“Two things awe me most,” Immanuel Kant wrote in his Critique of Practical Reason. “The starry sky above me and the moral law within me.”
That poignant quotation was inscribed on the German philosopher’s tombstone. Last month the remark received an unexpected renewal of prominence when it was cited in the president’s statement within China Merchants Bank’s (CMB) annual report.
More broadly Tian Huiyu’s statement had tried to impress upon investors his view that value creation for the bank’s customers had been a commitment for CMB from day one of its operations. But in a more appropriate application of Kant’s thinking, commentators have been taking aim at Tian’s morals, however, following news that the banker is under investigation for corruption.
It sounds like a familiar story for an industry that has been plagued by graft. Nevertheless, CMB has been one of the best-performing Chinese banking stocks for much of the past decade, a period during which Tian was in charge. That makes his case another indicator for pondering what has changed, and what has not, in the Chinese banking sector over the last 10 years.
Who is Tian Huiyu?
China Merchants Bank was set up in 1987 in Shenzhen as part of bold reforms in the city’s special economic zone. The idea was that it would offer financing to those keen to experiment with capitalism – often moving boldly in areas where other banks feared to tread.
A graduate of Shanghai University of Finance and Economics, Tian is a career technocrat in China’s financial sector. He began at China Construction Bank (CCB), then the biggest lender in China. In 1994, he was promoted to become secretary to Wang Qishan, then CCB’s president (Wang – formerly a member of the powerful seven-man Politburo Standing Committee – spearheaded the feared anti-corruption watchdog, the CCDI until 2017).
Tian’s career blossomed as the Chinese economy headed into two decades of unprecedented growth and he became director of retail banking at CCB. According to magazine China Entrepreneur, he was a ruthless operator and more than prepared to fight turf wars with political cadres wanting more of a say in the banking sector. For instance, when he was running CCB’s Beijing office he resisted political pressure to downsize the bank’s branch network in the capital. Later in his career, he refused to buckle to other state enterprises too, including a high-profile clash with state-owned counterpart Everbright Securities in 2019, when he demanded Rmb3.5 billion ($530 million) in compensation on a soured M&A deal (see WiC466).
In 2013, Tian, then only 47, took over from Ma Weihua as CMB’s president. Ma had been an influential figure, growing CMB’s consumer banking business during his 14-year tenure and earning a reputation as “the people’s banker”. Others simply referred to Ma as “China’s best banker” (see WiC194).
But Tian was undaunted, taking CMB to yet another level by differentiating it further from its much larger state-owned rivals, which had dominated corporate lending. The Shenzhen-based lender was the sixth largest bank in China by asset size last year and its share price had tripled prior to Tian’s sacking, making CMB the second most valuable bank in the country, after ICBC. In comparison, ICBC’s share price was largely flat over the same period (more on this later).
What happened to Tian?
Investors were stunned on April 19 when CMB announced that he had been removed from his role as president and a board director with immediate effect.
The bank said Tian was being assigned to another post, without specifying what the new role was. His biography was also removed from the bank’s website.
Bizarrely, just days before the announcement, Tian had featured in a ceremony celebrating CMB’s 35th anniversary. He also presided over an earnings call last month in which the bank reported a 23% increase in net profit to Rmb119 billion last year.
Shareholders have had little time to savour the bank’s fastest period of earnings growth in 10 years. News of Tian’s sacking triggered a 11% slide in its share price in Hong Kong and the CCDI confirmed last Friday that Tian was under investigation for “seriously violating discipline and laws”.
The anti-graft watchdog hasn’t provided any further details on the probe. But the likelihood is that Tian, like many senior figures in the finance sector before him, is going to be punished for corruption.
CMB investors must now wait to see if the investigation extends to a wider group of the lender’s employees, inflicting wider reputational damage. Its share price is down nearly 40% in Hong Kong since February and the CCDI’s intervention could be even more detrimental to the financial heavyweight’s prospects. Hong Kong-listed Huarong, one of the leading state asset management firms, came close to bankruptcy when its chairman Lai Xiaomin was given a death sentence last year after the CCDI found him guilty of accepting record amounts of bribes.
Tian joined CMB at a pivotal time
Sentiment in the banking sector was skittish in 2013 when Tian took over at CMB because of overexposure to property lending and local government debt. There was even talk of a banking crisis as a number of corporate defaults signalled the end of the so-called ‘Beijing Put’ (see WiC229) – an unspoken commitment from the government that it wouldn’t allow China’s large companies to go bust or their bonds to go bad.
