"Abandon the conventional wisdom of 'judging heroes by scale and speed'. Zhang Jinliang, the new chairman of China Construction Bank, said at the bank's 2023 results conference held in Beijing on April 2, 2024, which has been on the screen of the financial and media circles for several days. In the current counter-cyclical moment, this sentence is meaningful. Bank of China, which held its 2023 results conference on the same day as CCB, has attracted more attention from the market about the scale and speed of its assets.
As the oldest commercial bank in China's financial industry, Bank of China was once unique for being the most "international", and its total assets were second only to ICBC. However, the Southern Weekend New Finance Research Center reviewed and compared the annual reports of the four major banks in the past 11 years and found that compared with CCB and ABC, the development rate of BOC has slowed down. Since 2013, Bank of China has ranked last among the four major banks in terms of total assets, revenue and net profit, and the gap with the relevant indicators of CCB and ABC has been widening year by year.
Just as Zhang Jinliang said, "Finance is a marathon", in this long-distance race, how did the Bank of China stall in its development? Was it a mistake in business strategy for a certain period of time, or was it due to some systemic reason? Why did the overseas business, which once occupied half of the country, now account for only about one-fifth? What role did it play in this process?
In order to explore the above reasons, the Southern Weekend New Finance Research Center further examined the financial reports of the Bank of China and the other three major banks for a total of 20 years from 2004 to 2023, and compared the main indicators and found that the high proportion of the BOC's overseas business may be swapped between advantages and disadvantages, the short-lived domestic ultra-high credit growth rate in 2009, and the excess reduction of outlets compared with the three major banks may be the factors for the decline in the size and profit of the bank.
Although the gap with CCB and ABC has been widening year by year, BOC's revenue and net profit have continued to perform better than other large state-owned banks against the backdrop of continuous decline in revenue and net profit mainly relying on reduced provisions since 2021.
Does the Bank of China make it necessary to catch up with the three major banks in terms of scale and speed as its top priority? The Southern Weekly New Finance Research Center believes that in the face of the tightening of global financial regulations, the Bank of China should cherish its overseas licenses and closely follow the overseas strategy of Chinese enterprises, and continue to increase the share of domestic business, but should pay more attention to the quality of business.
Bank of China's overseas business was overtaken by ICBC?
Placed in a wider range of peers, what is the 2023 performance list of Bank of China, which is highly concerned?
According to statistics from the New Finance Research Center of Southern Weekend, as of April 6, among the 42 A-share listed banks, a total of 21 banks have disclosed their 2023 annual reports, including 6 large state-owned banks, 7 joint-stock banks and 8 small and medium-sized banks (including urban commercial banks and rural commercial banks), accounting for about 86%, 87% and 87% of the total assets, revenue and net profit of all listed banks.
As of the end of 2023, the total assets and net profit of these 21 banks increased by 11.66% and 1.94% year-on-year on average, but the revenue increased by 4% year-on-year. Among them, Bank of China is the only major state-owned bank with the growth rate of total assets, revenue and net profit all outperforming the average. Regarding the business strategy for 2024, Liu Jin, President of the Bank of China, specifically mentioned that he will actively build an international financial institution with Chinese characteristics.
In fact, before 1994, as a national bank specializing in foreign exchange and foreign trade, Bank of China was regarded as the most "international" commercial bank in China's banking industry, and its overseas business, including Hong Kong, Macao and Taiwan, once accounted for half of the bank's business. However, the 2023 financial report shows that BOC's overseas business assets and revenue account for only about 1/5.
In the process of decreasing the proportion of overseas business itself, has the Bank of China, which has long been at the forefront of the industry in various indicators of overseas business, been overtaken by ICBC? A landmark event occurred in 2015. In the same year, ICBC completed the acquisition of a 20% stake in Standard Bank, the largest commercial bank in Africa, becoming the single largest shareholder of the latter. ICBC's international business accelerated. Since 2019, ICBC has put forward the strategy of building a "preferred bank for domestic foreign exchange business".
