OREANDA-NEWS. May 03, 2012. The bank increased its net profits by 38% YoY, and its earnings per share reached RMB 2.36. Moreover, with its earning structure witnessing continuous improvement, the bank increased the proportion of intermediate business income, extended the net interest spread ( NIS ), and kept on reinforcing its profitability, reported the press-centre of Industrial Bank. 

Nonetheless, it was still a busy day for President Li Renjie. After arriving in Shanghai, he immediately met institutional investors. President Li finally had time to accept the interview from National Business Daily (hereinafter referred to as NBD). In the interview of over two hours, President Li talked about hot topics regarding economy and finance from the macroeconomic situation and disputes over regulatory indices to whether the banking industry gains huge profits or not, capital supplementing channels, and market-oriented interest rate reform. As a senior banker with years of experience in the field of finance, he expressed his opinions and views in a frank manner.

President Li described the development of IB in recent years as “steady”. He stressed: “IB does not simply pursue development speed, but rather focuses on quality-based development. ROE (Rate of Return on Common Stockholders' Equity) embodies quality, and it is our most important concern. IB does not follow the development route of “add flour when there is too much water and add water when there is too much flour”. In my personal opinion, the basic standard to judge whether a bank is good or not lies in ROE.”

The only feasible choice is to issue tailored additional shares
NBD: By December 31, 2011, the core capital sufficiency of IB ha d reached 8.20%, approaching the regulatory red line. It is unavoidable to increase capital considering the regulatory standard and business development requirements. However, why did you choose to issue tailored additional shares?

Li Renjie: It was the only program for us to choose. If we chose to issue open additional shares, it would cause great impact to the capital market, so it is not feasible. To issue rationed shares requires over 70% shareholders to participate in subscription. After communication, however, we found that a number of old shareholders lacked funds and couldn't reach the standard. If we issued convertible bonds, bonds would be issued first and then be converted into shares. Before the conversion, the bonds couldn't be used to supplement core capital. It was not feasible to get a list ing on H-share within a short period. Therefore, the only feasible option for us was to issue tailored additional shares.

NBD: Which enterprises did you negotiated with? Why did you choose PICC, China National Tobacco, Beijing Infrastructure Investment, and Shanghai Eightrent ZhengYang Rental Co., Ltd. as the four strategic investors.

Li Renjie: We held negotiation s with many companies, mainly non-banking financial institutions and central enterprises. Some enterprises had sufficient funds and were willing to make investment, but the superior authorities did not permit it. Some enterprises were willing to make investments but lack ed funds. Each of the four institutions has its own characteristics. After they officially become our shareholders, we will sign a strategic cooperation agreement with each of them. In general, after introducing new investors, IB is full of confidence in linking relevant businesses and improving corporate governance.

Since the last fourth quarter, we have h eld negotiation s with over 70 enterprises, and on the whole, we have visited all the large enterprises along Chang'an Street on the whole. As for IB, to issue tailored additional shares is not only to supplement capital, but more importantly to look for new partners.

NBD: Some small shareholders think that the additional shares were issued at too low a price, and the net asset value per share will be higher than the issuing price when the capital for tailored additional shares are invested in the fourth quarter this year. What do you think about it?

Li Renjie: The problem here is that the expected profit in 2012 is used to calculate the net asset value per share. However, with the development of businesses, maybe the core capital sufficiency will not reach the given standard in the middle of this year, so the existing and emerging businesses will be restricted. Let alone profit! It is not reasonable to calculate back the net assets based on the expected profit in 2012 and further deduce that the price to issue additional share is below the net asset value. As for the additional share price, we have always given consideration to the interests of both old and new shareholders. Upon negotiation, we stuck to the principle to follow the P/B ratio is 1.1 or the rate of 90% of the average price in the 20 trading days prior to closing, whichever is higher. When we began to launch this job in the last year, the share price dropped to RMB 11.8, and in line with the net asset value at the end of last September, the PB was only 1.05. Nonetheless, we still reached an agreement with the potential investor to set the additional share price not lower than the PB ratio of 1.1, insisting to choose the higher one between “90%” and “1.1 PB”.

An overall view is required in risk control
NBD: By December 31, 2011, the non-performing loan ratio of IB had reached 0.38%, dropping 4 base points over the beginning of the year, a low level of the whole industry. What experiences can IB share with us regarding risk control?

