Interview: Industrial and Commercial Bank of China Chairman Jiang Jianqing

ICBC chairman Jiang Jianqing concerned over effect of stimulus exit

-- China exit from stimulus programmes may have a major impact on ICBC

-- ICBC looking for fee-earning businesses to maintain high growth rates

-- Following clients overseas will save ICBC from being a regional player

SINGAPORE, March 25 /PRNewswire-Asia/ -- In a rare interview with outside media, Industrial and Commercial Bank of China (ICBC) chairman Jiang Jianqing laid out for The Asian Banker his key concerns for managing challenges to growth. A full transcript of the interview is available on the company's website http://www.asianbankerpublication.com and in the appendix to this press release. According to Emmanuel Daniel, CEO of The Asian Banker, "Mr Jiang, as the head of the world's largest bank, has huge responsibilities in terms of managing sustainable growth, but with a keen strategic vision and a long-term business view looks well able to meet all of his objectives."

China exit from stimulus programmes may have a major impact on ICBC

"The government is considering gradually exiting the stimulus package, and also consequently Chinese banks will also consider exiting the excessive lending practice which went on in 2009," says Jiang. "The concern is that during this process, how can we be sure that ICBC's operations will remain smooth and not be subject to a major volatility?" Jiang noted that the bank is expecting about 15% profit growth in 2009.

ICBC looking for fee-earning businesses to maintain high growth rates

"Longer term, the questions are how ICBC can maintain the high speed of growth, where our drivers of profit are and how we should define a strategy to achieve that growth," says Jiang, who outlines intentions to beef up fee-earning businesses such as global markets, asset management, wealth management and private banking.

Following clients overseas will save ICBC from being a regional player

"This round of Chinese investment made outside of China is made by China's biggest and best corporations," says Jiang. "As a bank, if we don't follow them we will lose these valuable customers and will gradually become a regional bank." The bank has made investments in South Africa and Thailand and is looking for small acquisitions where its clients go outside of China.

Use of this interview in parts is permitted only with attribution to The Asian Banker. Use in full is prohibited without the express permission from The Asian Banker. A full transcript of The Asian Banker's transcript with Jiang Jianqing can be found on the company's publication website http://www.asianbankerpublication.com , and in the appendix to this press release.

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Appendix:

Interview with Jiang Jianqing, chairman of Industrial and Commercial Bank of China, March 16th, 2010.

Emmanuel Daniel (ED): How do you balance between profit and government policy to slow down the growth.

Jiang Jianqing (JJQ): After this crisis, nearly every banker or financier realised one important point, that banking is a very pro-cyclical industry, an industry which is subject to changes in the outside business environment. Only if the economy performs well can financial industries perform equally well. That is why I am sure that all people from the financial industry hope to have a very good outside business and economic environment. As responsible players, majors bank are responsible for protecting the various parts of the outside environment in terms of the economy and the financial services industry. In the past decades, it has happened that there are some corporations, both from the real economy or from the financial services sector, which have developed their profits at the cost of the natural environment, or of the financial and economic environment. So people generally condemn this destruction of both the natural and economic environment; it is more obvious for people to realise the importance of protecting the natural environment, however it is getting equally important for people to safeguard the economic environment. Therefore I believe that the cause of this particular crisis has a lot to do with the destruction in the business environment made by many financial institutions in the world. Governments around the world should also play a role in maintaining the balanced business environment and safeguarding the economic order. Some overseas governments failed in their due responsibilities in this regard. This is not to say that the financial industries should maintain the business order at the cost of commercial principles. We still need to adhere to stringent commercial principles. Financial institutions should never give up the function to maintain the security of their depositors or the security of the general social and economic environment. We should never forget these functions. If all financial institutions could realise that they should do everything that they can do to protect the economic business environment while seeking profit, I believe the balance will be achieved.

ED: How would you describe the relationship between the big four banks with the regulator in China. Is it a special relationship, or is it similar to the relationship between big banks and regulators in other developed markets today. In other developed markets, that relationship can be adversarial; how would you describe the relationship between the big four banks in China and the regulator.

