The meteoric rise of Chinese and Asian banks in global rankings owes much to the 2008 financial crisis that cut a swathe through their western peers but it also reflects the shifting balance of power that is tilting the world eastward.
Perhaps no bank’s rise has been quite as spectacular as Agricultural Bank of China (ABC), which joins the FT500 this year as the highest-ranked newcomer in any industry sector. And ABC chairman Xiang Junbo likes to point out other categories in which his bank tops global rankings: ABC boasts the biggest branch network of any bank in the world, with 23,600 outlets across the country; it has the most customers – 320 million – and the most employees, with 480,000 people on its payroll. The bank also went public last year in Shanghai and Hong Kong, raising more than $22bn in what, at the time, was the biggest initial public offering in history.
Established by the Chinese Communist Party as the Agricultural Co-operative Bank in 1951, even very recently ABC was the poorest performing of the country’s five biggest state-controlled banks. By the early part of the last decade, China’s banking sector was technically insolvent, thanks to enormous bad loans resulting from state-directed lending to loss-making enterprises.
While most of ABC’s competitors had been cleaned up and listed on stock exchanges in Hong Kong and Shanghai by the end of 2006, ABC did not receive a bailout from Beijing until 2009 and did not list until July 2010. Critics argued that the bank’s risk controls, internal processes and asset quality were all still far behind its peers but by the time the bank listed last year, investors seemed ready to be convinced that things had really changed.
Total assets held by the bank nearly doubled between 2007 and the end of 2010 to more than RMB10,337bn (£935bn), and net profit last year increased 46 per cent from a year earlier to RMB95bn (£8.9bn). “There is no bank in the top 1,000 in the world with such a great profit growth rate [as ABC],” Xiang told the FT in a recent interview.
Today an investment in ABC shares is seen as an investment in the Chinese growth story, specifically the future prospects of China’s vast hinterland. It also buys into the Communist party’s ability to manage a shift in the country’s development model.
A comparison of ABC’s share prices in the separate markets of Hong Kong and Shanghai suggests that international investors are far more confident in both of these prospects than domestic Chinese investors are. In Hong Kong, ABC is trading at around HK$4.35, or RMB3.62 at current exchange rates, while the bank’s shares were hovering at just RMB2.78 in Shanghai, a nearly 30 per cent discount.
China’s capital account is mostly closed and its currency is not freely convertible. This means that foreign investors are mostly excluded from the mainland market and mainland investors are mostly barred from buying overseas equities or other financial assets. Hong Kong, although part of the People’s Republic of China since 1997, is governed separately. It has its own freely convertible currency and imposes no restrictions on international capital flows in and out of its markets, although mainland investors are still mostly banned by Beijing from investing there.
Xiang admits that he has had a harder time convincing domestic than international investors that his bank really has been reborn as a leader in global finance. This is reflected in how his bank is valued in the two separate markets. ABC’s market capitalisation in Shanghai is currently RMB903bn, while the bank’s market value in Hong Kong is about 30 per cent higher at around HK$1,480bn.
“Domestic investors are looking at ABC from the viewpoint of five to 10 years ago,” says Xiang. He argues that his bank is likely to be a huge beneficiary of the Communist party’s latest five-year plan, which includes a heavy focus on rural development. About half of ABC’s branch outlets are located in rural areas at the county level or below. Three years ago 80 per cent of these branches were losing money; now, says Xiang, 96 per cent of them are turning a profit.
This “life-changing, fundamental change”, as he calls it, has led competitors such as Industrial and Commercial Bank of China and China Construction Bank also to turn their attention to the countryside with huge plans to expand their rural branch networks. But while Chinese banks are slowly expanding beyond the nation’s borders they are in most cases simply following their domestic Chinese customers.
This means that outside China, where they do not have this guaranteed income, Chinese banks will have to rapidly adapt and adjust their entire business model in order to be competitive against global peers.
Jamil Anderlini is the FT’s deputy Beijing bureau chief