Li Renjie: The following experiences in risk control may be shared with all: First, we should grasp the macroeconomic situation accurately and judge the rhythm and direction. An overall view is required in risk control. At the monthly regular meeting of IB, we first analyze the macroeconomic situation and then the external policies and our business strategies.
Second, the development of businesses should fit our own conditions and capabilities. We shouldn't follow suit blindly and we should never pursue homogenized businesses and impose uniformity in all cases.

Third, we shouldn't copy international regulatory standards mechanically and blindly and we should apply them based on our own situations. After the Basel II and III Accord were released, all banks are building models to analyze data. IB is also understanding and studying the principles, models, tools and methods in the accord, and comprehending its requirements based the national situation and the circumstance of our bank.

Fourth, we should respond to the risks and market at a fast speed and with greater sensitivity. IB stresses “professional loan examination and personal responsibility” inside our bank. We embed risks into business lines to extend the sensitivity to the market and improve our respon se speed.
Fifth, we should manage banking businesses in a practical manner and attach importance to the capability and culture of implementation. We should do our job seriously, and after we formulate regulations, we should stress the enforcement.

I think that if we do a good job in the above five aspects, banking risks can be controlled.

NBD: Against the backdrop of regulation over the real estate market, what is the quality of loan assets granted by IB regarding real estate? How will IB arrange the real estate businesses in the future?

Li Renjie: The ratio of non-performing loans regarding real estate is only about 0.1%, accounting for less than 1/3 of the total non-performing ratio. Based on the result of our internal pressure test, under the same pressure, the resistance of real estate related assets is higher than that of other relevant industries such as iron and steel, cement, glass, and electrical appliances, that is to say, real estate related assets problems would occur later than those of other industries. We will strictly control the existing deposit. Nonetheless, urbanization is an unavoidable trend, and we will not give up this market, but we will be more prudent in the extension of such loans. Facing the policies on house purchase restriction, we will pay more attention to the construction of commercial real estate and urban complex es if their costs are controllable and the land price is reasonable.

NBD: For some period, the proportion of real estate related loans granted by IB remained at a high level in the banking industry. What factors made IB adjust the credit structure and reduce the proportion of real estate loans?

Li Renjie: The real estate loans granted by IB were concentrated in 2005 to 2007, and since 2008 we have begun to make adjustments to the structure. Around 2008, the situation was not clear and real estate enterprises were greatly impacted. We have made preparations for the worst situation since then. In the 1990s, the real estate industry of Hong Kong was also struck greatly and the housing price dropped by over 50%. With Hang Seng Bank as a strategic partner, I led a delegation to Hong Kong to learn from its experiences. After coming back, we made in-depth discussions and arranged various countermeasures. After the government released incentive policies, however, the situation reversed suddenly. Nonetheless, we didn't lower our guard and started our structure adjustment. Meanwhile, we have been reinforcing the construction of our own respon se capability continuously.

The high profits of banks cannot be attributed to being a monopoly
NBD: The profits of the banking industry were high last year, so the “huge profits of banks” were criticized severely recently. What causes contributed to the high profits of the banking industry over recent years, in your opinion?

Li Renjie: There are mainly the following causes: First, because of the fast economic growth, the demand for financial services also kept increasing, but indirect financing was still a main financing method in China. Second, the general asset quality of banks was good. For 10 years, with reform, capital attraction and IPOs, the Chinese banking industry witnessed great changes. Although there were some economic fluctuations and some investors worried that the quality of assets would be degraded, those concern s did not come to fruition. Third, the extremely high profits of banks in the last year had to do with the supply of capital. With the tightened monetary policies, banks had greater bargaining capability.

NBD: As for the high profits of banks, some people believe that they can be attributed to the credit spread between legal interest rates. What do you think?

Li Renjie: Indeed, the central bank sets up restriction over the legal interest rates, but it only covers deposits and loans. Besides, there are some interest rates depend ent upon the market. Up to now, the proportion of the latter has become higher and higher, such as bonds and deposits from other banks. Therefore, we cannot indiscreetly attribute the cause to being a monopoly.

NBD: Do you think market-oriented interest rate should be expected in the future? How will IB respond to this challenge?

Li Renjie: In my personal opinion, the course of market-oriented interest rates will certainly be accelerated. Nonetheless, IB made many preparations for such a rainy day at quite an early time. Through these years, we have always made adjustments to our asset-liability structure and made the liability sources and asset allocation as diversified as possible.

