The beery banker

Soon to offer credit cards and mortgages too?

“What’s breaking into a bank compared with founding one?” mused German poet and playwright Berthold Brecht.

Executives at China Resources Holdings, a state-controlled enterprise, may not be that familiar with Brecht’s work. True, his Marxist ethos may have resonated with the cadres who ran China Resources three or four decades ago. But today’s management takes a different view: it wants to build its own bank.

China Resources has not featured very prominently in WiC, which is a bit of an omission given it is one of the nation’s oldest and most prominent conglomerates. It operates more than 3,000 supermarkets and more than 70 breweries. Its Snow beer brand (see WiC65) is the world leader in sales volume, and the company is also the largest shareholder in China Vanke, one of the country’s largest listed property developers. Aside from that it has major interests in cement, pharmaceuticals and electricity generation (via China Resources Power).

Now it fancies its chances in banking, too, although it isn’t the first non-financial SOE to want to get into the sector, says Economy and Nation Weekly. The pioneer was CNPC, the parent company of listed oil major PetroChina, which began applying for licences of its own in 2002. It now has asset management, life insurance and leasing businesses, and in 2007 purchased the Karamay City Commercial Bank franchise (all have since been integrated under the Kunlun financial brand).

State Grid – China’s electricity distribution giant – has a financial services arm under the Yingda brand, and Baosteel Group and COFCO have also developed financial services businesses, according to Caing.com.

The relatively cautious pace of expansion in most of these businesses suggests some reluctance on the part of the banking regulators to allow a more rapid advance. For example, Caing quotes Yan Qingmin, assistant chairman of the China Banking Regulatory Commission, that CBRC has not been seeking to promote “integration of industry and finance in principle”. But the largest, best-connected state enterprises can still break into the sector, it seems. CBRC counters that only enterprises related to “national strategic resources” have been given the green light.

No doubt the state-owned banks will have been lobbying against encroachment on their patch, especially from newcomers with little experience in the business. The retort is that many of the leading SOEs have internal financing divisions that have become sophisticated organisations in their own right, and can provide a bridgehead into client-facing businesses.

PetroChina, State Grid and China Resources can also point to their pre-existing distribution networks. Just as Tesco is now developing a financial services business in the UK, the argument is many of the big SOEs can do something similar, as respected brands with millions of customer relationships. Hence China Resources chairman, Song Lin, said last year that the firm plans to capitalise on the 100 million families that use its supermarkets annually and the 30,000 that buy property from Vanke: “If we tap into the financial market with such rich customer resources at hand, we will be able to generate ever-increasing profits for the entire group.”

In China Resources case, it first purchased control of the Zhuhai City Commercial Bank network in 2009 but has only recently renamed the 49 branches as China Resources Bank of Zhuhai. It says it will be looking to expand, firstly in the surrounding environs of Guangdong province but then further afield.

Just like the other SOEs keen on offering financial services, the company sees a sector in which lucrative profits can often be higher than those in its existing businesses.

That assumption looks reasonable on current form, with all of China’s leading banks announcing strong performance in the last few weeks.

For instance, ICBC – still the world’s biggest bank by market value – announced first quarter net income up 29% on the same period last year, at Rmb53.8 billion ($8.3 billion). That was 49% better than JP Morgan Chase, the most profitable bank in the US, Bloomberg reported.

Elsewhere, profits also came in above expectations (Bank of China was up almost 28% and Agricultural Bank up 36% on a year earlier), even though profit growth actually slowed on a stellar 2010.

It’s this type of return that is attracting outsiders – even though there are warnings that the banks’ halcyon days are unlikely to last.

One concern is that the big banks are failing to put aside enough capital in provisions for non-performing loans. Why? Because an internal report leaked from the CBRC last year seems to suggest that a much larger share of recent loans is likely to go bad than the industry is making allowance for.

Last month Patrick Chovanec, a professor at Tsinghua University’s School of Economics and Management, looked at ICBC’s loan book, and asked what would happen if 10% of the bank’s new net lending over the past two years goes bad (one of his more conservative projections).

The answer? That a Rmb171 billion ($25.9 billion) additional charge would be required and that would have reduced last year’s pre-tax profits by a factor of almost five to Rmb44 billion ($6.7 billion).

Such forecasts have not dented China Resources’ enthusiasm. But Economy and Nation Weekly says regulators worry about a potential new systemic risk. That’s because corporate owners might endanger deposits by making risky loans to their own projects. The newspaper also fears that state-owned giants have enough political clout to circumvent banking regulations.

For similar reasons South Korea has long banned its industrial giants (chaebols like Hyundai) from owning banks. So is it a problem? At this juncture, the Chinese banking sector is fraught with bigger risks – particularly the exposure of the big four banks to local government loans. But if big state enterprises continue to grow their banking businesses, these new ‘findustrial conglomerates’ have the potential to be a source of future trouble.

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