The following year, media reported that in 2019, ICBC had surpassed Bank of China in terms of the number of overseas outlets and the degree of internationalization. According to an in-depth survey by the Southern Weekend New Finance Research Center, ICBC established 428 institutions in 48 countries and regions around the world at the end of 2019. During the same period, BOC covered 61 countries and regions and had 557 overseas institutions, including 427 institutions in Hong Kong, China.
Comparing the data of the 2023 annual reports of the two banks, the Southern Weekend New Finance Research Center found that the total assets, deposit balances, loan balances, pre-tax profits and number of institutions of BOC's overseas business (including Hong Kong, Macao and Taiwan) all exceeded ICBC's, while the NPL rate was 65 basis points (or 30%) lower than that of ICBC.
In terms of foreign currency business, BOC continued to lead in foreign currency deposits and loans and foreign currency bond investment. As of the end of 2023, BOC ranked first among domestic peers in terms of personal cross-border business income, personal foreign exchange settlement and sales volume, and foreign currency personal deposits. As a quotation bank in the interbank foreign currency lending market, ICBC continues to maintain its leading position in the domestic foreign currency lending market.
In the area of cross-border RMB business, BOC also serves as the main channel for cross-border RMB circulation. As of the end of 2023, BOC handled RMB 57.35 trillion in cross-border RMB settlement, a year-on-year increase of more than 80%, ranking first in the industry in terms of market share, and 15 of the 33 RMB clearing banks in the world, continuing to rank first in the industry.
However, with the advantage of the most abundant industrial and commercial enterprise customer resources in the domestic banking industry, the overall strength of ICBC's international business has caught up with Bank of China and ranked second. In 2023, ICBC's cross-border RMB business settlement volume reached 9.24 trillion yuan, which is equivalent to 72% of BOC's business volume in the same period.
Based on the comprehensive advantages of the Bank of China in overseas business, foreign currency business and cross-border RMB business, researchers from the New Finance Research Center of Southern Weekend believe that in terms of international business and foreign currency business, the Bank of China is still the "head goose" of China's banking industry to internationalize
Take the lead and fall behind
Bank of China, which has obvious advantages in international business, was once the leader in the share reform and listing of wholly state-owned banks, and was also the "second" among the four major banks after the share reform. How did it fall from the "second" to the "fourth" and widen the gap with the top three? How does it differ from the development trajectory of the other three major banks?
The evolution of history may reveal traces of development. Founded in 1912, Bank of China is the only bank in mainland China that has been in continuous operation for more than 100 years. It was not until 1994 that the Bank of China, together with three other major banks, carried out commercialization reforms, and was approved to transform from a professional bank to a wholly state-owned commercial bank. Since then, the Bank of China has gradually transformed from a national bank specializing in foreign exchange and foreign trade to a state-owned commercial bank that provides comprehensive financial services to enterprises and residents. Ten years later, in 2003, Bank of China and CCB were selected as pilot banks for joint-stock reform, and in 2004, they were restructured into joint-stock commercial banks, and then became the first A+H listed bank in 2006.
According to the Southern Weekly New Finance Research Center, in 2004, at the beginning of the share reform, Bank of China was the second largest commercial bank in China after ICBC in terms of total assets. Although the scale of deposits and loans of the Bank of China ranked last among the four major banks that year, the gap between it and the third place was only less than 5%.
From 2005 to 2009, the four major banks successively completed the shareholding system reform, and not only did their asset quality take on a new look, but they also met the economic and institutional dividends brought about by the wave of globalization after China's accession to the WTO. With the rapid growth of China's economy, the asset scale of the four major banks has expanded at an average annual rate of nearly 20%. However, the Bank of China expanded at the lowest rate among the four major banks during this period, averaging only about 15% per year. After 2009, although the Bank of China tried to catch up, the outcome was not ideal. As shown in the chart below, the growth rate of BOC's long-term assets is still lower than the average of the four major banks.
In terms of the size of deposits and loans, the performance of the Bank of China during this period was very different from that of the other three major banks. Among them, the gap between the deposit scale of the Bank of China and the other three major banks is widening. In just five years, by the end of 2009, the gap between the balance of deposits of the Bank of China and the Agricultural Bank of China, which ranked third, had widened to more than 10%. Fourteen years later, at the end of 2023, the balance of deposits of the Bank of China was 4.6 trillion yuan less than that of the third-ranked CCB, and the gap with the third-ranked bank further widened by more than 20%.