On the balance sheet of IB, the credit assets only account for a bit over 40% of the total assets, and corporate and personal deposits account for less than 60% of the total liabilities, that is to say, the liabilities and assets under the protection of legal interest rates do not claim a high proportion. We also made preparations in terms of pricing. For instance, overall FTP (transfer pricing) has been implemented across the whole bank, and the control of interest rate risks has been centralized in the Head Office to avoid interest rate risks. In general, we have made corresponding arrangements regarding business structure, asset-liability structure, institutional mechanisms, talent teams, and system construction, etc. The market-oriented interest rate will have little impact on IB.

NBD: As for a commercial bank, do market-oriented interest rates mean diversified asset liabilities?

Li Renjie: Market-oriented interest rate will surely lead to integrated banking businesses. Credit assets will account for a decreasing proportion of the total assets. I have always been promoting diversified liability sources. Commercial banks should be allowed to attract capital not only through deposits, but also bonds, commercial papers, and negotiable CDs, which are mature financial tools in the international market.

The standard to judge whether a bank is good or not lies in ROE

NBD: How does IB control its development speed?

Li Renjie: There are many factors for consideration, but ultimately it will come down to the return on equity (ROE). We will take into consideration the macroeconomic environment, our own capital and capability. If the macro-environment provides room for development, we will manage to raise capital and then intensify the construction of our own capabilities. IB does not merely pursue development speed, but rather quality-based development. ROE embodies quality, and it is the factor we care about the most. IB does not follow the development route of “add flour when there is too much water and add water when there is too much flour”. I always believe that the basic standard to judge whether a bank is good or not lies in ROE.

NBD: IB always stresses “differentiated businesses”. Which businesses will IB lay store by in the future?

Li Renjie: In the long run, IB will stress on developing the following five blocks in the field of corporate businesses:

First, projects related to urbanization. Urbanization is a long process. Although we encounter a number of problems such as excessively high housing prices, a long front line for infrastructure construction and liabilities of local government, the general trend cannot be reversed. Therefore, commercial banks must play a corresponding role in the course. Such businesses last very long. If allowed, we should explore increasing asset liquidity through asset securitization. As for large infrastructure construction projects, we may also consider group distribution.

Second, green finance. The issue of the environment is the key to determin ing whether the Chinese economy can maintain sustainable development. For instance, the water quality in 40% rivers in China fails to reach the given standard and most cities are confronted with the problem of lacking water, so there are great market room for the treatment and recycling of sewage, desalination of sea water in coastal cities, etc. Carbon trading is also a big market. During the “12th Five-year Plan” period, the state will need to invest RMB 6-7 trillion in energy conservation, emission reduction, and renewable energy. If our government lays store by this field, it is a big market share for commercial banks. IB has made full preparations in this area, such as product line and service capability. In the Chinese banking industry, we are in the first echelon.

Third, IB has proposed the strategy of “a bank focusing on medium-sized enterprises”. The future vitality of the Chinese economy lies in the large group of medium-sized enterprises. Large-sized enterprises may have problems of low efficiency and bureaucra cy due to their long management lines. Moreover, banks will have only limited bargaining capabilit ies against them. Meanwhile, some small- and mini-sized enterprises face high risk, and maybe they are more suitable for community banks. As a medium-sized bank like IB, I believe medium-sized enterprises are our best customers. As their financial demands are not merely limited to loan s and settlement, IB can meet all their financial needs as much as possible, and the opportunities for cross selling are also available.

Fourth, financial market. The development room for equity market, bond market, derivative market, bulk commodity market, and monetary market are very big. The financial markets in Europe and America were “over virtual” in the past few years, that is the finance was separated from the real economy and became indulged into its own realm. This problem does not exist in China as the Chinese finance industry does not separate itself from the real economy and the leverage ratio is not high. We can even say that the finance of China cannot fully meet the requirements of the real economy, and this provides opportunities for banks to achieve integrated development. The advantages of banks lie in their customer resources, and they can excavate the demands of customers during routine encounters with them. For example, when an enterprise is initiated, we may help it to introduce PE and VC. When it grows to a certain scale, we may grant loans. Then, after it makes further development, we may guide it to become listed on the market. After IPO, it may face merger s and acquisitions, and then we may serve as its financial consultant or help it to issue bonds. Our objective is to cover the whole development course of an enterprise with our integrated financial services.

