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Shirley Yam

You have heard a lot about how Beijing has showered favours on farmers. You have heard about the fortune spent on flat panel televisions, cars and houses by the countryman. This month shares in a provincial rural bank are on offer to Hong Kong investors for the first time. 
It is the Chongqing Rural Commercial Bank (CRCB). It is the largest bank in Chongqing, the next Shanghai. It is a pet project of Bo Xilai, the city's party chief and a Politburo aspirant. It has the rural theme. It's very tempting indeed. 
Before jumping on the wagon, there is, however, one word for you to remember - quarterly.
Here is a bank that pays its directors and supervisors a bonus every three months and bonuses accounted for 89 per cent of its executive directors' 2009 pay, according to its draft prospectus.
You would have expected that for a car dealer or the guy pitching an internet service on the street corner, but certainly not a bank, where prudence should be top priority. Also, 85.4 per cent of its loans go beyond one year.
In a country where bankers are trained to be size-hungry instead of risk-aware or profit-oriented, a quarterly bonus scheme is probably least expected. 
What's of relevance here is not just the pay scheme but, more importantly, the quality of governance and internal control of the bank that is revealed by such a scheme. 
Add to this the numbers in the draft prospectus and you have nothing but worry. 
Like any bank seeking an overseas listing, the CRCB boasted  29.5 per cent loan growth, 80.4 per cent profit growth, and  above-standard capital adequacy and non-performing loan ratios as of the end of  June.
This is the result of a 7.9 billion yuan (HK$9.2 billion) bad loan write-off funded by the government and a capital-replenishing 2.3 billion yuan bond issue last December. The fine print is far from comfortable.
Staff costs jumped 48.1 per cent last year thanks to the introduction of the so-called 'performance-based bonus scheme'. Yet, the bank saw its profits drop by 14 per cent that year.
In the first half of this year, the staff bill grew a further 59.1 per cent while its profits saw  80.4 per cent growth. Sounds okay? Wait. 
Over the past two years, the loan quality of CRCB has deteriorated. Of every yuan loaned out, 38 cents went to 'unrated' customers in the first half of this year, compared with 21 cents in 2008. 
That pushed the share of clients with fair or above creditworthiness from 67.76 per cent to 54.44 per cent.
Of every yuan lent to corporate entities, 19 cents is in the hands of unrated clients, compared with 10 cents in 2008. The share of A-grade or above corporate clients has inched up from 64.55 per cent to 65.85 per cent. Mind you, 2008 is when the bank completed its merger of 39 rural co-operatives, and Beijing had various draconian measures in place to cool down the market.  It's a bad year compared with the bubbling 2010. Yet CRCB clients' credit-worthiness is falling.
Of its loans, more than 30 per cent went to the property sector, either as corporate lending to developers or as personal mortgages. The industry average is between 15 and 20 per cent.
This exposure does not include the bank's aggressive investment in debt instruments issued by financial institutions. That includes papers issued by the financial arms of domestic governments which largely survive on proceeds from land sales and ever-escalating property prices. By the end of June, the bank had put 54.4 per cent of its bond holding into this kind of high-risk debt instrument. In 2008, the share was only 11.9 per cent. 
While Beijing has expressed grave concern about the borrowing of regional financial arms, CRCB's management appears unperturbed. Instead, it  boasts a treasury yield of 4.14 per cent, which is 'the highest among banks in China' in its draft prospectus.
(How much of its debt investment is related to the Chongqing government? There is no detail. But a telling example is the 1 billion yuan treasury product it has developed for its corporate clients. It's an investment in the equity of a government-funded company that specialises in Chongqing's garden and park construction!) 
Any banker would have lost sleep over these numbers given Beijing's measures to cool the property sector and the economy as a whole. 
So why has it happened with CRCB? A good explanation can perhaps be found in the composition of its 11-strong board. 
With  one exception,  its directors are from Chongqing. Among them are three heads of government enterprises, such as the provincial government's finance arm, Chongqing Yufu Asset Management; two private entrepreneurs; a retired banker; and a Chongqing University professor.
In an economy  where the interests of provincial governments, banks and entrepreneurs are notoriously intertwined, how this club of insiders can work for the interest of shareholders is a big question. Just imagine what each board member will say on a proposal to slow down loan growth.
Now, do you want to ride the wagon?



Bank where directors get paid a bonus every three months