With the implementation of the Measures for the Capital Management of Commercial Banks (hereinafter referred to as the "New Capital Regulations") in 2024, the "off-balance sheet return" of commercial banks (note: in accordance with the latest regulatory requirements, commercial banks will disclose in the new financial statements the operating activities that can not be included in the balance sheet but can affect the bank's current profit and loss, as well as their assets and liabilities). Which banks are leading the way in the process?
On the afternoon of April 17, 2024, Zheshang Bank held the 2023 annual results exchange meeting. Lu Jianqiang, Chairman of Zheshang Bank, and Zhang Rongsen, President of Zheshang Bank, together with the management team, explained the operation and development strategy to nearly 100 investors, analysts and media. In response to the concerns of relevant parties, Zhang Rongsen said that Zheshang Bank has completed the rectification of existing wealth management assets one year ahead of schedule, and by the end of 2023, all wealth management assets have been returned to the balance sheet, "Zheshang Bank now only has one table, and there is no off-balance sheet."
Removing the burden of non-performing assets, Zheshang Bank will become the fastest-growing joint-stock bank in 2023. By the end of 2023, Zheshang Bank's asset scale exceeded 3 trillion yuan for the first time, making it the only joint-stock bank to achieve double-digit year-on-year growth in asset scale, deposit and loan scale, and the only joint-stock bank to achieve double-digit growth in profit and revenue and profit. Lu Jianqiang said that the "spirit" of Zheshang Bank is now in a very good state.
In 2024, Zheshang Bank will continue to "accelerate the curve" in terms of scale, or maintain profit growth by "volume and price synergy"? Zhang Rongsen said that while maintaining a scale expansion rate of about 10%, it will give priority to the quality of operation, "continue to build the ballast stone of weakly sensitive assets in the economic cycle, take digitalization as the main line and scenario-based as the core", invest 70% of the loan increment in small and diversified assets, and maintain a balanced investment rhythm between quarters.
Why buck the trend to expand the balance sheet?
As one of the youngest joint-stock banks, it took 19 years for Zheshang Bank to reach its 3 trillion yuan in assets from its formal establishment. This rate is the second highest among the 12 joint-stock banks.
From 2022 to 2023, the banking industry will generally "reduce revenue and increase profits", and joint-stock banks such as China Merchants Bank, Industrial Bank and Ping An will slow down some retail business due to rising risks. As the banking industry as a whole experienced a cyclical trough, Zheshang Bank's asset scale and profitability grew rapidly against the trend, becoming a "dark horse" among joint-stock banks. The bank's growth rate, operating performance and asset quality have all hit the best levels in recent years.
As of the end of 2023, Zheshang Bank's total assets, deposits and loans increased by 20%, 11% and 12% year-on-year respectively, all of which were the fastest among joint-stock banks, and its operating income and net profit reached 63.704 billion yuan and 15.493 billion yuan respectively, an increase of 4.29% and 10.75% year-on-year, respectively, ranking first among joint-stock banks and the only joint-stock bank to achieve positive revenue growth.
Why did Zheshang Bank buck the trend and expand at a high speed? Is there a hidden risk or chaos behind it? The performance of Zheshang Bank has even attracted the attention of the regulatory authorities. In response to the concerns of all parties, Zhang Rongsen said that the ability to maintain such a rapid growth is first of all because Zheshang Bank will complete the allotment of shares in 2023, coupled with the accumulation of profits in 2022, and replenish the capital of 20 billion yuan in a timely manner. In addition, the bank also issued 30 billion yuan of secondary capital bonds.
However, the Southern Weekend New Finance Research Center found that compared with peers such as China Merchants Bank that did not carry out equity financing, the improvement of Zheshang Bank's capital position after the allotment financing was limited. As of the end of 2023, Zheshang Bank's core Tier 1 capital adequacy ratio, Tier 1 capital adequacy ratio and capital adequacy ratio were 8.22%, 9.52% and 12.19%, respectively, ranking the lowest among joint-stock banks. Among them, the Tier 1 capital adequacy ratio fell by 0.02 percentage points instead of rising year-on-year. It can be seen that the growth rate of Zheshang Bank's risk-weighted assets in 2023 is higher than the growth rate of its net Tier 1 capital.
