The rise and rise of ICBC

While Western banks try to pick themselves up from the setbacks brought about by the financial crisis, Chinese financial institutions stand tall. And there is none taller than the Industrial and Commercial Bank of China (ICBC), which is the world's largest bank in terms of market capitalisation, deposits and total profits. Although this status has not resulted in a change in credit ratings, Moody's has released a report that highlights the features that characterise the world's largest bank.

The first main feature of ICBC is that it has the complete confidence of its depositors. Depositors are happy to leave their money in the bank because there is a belief that no matter what happens, the government will always safeguard the deposits, says the report. As a state-owned company (the Ministry of Finance and Central Huijin Investment both have stakes of more than 30%), it is in the interests of national stability to ensure that the bank's huge customer base does not lose out.

ICBC's domestic focus has, along with tight regulations, helped keep the bank away from the toxic assets that have afflicted Western banks. This is combined with a traditional banking business model that focuses on deposit taking and corporate lending. 

"While its risk management skills are not regarded as sophisticated as those of its Western counterparts -- despite major improvements over the last decade -- one lesson from the current financial crisis is that the appearance of sophistication can be illusory," says the report.

The advantage of this apparent simplicity is that "the risks a bank is taking can be easily understood and quantified". The report adds that ICBC understands its customers and operates in a conservative manner, which in turn means that it has a low level of problem loans and a large reserve for loan losses.

Then there is the issue of its state-ownership. The report says that opinions of the bank fluctuate between two poles. There is the idea that as a state-owned bank it will naturally tend towards making bad loans as a result of government intervention. The other idea is that it works within the restraints of a market economy model with only mild distortions from state influence.

Moody's swings towards the latter view. While it admits that the government still issues directives, it gives less specific and stringent orders than before. Also, the government is getting better at managing macroeconomic cycles. "Under general government guidance, it enjoys considerable leeway for conducting business its way. Nevertheless, the risk of over-investment and resource misallocation due to government intervention is real."

The report concludes by asking why ICBC is in healthier shape than its peers in the West. Is it just because it is located in China, where growth is generally high due to the developing nature of the country? And will there be a convergence in risk attitudes as US banks de-risk and ICBC increases its risk appetite?

Moody's believes that ICBC will continue to benefit from the opportunities derived from traditional lending in China for some time to come. "Over time, however, the liberalisation of its home markets and more ventures into international markets will leave it facing many of the same management challenges that have recently humbled its US counterparts."