Bank of China Vice President Zhu Min on the Market Potential for Fee-based Income

Zhu Min: “The theme of this forum is: Who Will Be the Winners? Answering this question is very straightforward: those [banks] that have developed products will be the final winners. However, developing [financial] products depends much on the transformation of business structure. This is the key challenge for the Chinese bank industry, after listing and reform.

China’s banking industry reform has made great progress. Clear proof is that China’s top three banks are now among the world’s top 10 banks. However, their business performance is still weak compared to the others.

The ratio of interest income to total assets is 2.1 percent among banks internationally, and 2.2 percent in China, which means interest profitability in China is not low. On this other hand, the ratio of fee-based income to total assets among Chinese banks is 0.7 percent ? much lower than the international standard of 2 percent. This shortfall creates an overall gap between China’s banking industry and world standards. Chinese top three banks ? ICBC, CCB and BOC ? rank on the world top 10 list. They perform well in terms of market size, network, personnel, assets and capital, but [less well] in terms of ROA and ROE. The main reason is low fee-based income. So, the biggest task for China’s banking industry is to increase the ratio of fee-based or “non interest” income [from sources such as credit cards, assets management, security underwriting, and corporate treasury management].

Based on 2005 annual reports, interest income represented nearly 90 percent of the total among many Chinese banks, and the growth of fee-based income was really poor. Compared to other large Asia-Pacific banks, fee-based income made up 8.8 percent of earnings for the biggest Chinese bank (ICBC) while non-interest income made up 57 percent of Tokyo-Mitsubishi Bank’s earnings. Even the smallest foreign bank on the list ? Korean Bank ? earned nearly 21 percent of its income from non-interest business.
Relying too heavily on interest-based income leaves China’s banking industry vulnerable to macro-economic fluctuations. Meanwhile, with the expansion of direct investment market, traditional credit requirements will decline. Banks that rely too heavily on traditional business cannot meet customer needs and will eventually lose business. However, along with the financial reform and the development of capital markets, the market potential for non-interest income is huge in China’s banking industry even though the business structure must be updated.

Great changes are on the horizon for China’s banking industry. Structural changes are transforming the whole market, leading to more mature and wealthier international clients, as well as growing demands for automated transactions and real-time communication. External conditions are also maturing, including regulatory changes, financial reform, market-based interest rates and exchange rates, rapid growth of capital markets, disintermediation, wealth growth and new demands, reform of SOE shareholding structure and stock listings, and internationalization and technology import from strategic investors. Together, all these trends build a foundation upon which China’s banking industry can fully develop its non-interest income business.

We should also track the growth of personal wealth in China. According to Merrill Lynch and Capgemini, China’s fast-growing wealthy population reached 320,000 in 2005, with assets totaling US$1.59 trillion. China has one of the world’s fastest-growing populations of wealthy, and is now the second-largest wealth market in Asia (excluding Japan). Boston Consulting Group predicts that the total mobile assets of wealthy Chinese families will double from US$825 billion to US$1.61 trillion by 2009. Between now and 2015, China will have accounted for 10 percent of the total accrual of global personal financial assets. China is a huge market with high centralization which will lead to fierce competition and high-speed growth of fortune management and individual banking.

Furthermore, market changes will trigger the transformation of Chinese banks, first by expanding their revenue structure from cash management to diversified financial services and second by expanding their services to include investment banking, corporate financial services, consumer financial services and foreign-currency related products. Banks will extend their services to attract high-end customers with intellectual property innovations, online-banking, tele-banking, expanded outlets, shareholding, and M&A services.”

SPEAKER’S BIO

Zhu Min
Group Executive Vice President, Bank of China;
Adjunct Professor, CEIBS.

Zhu Min joined the Bank of China in 1996 after having spent six years as an economist with the World Bank. At BOC, he led the bank’s Hong Kong restructuring and IPO in 2002, then led the group’s IPO in 2006, raising US$15 billion. He currently serves as director of the Western Returned Scholars Association, vice chairman of the China International Economic & Trade Arbitration Commission, and vice chairman of the China International Finance Association (2007).