Under the general trend of shortage of high-quality assets, where will Zheshang Bank's large-scale loans be invested? Zhang Rongsen said that the new loans issued by Zheshang Bank in 2023 are mainly small loans, personal loans, supply chain finance and high-grade bonds. Personal loans mainly focus on housing loans, car loans, parking space loans, decoration loans, home appliance loans and consumption installments in family scenarios; inclusive small and micro loans are the dominant business that Zheshang Bank relies on and occupies an important position in Zhejiang county finance; Zheshang Bank also holds a large number of AAA and AA+ high-quality bonds, and holds a lot of commercial bills and bank bills in stages to supplement the balance of the asset pool. These are risk-free or low-risk assets. Zhang Rongsen revealed that by selecting industries with low capital consumption, the industry concentration of loans and the concentration of customers will be reduced, and the scale of the customer base will be increased. In the past three years, Zheshang Bank has lent a total of 500 billion yuan in the above areas, and the non-performing rate of new loans is only 0.17%.
Achieving "One Table" in Advance
Asset quality is the lifeblood of commercial banks. In the context of rapid growth in scale, the non-performing ratio of new loans remains low, what is the overall asset quality of Zheshang Bank?
According to the annual report, the bank's NPL rate at the end of 2023 was 1.44%, down 3 basis points year-on-year, and declining for two consecutive years.
At the same time, the bank's non-performing loan provision coverage ratio was nearly 183%, rising for two consecutive years. From the perspective of the scale of provisions, the balance of loan impairment provisions of Zheshang Bank at the end of 2023 was 44.9 billion yuan, an increase of 4.2 billion yuan year-on-year, and the increase was basically the same as that in 2022. It can be seen that Zheshang Bank has not beautified its profitability by drastically reducing provisions.
However, compared with the leading joint-stock banks, there is still a gap in the asset quality-related indicators of Zheshang Bank. For example, the NPL ratio is only better than that of Minsheng Bank among A-share listed joint-stock banks, and the provision coverage ratio is only higher than that of Minsheng Bank and China Everbright Bank. (Note: The 2023 annual reports of Shanghai Pudong Development Bank and Huaxia Bank have not yet been disclosed)
Zheshang Bank's non-performing assets are mainly due to historical problems such as wealth management assets, which are concentrated in off-balance sheet business. In order to solve these historical burdens, Zheshang Bank has set up a special asset risk collection and resolution team. In response, Zhang Rongsen said that Zheshang Bank's wealth management assets accounted for a relatively large proportion. As a result of hard work, by the end of 2023, all existing wealth management assets have been returned to the balance sheet, and the rectification task has been completed one year ahead of schedule. "Zheshang Bank now only has one table, and there are no off-balance sheet assets. He said that after the stock of wealth management assets were returned to the balance sheet, they were digested through a series of methods such as collection, transfer, write-off and revitalization, and sufficient risk provision was made as required.
Pan Huafeng, assistant to the president and chief risk officer of Zheshang Bank, said that under the premise that the bank's fundamentals are good in 2023, based on realistic and long-term considerations, the regulator has decided to return all historical wealth management assets to the balance sheet and make unified provision for impairment. Affected by this, the proportion of impairment provisions to revenue of Zheshang Bank in the past two years is significantly higher than that of its peers. In 2023, the scale of non-performing loans and full-caliber non-performing assets disposed of also hit a record high. At the same time, the bank's special asset risk collection and mitigation team also completed its mission.
However, compared with the revenue, profit and asset quality indicators of joint-stock banks such as China Merchants Bank and Industrial Bank when they first reached 3 trillion yuan in assets, Zheshang Bank still has a significant gap.
Weakly sensitive assets to the economic cycle account for 1/3 of revenue
Different from the annual reports of other listed banks, in the 2023 annual report of Zheshang Bank, many new concepts and new words have emerged. Among them, the new concept of "assets that are weakly sensitive to the economic cycle", which is unique to the bank, has been repeated as many as 24 times.
As the inventor of the new word "inventor", Zhang Rongsen has his own views on the connotation and extension of "weakly sensitive assets to economic cycles" and the relationship between them and the operation and development of banks. In his view, as a pro-cyclical industry, the more ideal operating state of banks is that "when the economy is relatively good, banks operate well, but do not pursue the best; when the economy is relatively poor, bank operations are not very bad, and on the whole they are relatively stable in the long run."
In order to achieve this goal, banks need to abandon the business model of "building large households", avoid excessive industry concentration and case concentration, select customer groups that match their own volume, and finally form a customer structure that combines "large, medium, small and small" through "cutting watermelons, picking peaches and picking sesame seeds". This customer structure can effectively avoid the devastating impact of individual corporate and industry risks on banks, and then can pass through economic cycles.
