Policy support needed in ICBC reform
(China Daily)
Updated: 2004-08-13 11:33

But without any external assistance, it would take the Industrial and Commercial Bank of China (ICBC) six years to "entirely" solve the problem of non-performing assets, fill up the provisioning gap, bring its capital up to regulatory requirements and achieve "strong profitability," even if its strong growth momentum in the past few years is maintained, the bank said.

"Although the Industrial and Commercial Bank of China's profits kept rising fast from 2000 to the first half of 2004, chalking up a combined 190 billion yuan (US$22.9 billion), nearly 90 per cent of the profits were used in risk provisions and write-offs of historical financial burdens," the bank said in a report.

"Since the gaps are too huge, we are still far from meeting the requirements of a public stock offering," it said.

The bank said its non-performing loan ratio and non-performing asset ratio will be reduced to 18 per cent and 13 per cent respectively by the end of this year, while the adequacy of core capital "will reach a relatively high level."

"But capital will still be seriously inadequate, and bad loan provisioning coverage will remain fairly low," the report said.

Nearly all Chinese banks face the problems of huge non-performing loans and fall short of an 8 per cent minimum capital adequacy requirement. None of them has fully set aside bad loan provisions stated by the banking authorities.

Many of the banks, including ICBC, have indicated plans for initial public offerings, which are expected to not only raise the badly-needed capital, but help the banks improve corporate governance, another key area where local banks are lagging far behind their foreign competitors.

China is scheduled to lift all restrictions on foreign banks by the end of 2006 as part of commitments made upon its World Trade Organization accession more than two years ago.

"Although a stock listing is not the ultimate goal, for a bank with huge historical burdens like the Industrial and Commercial Bank of China, a financial restructuring enabled by a stock listing will undoubtedly give a strong push to its ongoing construction of corporate governance mechanisms and a comprehensive risk management system," the report said.

Although the bank has the confidence and ability to transform itself into a modernized bank with strong profitability, sound corporate governance and comprehensive risk management within six years, there is a possibility that "the policy and market environments upon which the ICBC sets the target may see drastic changes," it said.

"If it cannot complete the reform within the grace period during which the financial industry is under State protection, the ICBC will miss out on a key development opportunity, and risk sliding back into difficulty due to failure to meet internationalized financial competition, thus become a new burden on the healthy development of China's financial industry," the bank said.

The ICBC is accelerating reform efforts after its State-owned peers - the Bank of China and China Construction Bank - were chosen by the Chinese Government at the end of last year for a pilot joint-stock restructuring and won a combined US$45 billion capital injection in preparation for initial public offerings.

"According to the bank's corporate governance blueprint, if the State gives appropriate policy support in terms of capital replenishment and non-performing loan resolution, the ICBC will be able to solve the three problems of non-performing assets, risk provisions and capital adequacy within three years," it said.

The bank has recently approved a corporate governance development report accounting firm PricewaterhouseCoopers (PwC) has formulated for it, which draws a detailed roadmap for the bank's reform in the areas of corporate governance and comprehensive risk management for the coming eight years.

The PwC report, which is based on some 100 interviews with bank officials and extensive research, identifies long-standing problems in the ICBC's existing corporate governance structure and spells out a new mechanism that the bank said not only stands in line with international practices but is compatible with the bank's own circumstances.

The report also formulates a risk management strategy for the bank, which centres on the co-ordination between the bank's risk management needs and business development and falls in accordance with the most advanced risk management methodologies.

The PwC report will help the ICBC solve the major problems facing it as quickly as possible and will keep its business growing while propelling its comprehensive reform, the bank said.

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