Chinese banks are deepening their cash, treasury and trade capabilities, with an eye on long-term growth opportunities
By David Hendrickson
Against the backdrop of the evolving financial crisis, banks in China are undergoing a business transformation, with wide-ranging implications for the future of transaction banking in the country. Arguably the most significant development arising from this process is the steady expansion of Chinese banks’ businesses and rethinking of their existing operating approaches.
As larger Chinese lenders upgrade their transaction banking infrastructure, for example, they are considering ways to cash in on outsourcing opportunities. “We are seeing the market demand,” says Li Renjie, president of Industrial Bank (IB), which is putting emphasis on the cultivation of package services to small and medium-sized banks (SMBs) to allow them address gaps in their service network and scale.
“We’re trying to connect ourselves with SMBs in China. They have strong resources and connections in their local areas, but they have limited ties with the outside world,” Li explains. Since IB launched its ‘bank-to-bank’ platform in 2006, it has formed cooperative relationships with just over 200 SMBs in China—77 forged in 2008 alone—in eight business areas such as agent services, clearing and settlement and built its IT system to support these relationships.
The largest outsourcing service arrangement of its kind in China, the platform helped IB nearly double its intermediary income year-on-year in 2008, which now stands at more than 10% of the bank’s total income, Li says. It is also helping IB extend its own interior city presence, beyond the scope of its existing 400 branches and sub-branches nationally. At the same time, many Chinese banks are increasingly looking beyond their own shores to drive their business and profit models.
“Chinese banks are clearly becoming way more global,” observes Lisa Robins, head of JPMorgan China’s treasury and securities services business and a resident of China off and on since 1980. “Just look at history, and how over the last ten years they have opened up branches and how they are approaching their customers,” she says, a trend driven by increased expansion and investment abroad by Chinese corporates.
Despite overseas market woes that have discouraged Chinese financial institutions from leveraging their relative earnings strength and making a vigorous M&A push, many are seeking inorganic expansion opportunities and opening the door to new transaction banking business. The move comes as the industry takes its embrace of international operating methodology to a new level.
“While other banks separate [businesses such as cash management, payments and settlement] from their trade finance units, we have brought them together in our operating model because we feel they are all closely linked,” says Lin Zhihong, China Minsheng Bank Corp’s (CMBC) trade finance president. The bank’s integrated approach is modelled after global peers, but is only starting to find a place within the industry in China, he claims.
Market difficulties are not making things easy for people like Lin. At present, China’s $2.56 trillion trade finance space is being particularly hard hit by reduced import-export demand, which has dampened on business prospects. In 2009, official estimates forecast a 4% decrease in the country’s annual international trade volume. Private estimates are even less favourable, projecting a slowdown of at least 10% year-on-year. Yet China’s market depth and opportunities for sizeable onward business growth are giving banks plenty of cause to march forward.
Lin notes that CMBC is now preparing to replace a legacy international settlement system, still common among Chinese banks, with a new core banking extension. The upgrade is intended to support the department’s integrated business approach and address market, client and operating needs over the next 5-10 years.
“Trade finance, like cash management, is an area where companies will always have a need,” adds Robins, who anticipates the former to pick-up in China in the second half of this year. To capitalise, JPMorgan and other foreign banks in the country are investing heavily to launch new branches and scale up platforms to support customers’ in in-country product and servicing needs.
The spoils are potentially significant, as illustrated by Chinese banks’ recent transaction banking performances. Agricultural Bank of China, for example, grew cash management revenue 28% in 2008, its highest total in the last five years, boosted by system integration under a new settlement and cash management department. Bank of Communications’ treasury services business, meanwhile, reported 45% growth in investment securities interest income and a respectable 4% return last year, benefiting from the introduction of a new financial markets division intended to better manage currency options and facilitate growth. CMBC has furthermore drawn 70% compound trade finance business growth over the last three years.
The branching out of the industry in China and the deepening of players’ transaction banking repertoires also translate into added business complexity and interdependence, with related challenges made more acute by the crisis environment. “Risk management is an ongoing area of concern for clients,” Robins says. “[Counterparties] want to know that the banks they are dealing with are solid and stable and a safe place to put their money.”
Bankers are also feeling the heat from China’s regulators. “Regulations are promulgated so rapidly…we try to anticipate as best we can, but oftentimes have to react very quickly,” Robins adds. Stepped-up risk management parameters and a tide of other new regulatory requirements are only part of the challenge. At the same time, regulatory controls continue to keep a lid on many products and services in China, particularly among foreign banks and in areas such as the repatriation of surplus cash by their MNC clients. There are signs that greater liberalisation in the Chinese market is possibly on the way, however.
The piloting of the RMB as an international trade settlement currency, which began in July 2009 and involves 200 Chinese corporates in five locations, is billed an important next step in this process. In the short-term, the move has immediate implications for FX liquidity and trade finance, says Robins, putting a new currency into play for banks and corporates. It also raises the question, “what potentially may happen after the pilot and after the RMB becomes a more integrated global trade currency if it were to become one,” she notes.
If the profound changes now occurring across in the industry in China are any indication, FI players should be prepared to address such issues and the opportunities and challenges they present sooner rather than later.