Bank of China has seized the opportunity in the progress of share reform and listing, why did it lose speed to its peers after that?
According to a survey by researchers at the New Finance Research Center of Southern Weekly, one of the reasons for this is the BOC's own relatively weak domestic business. As a typical pro-cyclical industry, the prosperity of the banking industry is closely related to the macro economy. Therefore, although the overseas business looks very "foreign", the domestic market is the real main battlefield of the big four banks.
In the 35 years from 1978 to 2013, the dividends of the reform and opening up system were fully released, and China's economy maintained rapid development. In the 20 years from 1993 to 2013, China's GDP grew at an average annual rate of more than 15%, and in the last 10 years of 2013, China's economic development entered a new normal, with GDP still maintaining a medium-high growth rate of 7.8% per year.
Compared with the world economy over the same period, the average annual growth rate of the world economy was 5.6% between 1993 and 2013, but this growth rate fell to 2.9% between 2013 and 2022.
According to a researcher at the New Finance Research Center of Southern Weekly, China's economic growth has consistently outpaced the average growth rate of the world economy for more than 40 years, which is obviously more beneficial to Chinese banks that rely on asset expansion and interest margins as the main source of income and profits. Specifically, as far as BOC is concerned, the reason why its business underperforms the other three major banks is not only due to its own reasons, but also the result of the intertwining influence of various external factors.
One of the internal factors: the mainland business is congenitally weak, and the absolute gap is widening
In the same economic environment, what are the main reasons why BOC lags behind the big three?
According to a study by the Southern Weekend New Finance Research Center, although the overall strength of the four major banks was relatively similar in 2004, from the perspective of Chinese mainland business, BOC has been in a relatively weak position since the beginning of the share reform. At the end of 2005, BOC's total assets, operating income and total profit in Chinese mainland ranked third with 85%, 71% and 60% respectively, while the number of BOC's mainland outlets was only about 80%.
By the end of 2023, the absolute gap between BOC's mainland business and the other three major banks in terms of the above three indicators has widened, but the relative gap has increased and decreased. Among them, the total assets of BOC's mainland business are only 72% of CCB's, a decrease of as much as 13 percentage points, but the proportion of operating income and total profit relative to the third-ranked bank has increased by about 2 percentage points and 18 percentage points respectively compared with 2005.
The data in the above chart shows that although the contribution of BOC's mainland business to the bank's revenue and profit continued to increase, and the return on assets of the mainland business increased significantly, it did not help BOC catch up in terms of asset scale, but continued to widen the gap between lagging behind.
The second internal factor: the rapid expansion of credit is unsustainable
In the face of the widening gap, the then management of the Bank of China was not indifferent, and the opportunity to catch up "fell from the sky" in the 2008 global financial crisis. In November of that year, China launched a $4 trillion economic stimulus package to boost the economy by massively increasing investment. The record investment plan required record credit support, which may have been the opportunity for the BOC's then management to expand its balance sheet.
Researchers at the New Finance Research Center of Southern Weekend confirmed from a number of witnesses that among the four major banks at that time, the Bank of China was a firm executor of the 4 trillion plan. The financial statements of the Bank of China also bear out this assertion.
From 2004 to 2008, the growth rate of the bank's loan scale remained at an average annual rate of about 10%, second only to CCB among the four major banks, but in 2009, the bank's loan balance grew by more than 50% year-on-year, which was the only time in the past 20 years that the annual growth rate of the loan balance of the four major banks exceeded 50%.
At the end of 2009, the balance of loans of the Bank of China surpassed that of the China Construction Bank and the Agricultural Bank of China to rise to the second place among the four major banks. From 2010 to 2017, the balance of loans of Bank of China has always been the third of the four major banks, but its advantage with Agricultural Bank of China has been shrinking year by year. In 2018, ABC's loan balance surpassed that of BOC, and the gap has widened rapidly since then. As of the end of 2023, ABC's loan balance has surpassed BOC's by more than 2.5 trillion yuan, equivalent to nearly 14% of BOC's credit balance that year.
