For Rural Bank, Being Big Also Means Big Complexities

11.01.2013 11:53

For Rural Bank, Being Big Also Means Big Complexities

Postal Savings started out large and has only grown, but its heft means making changes is hard, its president says

By staff reporters Zhang Yuzhe and Ling Huawei

(Beijing) – Understanding the complexity of the Postal Savings Bank of China (PSBC) – a spin-off of the postal service operator and now the seventh-largest bank in the country – is difficult even though more than six years have passed since it was established. The bank has never tapped the capital market for funds and thus has never been required to publish its financials. As a latecomer to banking, it is sitting on a huge stash of money that other big lenders have kept coming to for help whenever liquidity tightened.Its close ties with China Post Group (CPG), from which it was spun off, are more confusing than a regular subsidiary-parent relationship, not least because they still share offices.

And it looks like the bank is in no hurry to seek public attention. A common refrain from its executives to defend the bank’s low-profile is: “We need to keep our head down and work hard.”

“Going public is one of our goals, but for the moment there is no timetable for when that will be launched,” Lu Jiajin, the bank’s president, told Caixin on October 10.

The 45-year-old took over the reins of the bank in January after serving as a vice president in charge of personal finance, corporate banking and risk management. Before that, he worked in the postal system in various capacities.

Lu is frank about the bank’s advantages and disadvantages. As a young bank, the PSBC lacks a burden of non-performing loans that the big state-owned lenders took on because of politicians’ orders. It also has the most extensive network of operating offices across the country, penetrating into rural areas that do not interest other banks.

However, the PSBC is relatively inexperienced at banking, something observers say is its biggest shortcoming. Its six years of existence is too short a period for any bank to develop full confidence in its credit-analysis and risk-management abilities.

The PSBC’s predecessor, a thrift institution bound with postal facilities, ran on and off since 1919. Between 1986 and 2003, it was told by the central government to take in deposits, but not extend loans. The deposits were transferred to the central bank, where they sat in its vaults and collected interest.

By the end of the period, those deposits totaled 829 billion yuan. As reforms of the banking system deepened, they were gradually returned to the thrift institution starting in 2005. By mid-2010, the PSBC had all of them.

The bank has grown explosively. Its 5.42 trillion yuan in total assets put it behind only the Big Five state-owned banks and China Development Bank.

By the end of last year, the size of its deposits approached 5 trillion yuan, up from 1.3 trillion yuan in late 2007. Loan growth rates over the years were all above 35 percent.

And its potential to keep growing seems to be unmatched in China. Because of a low base, lending operations contribute only about 40 percent of the bank’s revenue. Its loan-to-deposit ratio has been around 20 percent, well below the official limit of 75 percent. That means it still has plenty of room to expand loans. Most of its competitors do not have this luxury.

But the huge amount of deposits also means higher costs and a greater challenge in the face of the liberalization of interest rates, Lu said.

Commission Costs

Compared with other commercial lenders, the PSBC is oriented toward providing simple financial services for small communities and rural areas. In a sense, it complements rather than competes with other big banks, Lu said.

“The escalating growth of the PSBC in various aspects since its establishment has proven the correctness of our business model and the positioning of the market and products,” he said.

Strategy-wise, the bank has positioned itself as a large retail commercial bank with a focus on extending small loans. By the end of September, it has lent out roughly 1.7 trillion yuan to small and family businesses through 15 million loans.

More than 90 percent of cities across the country are covered by the PSBC’s network of small-business lending centers. In terms of retail deposits and settlement of individual transactions, the bank ranks among the top three in more than a dozen provinces.

To control risk and speed up the lending process, the PSBC sends loan officers to the grass-roots level where they can directly communicate with borrowers, Lu said. This has improved the efficiency of writing small loans.

At the other end of the lending spectrum, the bulk of wholesale businesses, including large-sum corporate loans, are left to headquarters, which is staffed by better-trained professionals, Lu said. That means a few hundred employees are managing 70 to 80 percent of the bank’s total assets, he said.

Overall, the PSBC’s ratio of non-performing loans has been low recently, at 0.54 percent. The figure for many other banks has risen above 0.9 percent. To better manage risk, the bank suspends the operations of branch and sub-branch banks if their bad loan ratio gets too high, Lu said.

It is also cautious about innovation because “the PSBC was born a giant, so it is not easy to have any innovative adjustment, whereas small banks with only a few hundred outlets are more flexible,” he said.

The PSBC has more than 39,000 outlets, covering more than 98 percent of all counties in the country. Its network is even more extensive than the Agricultural Bank of China. The latter went public in 2009, and its investors treasure its 24,000 outlets.

How the PSBC shares the control and revenue of all those outlets with its parent, CPG, is a difficult subject to fathom. It is a relationship that Lu admits is confusing and tough to manage.

Although the bank runs its own balance sheet and operates as an independent legal entity, it has continued to share office space with CPG’s post offices in many areas. This may explain why some still often think of them as one company, Lu said.

The two are closely tied in operations as well. PSBC only manages 8,000 outlets. The rest are entrusted to CPG for day-to-day management. CPG staffs those outlets itself and provides basic financial services other than lending to customers. Loans are made mostly through outlets managed by the PSBC.

The bank pays CPG a commission for the arrangement, and this eats up more than one-third of its revenue every year. Last year, 47 billion yuan out of 110 billion yuan in revenue was paid to CPG for commissions.

Not all analysts think the money is well spent. It is hard to set the commission rates, Lu said, partly because they vary based on the type of services provided. Also, consideration needs to be given to providing enough incentive for workers to do their jobs right, he said.

Mulling the Inevitable

The PSBC has been learning from the examples of the Bank Rakyat Indonesia, Wells Fargo & Co. in the United States and Germany’s postal savings bank Postbank A.G., Lu said. “Around the world, all successful postal reforms brought in the element of financial services,” he said.

Structurally, the PSBC most resembles the Indonesian bank because their asset compositions, customers and financial services are very similar, Lu said.

It also has much in common with the Wells Fargo, he said, because both lenders position themselves as a community bank and develop products and services accordingly. Wells Fargo’s emphasis on consumer finance, for example, fits right into PSBC’s product plan.

“Running a retail bank is about reducing costs,” he said. It needs to figure out ways to attract deposits at a lower cost and assess borrowers’ credit worthiness more efficiently. Developing diversified services and mining user data with the assistance of computer models would help, he said, because these steps can strengthen customer loyalty and streamline the loan approval process.

Diversifying share ownership and going public is inevitable for a commercial bank, Lu said. Although there is no timetable for that yet, the PSBC hopes to bring in strategic investors with knowledge and experience to help in fields including risk management and developing financial products and information technology services.