Rumoured to be on the verge of elevation to becoming China's supreme bank regulator, we spoke to Liu Mingkang in his current offices at the Bank of China's spectacular Beijing headquarters. Chairman Liu Mingkang explains why Bank of China has moved into new territory.
What are the main themes of your strategic thinking at the moment?
We have planned a reform path and we are making solid progress. We have said goodbye to the scandals of before. We have a system and mechanisms that work. Every year, we are making incremental improvements. Take the issue of non-performing loans. We have kept the ratio of new NPLs since 2000 at first-world levels, or below 0.6%. We are also making steady progress towards our goal of reducing NPLs - currently at 27% - to 15% within five years, according to the national five point classification system, and cutting non-perform loans at a rate of around 2.5% per year. Our asset management company has also succeeded in retrieving ever-increasing amounts from creditors though more aggressive foreclosure and debt collection. In 2000 we snatched back Rmb21 billion, rising to Rmb28 billion so far this year.
Another yardstick is our loan growth. It's been only just over 4% over the past three years. That shows we are being very cautious about who we lend to. That includes centralized decision making on loans, credit vetting and evaluations after the loans have been made, and tight controls on the transactions carried out at these lower levels. It's true around 60-70% of our lending still goes to state-owned companies. But these aren't policy loans. We examine the SOEs for genuine signs of reforms and insist on clear financial information, although collecting good data is still a major problem.
What alternative sources of revenue are you looking at?
We are also rapidly increasing the proportion of income we get from fees, which currently stands at roughly 10% on the mainland compared to 22% in Hong Kong. We get those fees from custodial and trust services and back office operations for investment funds, trade finance, credit cards, running government pension funds and bancassurance deals with pension companies like Ping An. Together with laying off 14,000 staff in the last two years and closing 2000 branches, we managed to almost double our profits last year - admittedly before provisioning.
In terms of our improving our customer services, we are importing a number of technology packages, so that by the Beijing Olympics in 2008, tourists from all over the world will be able to use their bank cards effortlessly in Beijing.
What is the state of your loans to the private sector?
There's has been some of talk about Bank of China increasing lending to start-ups in the private sector, but that's not our job; it's the venture capital industry which is responsible for that. We are looking for clients who are sure to repay, and in search of that we are increasing the ratio of good quality clients, such as foreign-invested enterprises for example. Small business, which is what the bulk of the private sector is composed of, have a very high failure rate in their first three years of existence, so they are not always attractive to banks like us. Hopefully, these kinds of companies will be able to get financing through the creation of the second board, rather than relying on us. We are investing time and money in identifying the best types of clients - A-band clients as we have defined them, including wealthy individuals, and their ratio is increasing all the time. By supporting the best clients, such as the foreign-invested companies, and without insisting on the guarantees by other companies, we hope there will be a knock-on effect down to the smaller firms acting as suppliers to the multinational companies.
Now that GDP per capita is heading towards $1,000, we predict an ongoing rise in the banking services consumers will require, and that's obviously good for our growth prospects.
There's been a rumour that Chinese banks could suffer a big hit from the sinking mainland stock markets, since shares may have been used as collateral for loans. Is that true?
Our Hong Kong operations suffered because asset prices dropped so fast. But in China we were forewarned: we had been expecting a slump in the stock market for a long time, since the P/E ratios were ridiculously high.
How has the listing of your Hong Kong assets affected your mainland operations?
The listing of our Hong Kong assets is in many ways the prototype of the reforms we want to introduce on to the mainland. Bank of China (HK)'s performance has improved dramatically, both in terms of the low rate of new non-performing loans and in terms of return on equity. We are learning many useful lessons in Hong Kong, which we will transfer to the mainland operations.
For example, we are aware there are too many bureaucratic layers on the mainland, ranging from headquarters in Beijing, via province and county to municipal level. We are planning to introduce Special Business Units on both the retail and the corporate side which will have much clearer hierarchical lines of communication and control. These will be set up so that provincial offices will be liaising directly with the head office. By concentrating and centralizing back office processing operations we will be able to benefit from economies of scale and ensure control. And the fact that we are constantly increasing our efforts to supervise our control of even the lowest level branches, will guarantee that large-scale theft at grass roots level is not repeated. Local branches will be entering every transaction on to our expanding national IT network, not to mention twice-yearly visits by out-of-town auditors all across the country.
Basically, Bank of China (HK) shows the future of the mainland's operations: a shareholding structure with all the accountability that implies.
You are basically an outfit composed of civil servants. Employment is well protected and relatively comfortable. How can you incentivize your staff?
We have introduced a bonus system, which employees have to take very seriously. It has five bands and has a direct influence on whether an employee can continue his education, travel abroad and get promoted. The value of the bonus available can also be far more than the basic salary, so getting a good score on the assessment is very important, and is a good incentive for staff to perform professionally. This system has been in place since 2000.
Isn't Bank of China basically too big? Aren't there too many branches in too many provinces with not enough central control? Wouldn't it be better to break it up?
Bank of China isn't too big, certainly when you compare it to giants like HSBC and Citibank. What it does need is better management structures, which as I outlined, are being put into place. That's where the Special Business Units will play a role in the restructuring. In fact, when we introduced a similar process in our Hong Kong operations during the amalgamation of the 12 original branches, return on equity jumped from 7% to over 12%. We could do with the improvement, since our ROE is around 4% on the mainland, although we plan that it should be around 12% within four years.