One of the results of the rapid expansion of the bank's loan scale in 2009 was that the total assets of the bank surpassed the Agricultural Bank of China in 2010-2011 to rise to the third place among the four major banks. However, since 2010, the growth rate of BOC's operating income and net profit has declined sharply, and it has been lower than the average of the four major banks for three consecutive years.
The momentary urge to expand beyond the norm is not sustainable. Since 2012, the main operating indicators of the Bank of China have not fluctuated significantly, and the year-on-year change rate of assets and loans, operating income and net profit has fluctuated in a narrow range in line with the industry average. However, in terms of scale, in the past 11 years, the gap between BOC and the other three major banks has widened significantly. As of the end of 2023, the total assets, deposit balances and loan balances of the Bank of China are 15% (compared to CCB), 17% (compared to CCB) and 10% (compared to Agricultural Bank of China) compared to the third-ranked bank, respectively.
Internal Factor 3: Overseas business dragged down net interest margin
Credit expansion is supposed to boost revenue and profit performance, so why is the Bank acting unusually?
Further research by researchers at the New Finance Research Center of Southern Weekly found that the level of net interest margin of the Bank of China has fallen sharply since 2008. Between 2008 and 2021, BOC's net interest margin was significantly lower than the average of the four major banks, and the gap was as high as 45 basis points at the maximum.
From 2008 to 2023, the adjustment of the People's Bank of China's loan benchmark interest rate and the performance of the bank's net interest margin can be seen that in the 2008-2009 interest rate reduction cycle, the bank's net interest margin fell significantly more than its peers, but after the change to interest rate hike in 2010, the bank's net interest margin increased less than that of its peers. This shows that BOC's net interest margin is not only weaker than its peers, but also inelastic.
Further research by the New Finance Research Center of Southern Weekend found that the high proportion of overseas assets of the Bank of China is the main reason why the bank's net interest margin has been lower than that of its peers for a long time. Hong Kong dollar assets are BOC's major overseas assets, and from 2008 to 2022, the net interest margin of Hong Kong's banking sector was significantly lower than that of the mainland. Take Hong Kong's three major listed banks and note-issuing banks, HSBC Holdings, Hang Seng Bank and Bank of China (Hong Kong), as examples. Since 2011, its average net interest margin and ROA (return on total assets) have been lower than the average of the four major banks for a long time, while the BOC's net interest margin and ROA (return on total assets) are in between.
Internal factor four: the fewest outlets
In addition to the asset distribution pattern, the number and distribution of bank branches are also closely related to the customer base, the scale of deposits and loans, and even the operating performance.
The unique asset distribution structure of the Bank of China determines that the distribution of its outlets is different. At the end of 2023, BOC (including BOCHK) had the fewest number of outlets in mainland China among the four major banks, with a decrease of 67 from 2005. In the same period, the number of CCB's branches in mainland China increased by 704. At present, the number of branches of the Bank of China in the mainland is only about three-quarters of that of CCB, which ranks third.
In terms of the distribution of outlets, 37% of the outlets are located in municipalities directly under the central government, provincial capitals and cities specifically designated in the state plan, and 65% of the outlets are in the top 100 economic cities. These two indicators are not much different from those of CCB. However, more than 60 percent of CCB's more than 3,300 branches are concentrated in the more economically developed cities mentioned above.
Researchers at the Southern Weekend New Finance Center also noted that in 2005, the BOC's single branch asset size ranked first among the four major banks, but the profits generated were the lowest, and in the 18 years to the end of 2023, the growth rate of the assets of a single branch of the Bank of China was the slowest among the four major banks, but the profit growth rate was the fastest. At present, the total assets, revenue and profit level of a single branch of Bank of China are higher than those of Agricultural Bank of China, ranking third among the four major banks.
The drag of overseas business is the main reason for the lag
After the rapid expansion of credit in 2009, are the remaining asset quality problems also one of the reasons for the BOC's lag?