Based on the above-mentioned business model selection, Zheshang Bank takes the three quantitative indicators of risk-weighted assets, economic added value and non-performing ratio as references, and takes small diversified assets, weak cyclical industry assets and total customer service as the main sources of "weakly sensitive assets in economic cycles". In 2023, Zheshang Bank will invest 56% of its credit increment in small diversified assets, and the revenue growth rate of "weakly sensitive assets to economic cycles" will far exceed the growth rate of the bank's revenue, accounting for 1/3 of the bank's revenue that year. Zhang Rongsen said that Zheshang Bank's goal is to increase this proportion to more than 50% in the future.
Reducing the interest rate on deposits
Researchers at the New Finance Research Center of Southern Weekly also noticed that in the annual report of Zheshang Bank, the new word "smart management", which is comparable to "weakly sensitive assets to the economic cycle", also appears 22 times. One of its connotations is to unswervingly reduce the interest rate on deposits.
In Zhang Rongsen's view, lowering the interest rate is the fastest way to achieve revenue without consuming capital, but it is also the most difficult method.
From 2019 to 2021, Zheshang Bank's deposit interest payment ratio ranked first among joint-stock banks for three consecutive years. In 2021, when Zhang Rongsen became the new president of Zheshang Bank, the bank still had large deposits with annual interest rates as high as 3%-4%. The high cost of deposits not only erodes banks' profits, but also affects the bank's ability to serve the real economy by lowering lending rates.
Therefore, in 2022, Zheshang Bank launched a campaign to reduce the interest payment rate. Over the past year or so, the bank has reduced its high-interest liabilities by 400 billion yuan and increased its low-interest interbank liabilities by 1 trillion yuan. Correspondingly, the bank's average cost of deposits fell from 2.47% at the end of 2021 to 2.24% at the end of 2023. Based on the deposit scale of 2 trillion yuan, Zheshang Bank can reduce interest expenses by as much as 6 billion to 8 billion yuan per year.
By vigorously expanding the scenario-based supply chain finance business, Zheshang Bank also brought 109 billion yuan of high-quality low-interest deposits such as settlement deposits and margin deposits to the bank, with a deposit cost of only 1.45%, effectively reducing the bank's deposit interest payment rate.
The decrease in the cost of interest payments on deposits was reflected in net interest margins. In the two years from 2022 to 2023, Zheshang Bank's net interest margin fell by 26 basis points, which is a small decline.
"Financial for Good" and "Linping Model"
What other catch-up strategies did Zheshang Bank adopt?
According to a survey by the Southern Weekend New Finance Research Center, the bank's pioneering financial advisory system is being rolled out across the country.
Lu Jianqiang believes that in the future, commercial banks should be like investment banks, grow with customers and provide customers with integrated services. To this end, he learned from the legal counsel system in the 80s of the last century, and the employees of Zheshang Bank took the initiative to assume the social role of financial consultants and assume the social responsibility of public welfare.
In the six years since it was first established in Zhejiang, the bank's financial advisory system has been extended to 16 provinces, autonomous regions and municipalities across the country. In Zhejiang alone, there are more than 3,400 professional teams of financial consultants and 93 financial advisory studios, forming a three-level linkage mechanism of provinces, cities and counties, and becoming a practical sample of financial supply-side structural reform that puts functionality in the first place.
Zheshang Bank has also created the "Linping Model", which includes the construction of a comprehensive financial ecology at the county level: the "Zheyin Good Standard" which incorporates the positive contribution of enterprises to society into the credit evaluation system, the "Shan Ben Trust" which empowers entrepreneurs to do good with innovative financial tools, and the "Accountability for Goodness" and "Employee Kindness" within Zheshang Bank.
According to a survey by the New Finance Research Center of Southern Weekly, as a catch-up among joint-stock banks, Zheshang Bank seeks a differentiated growth and development strategy in the fierce homogeneous competition, and organically combines the functionality and profitability of finance. Judging from the current performance, this move has achieved the expected results.
However, it must also be noted that after the completion of a round of refinancing, the bank's capital adequacy situation is still relatively low, especially the core Tier 1 capital adequacy ratio is only 0.72 percentage points away from the red line of 7.5% under the "new capital rules", and there is still pressure on future capital replenishment.
Li Heming, New Finance Research Center, Southern Weekly, and Meng Yang, assistant researcher
Editor-in-charge: Fengyu