JJQ: As a major bank, we need to manage very properly and successfully our relationship with all stakeholders, and the regulator is only one of our stakeholders. Regulators need to perform their duties to safeguard order, and sometimes need to tighten regulations, so from this point of view regulators and bankers are sometimes in an adversarial relationship. From another perspective, if the regulator can create a very good regulatory environment that leads to a very healthy business environment, this will definitely reduce the operational cost of banks in the industry, which means that a good regulatory environment can promote industry development. If I can make an analogy between driving and policing: drivers, without police maintaining order on the street, will clash with each other, so good policing and good rules can ensure that drivers drive safely and successfully on the roads.

ED: The reason why I ask this question is that ICBC has a very special position in the economy of China. You have the largest deposit base in the country, so whenever regulators wants to implement economic policy they just need to target your bank's business. Sometimes when we read about new regulations, we ask immediately what the response of ICBC is, and that of the other big four banks.

JJQ: I don't think I fully agree with that observation. I believe that a good market order in a certain country's financial industry depends on the behaviour of all of the market practitioners, and not just that of a few big banks. What I see as ICBC's role in accepting new regulations, we hope that ICBC can be a very good student in accepting the rules from teachers. But sometimes when we detect that regulations may not be perfect enough, we will raise our thinking to regulators to help them improve.

ED: Is ICBC's policy of becoming more international in line with the government's policy in this regard.

JJQ: When we are making our strategies, or when we are trying to comply with policies, we normally consider three factors. Firstly, we consider the trends in international markets, what the major financial institutions in the world are doing, and what changes the financial industry all around the world is expecting of us. Secondly, we also take into account China's economic characteristics and the features of our own corporations and enterprises. Thirdly, we consider ICBC's own features of business and development. A good strategy for business can sometimes tell in advance how the industry or market is going to change for the next couple of years.

ED: Have you been increasing your lending to corporations outside of China, even as the government expects you to reduce your lending inside of China?

JJQ: In 2009, the Chinese financial services industry total lending grew much quicker than in recent years in order to meet the increasing demand from domestic corporations. Even against these circumstances, ICBC still increased lending support to overseas companies, particularly Chinese companies contracting projects outside China or sending machinery and electronic equipment to overseas markets. I'll give you two examples to illustrate. Last year we did two financing products in Africa. One is the $800 million coal power plant export credit project. The whole project value was $1.6 billion, so we lent half of it to support it. The other example was in Angola, where we provided $2.5 billion in funding to a local urban infrastructure development. Last year, new lending for overseas businesses was $12 billion in total, and most of it went to Chinese companies doing businesses outside China. We even extended our aircraft leasing and ship leasing business to European markets.

ED: To what extend can foreigners looking at your international lending business interpret this business as a form of Chinese government policy to export the current account surplus of the country?

JJQ: It is true that over the past years we are seeing more and more Chinese companies implementing their going-out strategies at an enhanced level, and you will see at the same time Chinese financial institutions following the Chinese corporations to help them make direct investments outside China, so the direct investments made by Chinese corporations outside China, followed by Chinese banks' lending support, to some extent helps the Chinese government reduce the trade surplus under the current account. In 2009, Chinese non-financial corporations made $58 billion in direct investment outside of China, and the financial industry also made a significant amount of direct investment outside of China. ICBC itself made a $5.5 billion investment for a 20% stake in Standard Bank of South Africa. Currently we are working on buying a Thai bank called ACL. The investment amount will not be as large as with Standard Bank, but it will also be another significant investment by us.

ED: Please give us a picture of your strategy in terms of the kind of banks that you look at. I notice that you tend to look at small institutions, and you also take minority stakes. Is that a deliberate strategy, or do you make your investment decisions one by one?

JJQ: You will find that our footprint is in close proximity with our clients in terms of overseas investments, and in terms of geographic distribution we now focus on emerging markets. You found that we made a few small acquisitions overseas, which reflected a very prudent attitude that we adopted in our acquisition strategy.

ED: Because in these acquisitions, the revenue will not be significant so this would not be strictly to increase profits.