Researchers from the New Finance Research Center of Southern Weekend compared the non-performing loans and write-off loans of the four major banks since 2009. The results show that the main indicators of asset quality of the Bank of China have been better than the average of the four major banks for many years, for example, the bank's non-performing loan ratio has been the lowest among the four major banks for 14 consecutive quarters. In terms of the sum of the balance of non-performing loans at the end of the year and the "write-off or transfer of assets" in the current year, the Bank of China has been less than the other three major banks in absolute terms for nine consecutive years, and has an average annual growth rate of 13.34% in the 10 years from 2009 to 2018, ranking third among the four major banks.
For Chinese banks, which are highly dependent on net interest margins, the Bank of China relied on sacrificing net interest margins in exchange for catching up in scale, which outweighed the losses in the final result. However, it should also be noted that during the 4 trillion yuan economic stimulus plan, the expansion of the non-performing scale of the banking industry due to excess credit is a common phenomenon in the industry, and it is not the main reason why the operating performance of the Bank of China has been lower than the average level of the four major banks for a long time.
Based on the above research, researchers at the New Finance Research Center of Southern Weekly believe that since 2008, BOC, which is also a large state-owned bank, has gradually widened the gap from the other three major banks, mainly due to its large proportion of overseas business. The structural contradiction between the relatively high proportion of BOC's overseas assets and the large strength gap between the other three major banks in the mainland business due to the disadvantage of its outlets not only affects the expansion of its scale but also bears the performance of net interest margin, which is the most important internal reason why the overall growth rate of BOC lags behind that of the other three major banks.
Three major external factors constrain the BOC
In addition to the above-mentioned internal factors, due to the relatively high proportion of overseas business, the development of BOC is more significantly affected by the cyclical impact of the world economy than the other three major banks.
The proportion of BOC's overseas assets has remained stable at more than 20% for a long time. Before the share reform, the industry once said that "half of the country" of the Bank of China was overseas: overseas assets accounted for nearly 30%, and pre-tax profits accounted for 82.7% in 2002. In particular, from 2005 to 2007, the profitability of the Bank of China in Hong Kong and Macau still exceeded that of the Mainland, with an average return on assets (pre-tax profit/assets in Hong Kong and Macau) reaching 2.24%, significantly higher than the 1.03% of the Mainland business.
However, since the outbreak of the financial crisis in 2008, the banking environment in the mainland and Hong Kong has reversed. In that year, the return on assets of the Bank of China in Hong Kong and Macau was only 0.48%, while the return on assets of the mainland business rose to 1.42%. The main reason for this is that the overseas markets represented by Hong Kong and Macao have been continuously affected by the subprime mortgage crisis and the European debt crisis, and the effective demand for credit is insufficient. In addition, the monetary easing policies of European and American countries have led to a sharp decline in the interest rates of the US dollar and other currencies, which has further compressed the profitability of BOC's overseas business.
Another major external factor is monetary policy. In particular, the impact of the change in interest rate policy on the Bank of China has been analyzed above, and the main conclusion is that the loan interest rate of the Bank of China is always lower than that of the other three major banks, and it is relatively inflexible in exchange rate fluctuations. The impact of exchange rate factors on overseas assets of up to trillions of yuan cannot be ignored when they are included in the statements. Overall, from 2005 to the end of 2023, the Hong Kong dollar depreciated by about 12% against the renminbi. If the current exchange rate of RMB is used in the financial statements, there is a possibility that BOC's overseas assets may be undervalued in terms of exchange rate translation.
In addition, the banking regulatory policies also have a significant external impact on the BOC. For example, the loan-to-deposit ratio indicator. Before 2008, the interest rate on the deposit side of the Bank of China was at the same level as other major banks. However, because the Bank of China has the least number of outlets among the four major banks, its ability to collect reserves is correspondingly weak. In 2011, during the "deposit shortage" in the banking industry, the loan-to-deposit ratio of the Bank of China was as high as 76.7%, and at that time, the regulator still imposed a mandatory requirement for commercial banks to have a loan-to-deposit ratio of no more than 75%. This regulatory requirement was not removed until 2015 when the Commercial Banking Law was amended. Therefore, during the period from 2011 to 2015, the disadvantages of the Bank of China's outlets and the regulatory indicators of the loan-to-deposit ratio constituted obvious constraints on the bank's credit growth and asset expansion.
