OREANDA-NEWS. September 07, 2012. Against the background that the economic growth rate has kept descending and the central bank has cut the interest rates twice this year, how will Industrial Bank (IB) take the differentiated businesses strategy to respond to the challenges brought by market-oriented interest rates. In this regard, China Securities News had an exclusive interview with President Li Renjie of IB. He indicated that it would be a step-by-step process toward market-oriented interest rates. In recent years, IB has become increasingly market-oriented as it has adhered to the differentiated businesses strategy, therefore the accelerated process of market-oriented interest rates will bring IB more benefits than disadvantages, reported the press-centre of IB. 

China Securities News: Which challenges will market-oriented interest rates bring to the banking industry?

Li Renjie: Market-oriented interest rates are an unavoidable trend for the reform and development of China's finance industry. Macroeconomically, the state will consider the pace and progress of market-oriented interests in an all-round way. In the global banking industry, the Chinese banking industry is comparatively healthy because China has controlled the progress of market-oriented interest rates in a desired manner. It is self-evident that it is unpractical and hard to achieve desired results with only the unilateral development of market-oriented interest rates but the market-oriented development in other fields. The practices during previous years prove that credit spread is more related to the tightness of money. In 2009, the monetary policy was very eased, and commercial banks witnessed the smallest credit spread. Under the macroeconomic control, the credit spread between banks in the third quarter of last year was the biggest in recent years. In this year, the central bank cut the interest rates twice in a month and extended the downward float range for the loan interest rates. However, the actual execution results show that the credit spread and interest spread of banks do not go down significantly.

Under the macroeconomic control, now the average financing interest rate of enterprises drops obviously compared the third quarter of last year. If the real economy does not show the sign of recovery in the second half, it is also possible that the central bank will continue reducing the interest rates. Nonetheless, we also need to combine policies regarding finance, tax and other aspects to solve our problems.

As the proportion of deposits and loans of IB is the lowest among all banks, the proportion of common deposits in the total liabilities is about 60%, and that of loans in the assets about 40%. All the remained part is priced according to the market interest rates. Market-oriented interest rates display the comparative advantages of IB's differentiated businesses strategy. IB extends businesses to the credit market, monetary market, bond market, equity market and the alternative investment market, rather than limit them only in the credit market. In one word, the accelerated process of market-oriented interest rates will bring greater benefits than disadvantages.

China Securities News: Under the current macroeconomic situation, is it necessary to make adjustment to the index of loan-deposit ratio?

Li Renjie: I believe that loan-deposit ratio is not an index for liquidity management, but more a grab for macroeconomic control and the control of loan extension. Our loan-deposit ratio is highly related to the scale of foreign exchange reserve and the results of phased operation of the central bank's monetary policy. Loan-deposit ratio can be taken as a monitoring index, but not a directive one. Even though we take it as a monitoring index, the computing caliber for its numerator and denominator also requires adjustment in order to reflect the changing situation.

China Securities News: When the economic growth rate goes down, the market will generally worry about the quality of banks' assets. What main pressures does IB face in controlling the rebound of its non-performing ratio of banking assets?

Li Renjie: Currently, local financing platform loans and real estate related loans in our bank showcase a stable asset quality. There are not any loans at the local financing platform and the non-performing loan rate in the field of real estate is maintained at a low level. The pressure which may cause the rebound of non-performing assets mainly lies in the manufacturing enterprises in Zhejiang. The non-performing loan rate in the area may rebound to 1%, higher than the average level of the entire bank, but it still remains controllable.

China Securities News: Institutional banking businesses constitute a major feature of IB, but they also bring a high proportion of institutional liability. Some market players believe that this will make it hard to forecast whether the liquidity of IB is stable or not. How do you think of it?

Li Renjie: I can't agree with this opinion totally. Firstly, there is some deviation in the understanding and knowledge of the market to institutional liability, which is not equivalent to overnight lending. It is not correct to take all institutional liabilities as overnight lending in calculating the liquidity indexes. Overnight lending only accounts for a very small part of the institutional liabilities of IB.

Secondly, with appropriate management, the stability of institutional liabilities is better than that of common deposits. The deposits in China are characterized by “depositing voluntarily and withdrawing freely”. Either an enterprise or an individual may withdraw their deposits in advance provided that they notify the bank one day prior. However, institutional liabilities cannot be withdrawn in advance, and similar to financial liabilities, they are better than the common deposits in terms of liquidity management and term management.

China Securities News: How do you look at the evaluation of the banking industry? Among the banking stocks, why does QFII hold a high proportion of shares of IB?

Li Renjie: With regard to the evaluation of the banking industry, I think it is undervalued. There are many factors, of which the most direct one is the insufficient funds in the market. All the stocks of the banking industry are large-capitalization shares. When there are not sufficient funds, the fund managers will invest more funds in the medium- and small- capitalization shares in order to seek a better performance ranking. Through consultation with the foreign investors in 2003, the PB ratio of the price at which the shares of IB were sold to foreign investors was 1.8times of that of PB but now the PB ratio of the bank is about doubled and the quality is far better than that in 2003. In the future, IB will be still confident in maintaining the quality of assets and keeping a stable ROE, and will keep the momentum of overall profit growth in the previous years.

For five years after the IPO of IB, the ROE has been kept around 24%-25%, ranking front in the market. IB regards ROE as the most important index for business operation. As ROE is a composite index that reflects many management measures, to provide good returns to shareholders, the management team hopes to keep a relatively stable ROE. The high proportion of shares of IB held by QFII shows that overseas investors recognize the investment value of our bank.

China Securities News: As the Chinese banking industry is confronted with heavily homogenized operation, what measures does IB take to promote the differentiated businesses? Which directions will IB focus on in the future?

Li Renjie: Due to the uniform regulatory standards, our banking industry now faces serious homogenization. IB is making great efforts to realize differentiated development. For instance, the asset-liability structure of IB is significantly different from other banks. The deposit and loan interest rates of our bank have a big floating range, and the proportion of loans and deposits in the asset-liability of IB has kept going down gradually. The non-credit assets account for over 50% of the total assets of our bank, and have realized market-oriented pricing. As the market-oriented and integrated development, market-oriented interest rates in particular, becomes an unavoidable trend for the banking industry, IB has made arrangement ahead. By taking such measures as internal system construction and FTP (funds transfer pricing), our bank has kept improving our sensitivity to the market, endeavoring to open its own path in every business line and establish comparatively advantages in some local markets and fields.

In terms of specific business types, now IB basically has three business lines, which are developed in a balanced manner:

In the aspect of corporate businesses, our bank will classify our customers in the future, and we will provide services to large-sized customers more through direct financing. IB will put business emphases on SMEs, and we have put forward the strategy of running the bank mainly based on medium-sized enterprises. In the long run, the growth and diversified businesses of medium-sized enterprises in the future will provide our bank with a broad room for our integrated businesses, and this also matches the current scale of IB. The businesses of IB will become increasingly integrated. Besides deposits, loans, and settlement, our bank will engage in more other businesses. For instance, we can provide such services as financial consulting for IPO and merger and acquisition.

The retailing businesses are still an important business line. The retailing business model of IB is different from those of other banks. While the wealth of resident keeps increasing, IB will provide more such services as wealth management and assets management to customers in the future.

Institutional businesses, including the finance market businesses, constitute a major feature of IB. The bank has over 20,000 customer network sites, which are connected with the bank-bank platform, equivalent to the outlets of a large bank. Moreover, the network scale still keeps growing now. Meanwhile, the network advantages are being brought into play now.