On the political front, there was criticism of many of the leading lenders too, including a highly publicised parting shot from then premier Wen Jiabao that the state banks were making excessive profits from their monopoly status.
Policymakers in Beijing were also concerned that the banks weren’t doing enough to support the small and medium-sized enterprises that create the lion’s share of the country’s jobs.
Under new political pressure, profitability at banking giants such as ICBC and CCB started to decline. The major banks reported annualised single-digit growth for their bottom lines over much of the period, although most have rewarded their shareholders with respectable dividend yields (at least in comparison to US government bonds, the world’s favourite asset class).
The wider trend reinforced the general impression that the leading Chinese banks were pretty similar in terms of their operating strategy and they differentiated themselves mostly by their size. The bigger banks typically returned the bigger profits.
So was CMB different from the rest?
In an interview published in 2019, Tian told Euromoney that CMB had “innovation in its blood” and that it was making an effort to stand out from its peers.
Indeed, the lender was different from day one. It was founded as the country’s first commercial lender with a corporate shareholding structure. While the ‘Big Four’ state banks count the Chinese government as their controlling shareholder, CMB’s main backer is China Merchants Group, a state enterprise founded in the Qing Dynasty to pioneer commercial change in the ailing empire.
When Tian took over from Ma in 2013, CMB had Rmb4 trillion in assets. That had grown to Rmb9.3 trillion last year, with CMB’s shares more than tripling in Hong Kong over the same period. The performance of its dual-listed A-shares in Shanghai has been less impressive, but they have still outperformed most of CMB’s state-backed peers.
According to Gelonghui, an investment research platform, CMB is also one of the most popular A-shares for international investors. CMB’s market value was Rmb1.23 trillion at the end of last year, second only to ICBC’s Rmb1.56 trillion. But CMB is running a business with assets that amount to less than 30% of ICBC’s.
In other words, the bank has been trading on a price-to-book ratio of more than 1.5 times, much higher than the 0.4 multiple at ICBC and CCB. Investors have been happy to bestow it with a much higher valuation, Gelonghui says, because of its focus on retail banking. The retail arm accounted for 58% of its income last year, the highest proportion of any of China’s major banks. Its wealth management division is particularly envied by its rivals, with a mobile-banking platform that even promotes other banks’ asset management units and mutual funds.
At a time when lending to China’s large corporates seems to come with greater risks (no more so than in loans to China Evergrande and some of the country’s other property developers), CMB’s focus on retail banking has proved relatively more resilient amid the economic downturn. It posted its highest net profit growth in a decade last month and its share price was poised to challenge its historical highs from February this year – before the news of Tian’s sacking.
What did Tian do wrong?
Until a few days ago CMB was being celebrated as a rare growth story in the banking sector. But another narrative has been taking shape this week as the government redoubles its efforts to root out corruption in the financial sector – doing so against the backdrop of a slowing economy, a distressed real estate sector and worsening outbreaks of Covid-19 across the country.
Obviously the key area of speculation is what Tian did wrong. In the absence of any official announcements on this point, one suggestion is that CMB’s wealth management division had been doing a lot of business with the property sector bosses. In a period in which state policy was to choke off liquidity and push the developers to deleverage, the supposition is that Tian arranged to channel funding to the private sector’s embattled real estate tycoons via wealth management products.
Bloomberg Opinion’s columnist Shuli Ren put some numbers on this hypothesis: “According to Autonomous Research, about 75% of developers’ Rmb2 trillion ($310 billion) of onshore notes are held in wealth-management products. With only 7.2% of its loan book tied to developers, CMB does not have significant direct exposure to the troubled sector. But its wealth-management customers have a sizable one, including Rmb93 billion of non-standard assets sold to its wealthy, private banking clients. Even if the bank won’t have to absorb credit losses because it was simply acting as a broker, didn’t CMB in some sense enable the builders to become this indebted and insolvent?”
That said, the CCDI’s crackdown shows signs of widening too. Only a few days after Tian’s sacking, Everbright Securities announced that its chairman had resigned. Citing unspecified “work adjustments”, Everbright said that five other senior managers had been relieved of their duties. The speculation in the domestic media is that these executives are under investigation too.
In fact, graftbusters said this week that at least 16 officials within the financial sector are being questioned by investigators. Including Tian, 29 senior executives and financial regulators have been relieved of their posts already this year, Caixin Weekly adds. That includes Jiang Yunming, vice-president at an investment firm owned by Fujian’s provincial government. Jiang and Tian were roommates at university, according to local media reports. Also snared: Zeng Changhong, a former official at the stock market regulator, who is suspected of taking bribes.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.