According to the researchers, researchers at the New Finance Research Center of Southern Weekend believe that based on the BOC's own capital structure and resource endowment, and under the long-term intertwined influence of various external factors such as domestic and foreign economic environment, macro policies and industry supervision, its overall scale and development speed in the past 20 years have lagged behind the other three major banks, which is the inevitable result of the characteristics of the times and the specific development stage of China's banking industry.
Why do you have to rely on overseas business to catch up?
Since 2008, the once proud high proportion of overseas business has cost BOC its title as the second largest bank. Does BOC want to abandon its overseas business advantages?
In response to this concern at the 2023 Annual Report Results Conference, BOC's management continued to repeatedly emphasise the importance of overseas business to BOC. Liu Jiandong, risk director of Bank of China, said that globalization is the "most distinctive feature and the most important gene" of Bank of China's century-old company, and said that Bank of China has always attached great importance to global development and will continue to consolidate and expand its overseas business advantages on the basis of maintaining the bottom line of risk compliance.
In the past ten years, the overseas business has "slowed down" the development speed of the Bank of China, and the Bank of China will continue to grow bigger and stronger in the future. Why is that?
The crux of the matter is also net interest margin. Since 2022, the Federal Reserve's sharp interest rate hikes have led to higher interest rates on the Hong Kong dollar and other related currencies, which has greatly improved the environment for BOC's overseas business, and the net interest margin of overseas business has been able to feed back to the mainland business. Among them, since 2022, although the net interest margin of the Bank of China has been in a downward trend, the decline is significantly less than that of the other three major banks. By the end of 2023, the net interest margin of Bank of China is basically the same as that of ICBC and ABC.
However, it has become an industry consensus that the interest rate spreads of the banking industry will still face greater downward pressure in 2024. While both the asset side and the liability side point to a further decline in interest margins, the Bank of China is also facing a unique third hidden danger. As Zhang Yi, Deputy Governor of the Bank of China, said at the press conference, if the Fed nears the end of its interest rate hike cycle in 2024 and enters the interest rate cut channel, the advantage of the Bank of China in 2023 may become a disadvantage in 2024, which will further exacerbate the profit pressure of the Bank of China in 2024.
In the face of the general "interest margin dilemma" in the industry, in addition to the targeted improvement measures on the asset side and the liability side, the targeted strategy of overseas business is more important. Zhang Yi revealed that in 2024, the asset side of BOC's overseas business will continue to expand the scale of high-interest assets and increase the duration and scale of loan investment, while on the liability side, it will strengthen the management of active liabilities, appropriately shorten the duration of liabilities, and prepare in advance to cope with the interest rate reduction cycle.
Researchers at the Southern Zhouxin Financial Research Center believe that from 2022 to 2023, Bank of China's overseas business will benefit from the asset appreciation brought about by the US dollar interest rate hike, and the overall asset growth rate, which has been undervalued for a long time in the past, has also improved to a certain extent. Judging from the current U.S. economy and the Fed's statement, the Fed's expectation of interest rate cuts this year has been significantly weaker than at the beginning of the year. In the coming period, if the Fed still maintains a high interest rate level, it may continue to be positive for BOC's overseas assets. In 2024, if BOC can seize the favorable opportunity to actively make a difference, not only is the net interest margin expected to be the first among the four major banks to stabilize, but also has the opportunity to improve or even narrow the gap with the other three major banks in terms of asset scale, revenue and profit.
Based on this, the Southern Weekend New Finance Research Center suggested that in the context of the tightening of global financial regulations, the Bank of China should cherish overseas licenses, follow the strategy of Chinese enterprises to go overseas, extend the service chain, and make up for the disadvantages of its outlets by leveraging the digital outlet, and continue to increase the share of domestic business, but should pay more attention to the quality of business.
The Southern Weekend New Finance Research Center will continue to follow up on the performance of Bank of China and its overseas business in 2024.
Southern Weekly New Finance Research Center, Li Heming, intern, Zhao Yingxiu
Editor-in-charge: Fengyu