs emerging in 2H2009 and 2010.
That could be an important test for China’s bank regulators, some industry watchers say. At that point, will China’s banks be pushed to continue extending credit to forestall a deepening recession and a cascade of bankruptcies and corporate failures? Or, will they move to ensure that the safety and soundness of the banks are protected?
Bankers in China say publicly that they expect to be pressed into undue risk by the government in order to support the economy. “This is a commercial bank after all and it should behave as a commercial bank in carrying out its business,” CCB’s chairman Guo was quoted as saying in a news report. In fact, the China Banking Regulatory Commission has been tightening its supervision of banks, demanding that they adhere to higher provision coverage ratio requirements to improve their asset quality and to dissuade the growth of risky lending.
The tougher standards are a double-edged sword for banks, especially if the recession continues to deepen. While it discourages banks from lending recklessly, it could also hit their earnings in the short term. BOCI Securities says, in a research note, the recent hike in the provision coverage ratio requirements to 150% will significantly reduce earnings for 2009 and 2010, if strictly implemented.
Another concern is narrowing net interest margins (NIM) at the larger banks, as a result of falling interest rates. In the short term, high loan growth will compensate for the margin squeeze, but once that slows the impact on banks’ bottom lines could become more pronounced. “I see no big risk in 2009,” says Huatai’s Liu. “In the medium to longer term, we are a little cautious.”
On the plus side, China’s central bank governor Zhou Xiaochuan has signalled a halt in rate cuts this month by noting that China has other tools that it can use to stave off a deeper recession, says Yan. China’s central bank has cut interest rates five times since the collapse of Lehman Brothers.
Going by consensus estimates, ICBC is expected to report a 2.65% rise in earnings in 2009 to 34.8 HK cents (16.4 sen) a share and a further 12% rise next year to 39 HK cents a share. Earnings at BOC are forecast to hit 26.9 HK cents a share this year, down 1.5%, and come in at 30 HK cents a share in 2010, up 11.5%. CCB is forecast to deliver a 0.46% rise in earnings to 42.9 HK cents a share this year, and a further 8.6% to 46.6 HK cents a share in 2010.
In a report last month, Credit Suisse says Chinese banks are trading at their biggest discounts to their Asian peers in six years. They are valued at 1.48 times their book value, the lowest since they were listed. In a Feb 12 report, Nomura reiterated a “buy” rating for ICBC, and upgraded BOC and CCB to “buy” ratings.
ICBC expanding in Singapore
Back at ICBC’s offices in Singapore, Xu says the local unit has been growing its business rapidly. With its three sub-branches, ICBC Singapore recorded a 40% growth in its net operating income last year, while net interest income was up 50%, Xu says.
ICBC actually started in Singapore with an Offshore Bank Licence in 1993, before getting its Wholesale Bank Licence in 2003. It now counts local corporates like City Developments, CapitaLand, Keppel Corp and Singapore Airlines among its clients. Its multinational customers include Thyssen Group and Lenovo, while its Chinese corporate clients include CNOOC, PetroChina and Sinopec. The bulk of its business with these companies is trade financing.
Despite its licence restrictions, ICBC Singapore has received permission from MAS to sell some ad hoc retail bank products. Among them is Advance Exchange Renminbi Remittance, which allows customers to lock in same-day foreign exchange rates. According to Xu, demand for the product has been strong because of the large number of Chinese workers here as well as businesses that have to remit money to China regularly. The product generated a turnover of US$240 million last year, an increase of 15% from 2007.
ICBC Singapore has also been allowed to offer trustee accounts to Chinese nationals with children living in Singapore. There are an estimated 300,000 Chinese nationals living and working in Singapore, of which 30,000 to 40,000 are students. Back in 2003 and 2004, ICBC Singapore was involved in the IPO business, but it had to give it up so as not to run afoul of Chinese regulations that require a separation of investment banking operations from commercial banking. Since last year, however, it has increased commission income from mergers and acquisitions, financial advisory work as well as by cooperating with local banks that are in the IPO business.
Xu and his team in Singapore are eager to do more, though. According to him, ICBC Singapore has broached the topic of obtaining a full banking licence at annual meetings both here and in Beijing with its president and MAS. Xu doesn’t know when such a licence will be awarded, but he is already mapping out a strategy to build up a retail banking business. ICBC Singapore does not intend to compete directly with the likes of Citigroup, Standard Chartered Bank and the three local banks, Xu says. Instead, it will try to carve its own niche serving Chinese customers in Singapore and Singaporean customers who have dealings with China. Among the products Xu has in mind is a renminbi cash card that operates in a similar way to NETS.
Xu concedes that the banking industry will be in for a tougher time this year, but there are still lots of opportunities for ICBC Singapore. “We will do our best to finance Chinese enterprises and local companies which are of higher credit quality,” he says.
ICBC Singapore’s main banking hall isn’t any busier an hour later, but if Xu keeps growing its business and expanding into the retail banking sector, the peaceful atmosphere its customers and employees currently enjoy probably won’t last for long.
Leu Siew Ying is associate editor at The Edge Singapore