JJQ: There's a Chinese saying that if you want to become fat you should eat a lot, but eating small pieces will not make you fat. So we are implementing a long-term strategy. Today, banks in China still enjoy a high interest spread from the domestic market. At the same time, the ROE and ROA from domestic businesses is still satisfactory. Other markets in the world either cannot give you the high returns that the Chinese market promises, or in the emerging markets the spread may be high but so is the risk. Some people in China think that "we should remain in China and only develop domestic businesses, that is enough." At ICBC our thinking is a little bit different. This round of Chinese investment made outside of China is made by China's biggest and best corporations. As a bank, if we don't follow them we will lose these valuable customers and will gradually become a regional bank and never have a chance to serve them. So in the long term, this development could drive us out of this customer base and harm us. That's why I said that ICBC's international strategy is quite long-term oriented. We have a mid-term 6-7 year strategy, we also have a long-term strategy over a 20-30 year period. Gradualism is the core spirit of our processes.

ED: Is that your personal sprit-gradualism?

JJQ: Big acquisitions that happened previously in the global financials services industry turned out to have a very high possibility of losing at the end of the day. Many big acquisitions have become Waterloos for many successful organisations.

ED: The approach you use is to take an investment directly in some of the small institutions in the different countries. Some would argue that puts a high risk on ICBC itself. Another approach would have been to set up a fund and take strategic stakes in larger banks in some of these countries.

JJQ: In the past decade, ICBC conducted 10 acquisitions, all of them very successful. I studied HSBC's acquisition history; I found out that in the three decades before they took Household in the US, they had conducted a series of small acquisitions and most of them were successful. We are not in a hurry, we don't want to become rich and successful overnight by taking big financial institutions. There's another old Chinese saying that we accumulate small successes to a big triumph, and we make continuous small steps to achieve a 1,000 mile march.

ED: The next point is your domestic business. In the year past you became the largest deposit institution in the world. What was really good was that in the last one year you have put that deposit base to work for you, so the profitability from the fee business has been very strong in the past year. We also discovered that a number of your products are very successful, and are good examples not just in China but for another number of countries as well. Is it important for you to protect your deposit base?

JJQ: For us, deposits represent client base. On the surface, you will see that ICBC has a big chunk of China's deposits. If you look deep into that, you will see that represents 3.1 million corporate customers and 220 million individual clients. A large deposit base provides quite a comfortable cushion to ICBC's operations. It also gives us more than abundant liquidity. The reason why today's European and US banks are facing a string of problems is a lack of liquidity. Funding sources for many European and US banks are mainly from the bond market, where they issue instruments, so for those banks it is very normal to have a deposit to loan ratio of 100%-150%, which is very high. In contrast, ICBC's loan to deposit ratio is only 57%. At the same time, we have core deposit liabilities, and we need to pay for that. If you can put those deposits to profitable use and manage the cost appropriately, the deposits will bring very good returns. That's why ICBC is putting a high priority on developing wealth management, asset management and private banking businesses, because we see these three areas as our future profit engine. Last year we sold wealth management products with a value of RMB 2.7 trillion ($395.5 billion).

ED: What is missing today in the business areas that you have been building in the last 3-5 years?

JJQ: There are many areas where we could make a lot of improvements. One example is our global markets business. If you look at a typical western bank today, a very high percentage of their revenue is from the global markets trading or treasury business. Their problems are also our weak points in terms of the global markets business. In traditional Chinese medical theory, there is the concept of yin and yang. It you could say that the Western banks are like patients that have too much yang (characterized as fast, hard, solid, dry, focused, hot, and aggressive), Chinese banks would be patients that have too much yin (characterized as slow, soft, insubstantial, diffuse, cold, wet, and tranquil). So the same prescription could not cure both patients. My point is that there are a lot of areas where we can make improvements. Apart from global markets, there is still asset management and private banking where we could do a lot more with.

ED: I noticed that you had built a number of joint venture agreements for some of these areas. What have you learned form the joint ventures, and how will you improve the joint ventures?