Fifth, trading finance. The conventional businesses of banks are very simple, including deposit, loan, payment and settlement. Now, however, traditional payment and settlement have been upgraded as cash management. With the development of trade, the demands for trading finance and supply chain finance emerge.

In the field of retail business, IB will focus on developing the asset management services for high net value customers and individual business loan s targeting natural person, and in terms of internal logic, we also aim to provide all-round in-depth services to our customers.

Regulatory indices should not be imposed uniformly in all cases

NBD: By end of the third quarter of 2011, the LLR/loan ratio of IB was 1.34%, far from 2.5% as provided in the regulatory requirements. What suggestions do you have for this regulatory index?

Li Renjie: Different banks have different circumstances, so they should decide their risk strategies by themselves. The concept of LLR/loan ratio does not exist overseas. In my opinion, the two indices “provision sufficiency” and “provision coverage” are very scientific, corresponding to the principle of “dynamic provision” stressed by the China Banking Regulatory Commission (CBRC) all the time, meaning, provisions should be made in line with the nonperforming volume. The index of “LLR/loan ratio” is imposed uniformly in all cases. First, excessive provision cannot be taken as capital nor profit. This is a kind of waste to the equity of shareholders. In addition, it will lead to an abnormal financial statement. If IB now raises the LLR/loan ratio to 2.5%, then the provision coverage will reach 700%~800%, and this will cause many queries among investors. I suggest that the excessive part may be used as Tier 2 capital. I believe that the CBRC will listen to opinions from all sides based on the actual situation. NBD: The index of “75% loan-deposit ratio” restricts the loan-granting capability of some joint-stock banks. Recently, some scholars suggested canceling the index. What do you think about it?

Li Renjie: I support the index. It exists abroad, too. But, this is not the most fundamental factor for consideration. In different economic periods, it is not scientific enough to require all banks with 75% loan-deposit ratio simply. For instance, the deposit reserve ratio was over 20% in the last year. Next, the asset-liability management of banks is becoming increasingly diversified. The assets can be used not only for credit, but also for investment. Liabilities can be deposits, financial bonds and deposits from other banks. If we insist on using this regulatory index, the definition of deposit and loan should be adjusted in correspondence so that the index can be more realistic. The loan-deposit ratio of IB has always been kept below 75%, meeting the regulatory requirement.

NBD: In confrontation with the “prudent monetary policy” and slowed economic growth speed, how will IB make adjustment to its own asset allocation?

Li Renjie: Last year, we foresaw that the ROE would go down in 2012. Therefore, we have begun to purchase some assets with good quality and high rate of return from the market from the third quarter last year. With the decreasing ROE, the liability cost will also go down but with a lag. Therefore, we intensified maturity mismatches in the asset-liability management to an appropriate extent, ensuring a high rate of return from the fourth quarter of last year to the first quarter of this year. Of course, this requires us to make a good judgment to the situation and we shouldn't purchase assets after the liability cost is already reduced.

NBD: How will IB respond to the challenges of foreign-funded banks?

Li Renjie: Before joining WTO, compared with foreign-funded banks, Chinese-funded banks indeed lagged behind in the level of management. Chinese-funded banks have made fast progress in these years, and they learn more about the demands of customers as they know our national situation better. Nonetheless, Chinese-funded banks are not as good as foreign-funded banks in terms of foreign exchange business and product design. However, foreign-funded banks are a disadvantaged position in grasping the needs of domestic customers, so they still have a long way to go in the Chinese market.

To conclude, both sides have their own features and advantages, but I feel that the gap is narrowing.

Financing
Since the last fourth quarter, we have held negotiations with over 70 enterprises, and on the whole, we have visited all the large enterprises along Chang'an Street on the whole. As for IB, to issue tailored additional shares is not only to supplement capital, but more importantly to look for new partners.

Real estate
Based on the results of our internal pressure test, under the same pressure, the resistance of real estate related assets is higher than that of other relevant industries such as iron and steel, cement, glass, and electrical appliances, that is to say, real estate related assets problems would occur later than those of other industries.

“Huge profits”
The central bank sets restriction s over the legal interest rates, but it only covers deposits and loans. Besides, the proportion of the interest rates depend ant on the market is becoming higher and higher, such as bonds and deposits from other banks. Therefore, we cannot simply attribute the high profits of banks to being a monopoly.