Bank of China Chairman Xiao Gang, 51 years old, has been at the helm of China's third-largest bank for six years. He presided over the bank's historic initial public offerings on the Hong Kong and Shanghai bourses in 2006.
While preparing for the listings, the bank boasted of roots in China far deeper than those of international banks, and more overseas business than any other Chinese bank. In recent years, however, this has proven a double-edged sword as appreciation of the yuan has squeezed Bank of China's business overseas. The financial crisis delivered another blow. And results from the bank's domestic operations have been overshadowed by other state-backed commercial banks.
The key to whether Bank of China can turn itself around may lie in a new slogan Mr. Xiao likes to stress: Expand in scale and improve the structure.
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Mr. Xiao was interviewed recently by Wen Xiu, a reporter for Caijing Magazine, a business and finance publication based in Beijing. Excerpts:
Caijing: Last year, Bank of China's new loans were only half of those made by [Industrial and Commercial Bank of China] and China Construction Bank. New lending by BOC in the first quarter exceeded last year's total amount. Do you want to increase your market share by heavy lending?
Mr. Xiao: No doubt compared with previous years, when Bank of China issued relatively fewer loans, this year offers good opportunities because we have a lot of good projects. We intend to seize opportunities and move forward as we close some high-quality deals. Although newly issued credit grew in the first quarter, we slowed our lending pace in April and May, as did our peers in the banking industry. Overall, we must work toward maintaining stable lending growth.
Caijing: How do you manage the risks of such a large amount of lending? To what extent have bad loans overseas, resulting from the global financial crisis, affected the bank?
[Gang Xiao]
Xiao Gang
Mr. Xiao: Bank of China finds that non-performing loans were mainly generated within China. The NPL ratio from the overseas market has been low. Whether the current round of lending leads to a substantial increase in NPLs will depend on projects and company operations. This requires a case-by-case analysis. Our goals are to expand, adjust our structure, and build our brand. These three goals are intertwined. A better structure will be achieved by expanding the scale of our business, while our market share will grow in the process.
For example, our new loans in yuan went mainly toward investments in infrastructure. This is because Bank of China traditionally issues fewer mid- to long-term loans. We actually hope to use this opportunity to increase these kinds of loans. For the time being, there are quite a few infrastructure projects, including railways, subways and nuclear-power plants that can secure stable cash inflows in the future. So this is helpful for improving our earnings structure, bolstering our capital adequacy, and increasing profits. For projects such as building a bridge to link Hong Kong, Zhuhai and Macao, lending periods are quite long. But these are profitable deals as future cash inflows are stable.
Meanwhile, we have increased credit for Chinese companies going overseas, and repayment of these loans is guaranteed. For industries that may have overcapacity problems, we have been selective, issuing loans to market leaders, or the most established companies.
Caijing: Some worry that some financing platforms backed by local governments may use excessive bank credit, which would accumulate credit risks. What is your view?
Mr. Xiao: We have paid significant attention to this problem. We require that government-backed financing projects be limited, in principle, to large to medium-sized cities. The use of such financing platforms is strictly restricted for smaller cities and towns. As provincial governments control a lot of valuable resources, and their fiscal balance is rather secure, credit risks for banks are controllable.
Caijing: Can you discuss your earnings outlook for the year?
Mr. Xiao: We are under great pressure, but we will try to remain even with last year's earnings. We actually slid downhill from one quarter to the next last year. This year, we hope to see each quarter beat the previous one. However, there are many uncertainties in the macroeconomic situation. Thus, it is too early to give you an answer about the earnings outlook for the entire year.
Caijing: The market is concerned about why Bank of China's stock prices are discounted compared to those for ICBC and CCB. What strategic adjustments will the bank make in the future?
Mr. Xiao: The rather discounted stock price is linked with earnings. Our earnings performance is below industry average. This is due to many historical and practical factors.
One historical factor is that Bank of China has long enjoyed an advantage in foreign exchange. But this is actually turning into a disadvantage. Since 2005, with the reform in [China's] foreign exchange system, the yuan has been appreciating, which has been a big blow for Bank of China. Foreign currency assets account for 35% of the bank's total assets. As a result, profits generated by foreign currency assets have shrunk.
Also, Bank of China used to have nearly $ 100 billion in investments annually in foreign currencies. Although we have reduced investments of this kind, the absolute amount is still large. Due to the negative impact of the global financial crisis on these investments, Bank of China had set aside provisions of 27.1 billion yuan for relevant securities investments. Besides, we had a late start in our yuan business. It isn't as strong as our counterparts in some aspects, and our revenues have been lower.
So Bank of China should further expand its yuan business while cutting back on investments in foreign currency bonds, and increase foreign currency credit for Chinese companies going overseas.
Caijing: Bank of China has two listed companies and three kinds of stock, including H shares and A shares. What kind of impact has this complex structure had on the company?
Mr. Xiao: Yes, Bank of China has a rather complicated corporate structure, and many investors cannot understand our financial statements. First of all, Bank of China was listed as a whole, including Bank of China (Hong Kong), which became a public company well before. So Bank of China (Hong Kong) has assets and personnel written into Bank of China's books. However, in terms of shareholder profits, the part covering small shareholders at Bank of China (Hong Kong) is excluded and 66% of the profits are written into Bank of China's books. The two companies belong to one group and their investor pools overlap. All these issues impact the stock price.
In addition, Bank of China has an advantage as a multilevel platform with a wide range of services, including investment banking, insurance, funds and equity investment. This better serves the needs of our clients but at the same time makes cost calculations and management more difficult.
Caijing: In that case, will you consider delisting Bank of China (Hong Kong) to simplify financial statements?
Mr. Xiao: Simpler financial statements are better for investors. But we cannot do that. Bank of China (Hong Kong) is a long-established bank with a 90-year history. In Hong Kong, it enjoys money-printing status. So we will not privatize it.