JJQ: The reason we set up some joint ventures in some business lines is that current regulations would only allow us to do it in that way. For example, in the mutual fund business we set up a joint venture and our partner provided us with some help. The point is that we are not trying to enter new business areas through joint ventures if our regulators give us the license and we have the ability to develop them ourselves.

ED: But are you thinking about maturing these joint ventures into wholly-owned businesses in China?

JJQ: That depends on the regulations.

ED: The business is growing, the numbers are good. But what are you most afraid of?

JJQ: Every year we have a lot of concerns. The point is that in different years, the concerns also change. At this point in time, the biggest concern is still the outside environment, the uncertainty and the interconnectivity of global economic conditions. Another current concern is that due to the regular recovery of the Chinese economy, the government is considering gradually exiting the stimulus package, and also consequently Chinese banks will also consider exiting the excessive lending practice which went on in 2009. The concern is that during this exiting process, how can we be sure that ICBC's operations will remain smooth and not be subject to a major volatility? If we say that there is another concern, it is the sustainability of ICBC's growth rate. In the past seven years, the CAGR of our net profit has been about 33%, although in 2009 we only grew by around 15%. But longer term, the questions are how ICBC can maintain the high speed of growth, where our drivers of profit are and how we should define a strategy to achieve that growth. Another issue I'm always thinking about is the significant changes to banking models in the world, and also the changes in global financial regulations will bring us what kind of challenges and opportunities.

ED: These last two points are exactly what we cover as well, and we are very interested in knowing about your sustainability. The answers you have given me are very important -- the rest of the story we can follow on our own, but your answers always help to guide us in knowing how you think about these matters.

JJQ: Forget about the four points I mentioned -- the biggest problem to me is demonstrated by another situation: if we say that the birth of the Bank of England marked the birth of the modern financial services industry, which dates back 300 years, this is the first time that big Chinese financial institutions have become mainstream financial institutions in the world by having the largest market capitalisation, the largest deposits, even the largest profitability. How can we maintain this position, given that the global landscape keeps changing, how can we balance the quality and speed of our business, and how can we develop our business healthily and successfully? This is a big challenge.

ED: Next week I am giving a speech in London, and the title of the speech is "will Asian banks be the largest banks in the future," and I have to describe to them some of the developments taking place in the Asian banks. And because we understand ICBC very well, I will be talking about the possibility of ICBC being a leading bank in the future. Actually, the Japanese banks had this opportunity before; the big difference between the Japanese banks and the Chinese banks is that the Japanese banks concentrated too much on the wholesale funding business. You have spent a lot of time building the basic business.

JJQ: The key for a bank to keep its competitive edge amongst its peers is whether the banks' leadership have global vision or a vision oriented to the future, and at the same time if they have a forceful execution capability for this vision. More importantly, you still need a very strong home country economic development which will provide a solid platform for you to grow even outside of this country.

ED: For me to know someone like yourself who is the chairman of one of the largest banks in the world, with a strategic mind and an execution skill, very few leaders have the ability to use these two together. You can choose not to be concerned, but you are, and this is what makes this bank a very good bank.

JJQ: The world is changing very quickly, particularly over the past three years. I am personally very good friends with many global financial institution leaders, and during our discussions over the past few years not many of them predicted that a global crisis of such a big scale could happen. So that reminds me that we always need to remain very cool-minded, because we never know where the next crisis will come from.

ED: If you forget, I will remind you.

JJQ: Yes, please kindly do that. We hope that we can always have many friends observing our every movement and reminding us of the potential dangers, correcting our actions and bringing us back to the correct track. That's one good thing about being a listed company, because every movement is very transparent, and you are subject to the monitoring or regulators, shareholders, media, and everybody is watching and saying what is right and what is wrong. On the 25th of March we disclose our results for 2009, so once again we will be put under the spotlight, and global investors and the media will try to find single bones from our egg.

ED: Yes, but the market has already factored in the price, so it's okay.

JJQ: The important point is that we always respect our investors and the media.

ED: Thank you very much for your time.

JJQ: Thank you.