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Banks' new strategies amid financial crisis

By Wang Zhenghua (China Daily)
Updated: 2008-11-24 16:16

Although banks in China face nowhere near the challenges confronting their overseas counterparts in the financial crisis, they are sure to expect a tough year ahead because of uncertainties in the nation's economy and the gloomy global economic outlook.

Slower economic growth, a narrowing interest spread, the falling of export-oriented companies and the cooling housing market are eroding Chinese lenders' profit growths, while raising the default loan levels.

Foreign lenders in China, which focus on offering wealth management services, are also suffering because of the poor performance of their products stemmed largely from the fallout from the financial crisis that was outside their control.

Analysts say China's Central Bank may further lower interest rates and has already lowered the interest rate three times since September.

Bank of Communications, the nation's fifth largest lender, says it will take extraordinary steps to handle a narrowing interest spread that is eroding the lender's profit. The bank, in which Europe's biggest bank HSBC owns an 18.6 percent stake, posted a 21.7 percent net profit growth for the third quarter, a sharp fall from the 81 percent profit surge recorded in the first half of this year. The global financial crisis is behind the slowdown.

"The major pressure comes from cuts of interest rates and a downward trend of the interest spread," says Yu Yali, the bank's vice-president and chief financial officer. Other challenges include increasing liquidity in the market that reduces banks' bargain abilities.

To deal with slowdown, the Shanghai-based bank says it will keep diversifying its business scope and following the path of internationalization.

It will also strengthen money transfer management and treasury operation, and enhance lending support for small- and medium-sized enterprises.

Confronted by risk of the rising default loans, Yu says her bank will devote more resources to studying clients' financial backgrounds and worth and be cautious in lending.

Others, including Bank of China's vice president Zhu Min, see a silver lining for the banking industry.

It's about time to raise its management level and core competitiveness, Zhu told a recent financial forum held by China European International Business School.

"Banks abilities to price the risks will be raised," the banker says, because financial institutions are allowed to fine-tune lending interest rates within a certain range though the Central Bank has lowered the rates.

He also stresses that fee-based income is key to a bank's sustainability. Banks' non-interest income ballooned to record high last year, mainly contributed by funds distribution. But the revenue in the sector has plummeted since, along with the sluggish stock market.

Zhu says banks should expand sources of fee-based income, such as developing Internet banking, distributing insurance products and gaining from yuan settlements.

Others stressed a "defense" strategy when leaner times comes.

Eddie Wang, president of China Mingsheng Banking Corp, says the economic slowdown offers good opportunity to enhance Chinese lenders' competitiveness, while also lowering the costs.

According to the banker, who worked for Europe's biggest bank HSBC for most of his career, domestic banks are less competitive concerning the profit rate of cost than their overseas rivals, though the interest spread is wider in China and human resource costs remain low.

That's partly caused by high-flying operation expenses, because Chinese banks failed to understand the real attraction for clients and did not do enough on brand building, he says.

Domestic players also paid insufficient attention to corporate culture. "Only attractive corporate culture could retain your talented people for 30 and 40 years," Wang says. For example the salary at HSBC is always slightly lower than the market level but the British lender is successful in helping its employees grow and raising their abilities.

"It's time to talk about lowering your costs rather than making more money," Wang says. "You become more flexible when you are leaner," referring to the low stock price at a time when China's equity market is slack.

"To defend is the way to success," the banker says.

Foreign banks' opportunity

China will remain a magnet for foreign banks, which take a share of about 2.3 percent in terms of total assets value, as business in their home countries keep shrinking.

"One opportunity for foreign banks is that China is transforming from a product exporter to capital exporter though it will take time," says Shen Minggao, chief economist with Caijing Magazine.

"Experiences in Japan and Taiwan illustrate that overseas investment will go up with currency appreciation," he says. "Foreign banks have rich expertise in the sector."

Also, Shanghai, long known for its dream of becoming an international financial center, needs foreign banks to fend off the disadvantage that most of the heavyweight Chinese lenders are headquartered in Beijing.

"Shanghai has a good opportunity to build the financial hub. We will attract more financial services to the city," says Shanghai Financial Services Office head Fang Xinghai.

Nationwide, overseas institutions will help fill the gap caused by insufficient supply of financial services by domestic institutions.

Jackson Cheung, CEO of Societe Generale (China), says his bank, France's second-largest by market value, will open 50 to 60 new outlets in China over the next five years and bring on more services like retail banking, corporate banking and consumer finance banking.

The French bank is also seeking partnerships with domestic players with local knowledge and customer base.

"There is good reason for us to do more in China," says Christine Ip, China head of Standard Chartered Bank's consumer banking business. "China is still growing at about 9 percent."

The Asia-focused bank, suffered a setback on wealth management because of the lukewarm performance of nearly all major markets due to the financial crisis, will concentrate on small and medium-sized enterprises (SMEs) business, mortgage loans, unsecured personal loans and development of products adapted to current conditions.

The bank has expanded the unsecured lending services for SMEs to 11 cities and doubled the maximum lending amount to 1 million yuan.