ICBC’s push into central, eastern Europe elicits cautious response from China banking regulator official

Bilateral loan agreement with Poland’s mBank seen as supporting Beijing’s ‘One Belt, One Road’ plan, while separate 1 billion investment slated for infrastructure projects in region

PUBLISHED : Wednesday, 01 June, 2016, 7:06pm
UPDATED : Wednesday, 01 June, 2016, 7:06pm

Defying the trend of Western banks’ downsizing branches and capital in the central and eastern European markets, the Industrial & Commercial Bank of China this week orchestrated two significant moves into the region as part of Beijing’s call for domestic banks to get more involved in project financing in countries under its “One Belt, One Road” plan.

The push into central and eastern Europe comes as China’s largest state-owned bank undergoes a succession process in its top ranks with the resignation of long-serving chairman Jiang Jianqing, who has reached retirement age. He will be officially replaced by ICBC’s current president Yi Huiman.

But even as these latest overtures into the European market are completely in line with state-policy, the manner in which ICBC is orchestrating the moves may be raising concern from the nation’s banking regulator over potential risks to the lender’s balance sheet, which is already being challenged by mounting bad loans and slowing revenue growth in the domestic market.

Christopher Wang, a deputy director at the China Banking Regulatory Commission, wrote in a posting on the professional social media site LinkedIn: “ICBC is bold enough to wade into something no others dare to go. Be cautious.”

He was referring to a newly announced 130 million (HK$1.1 billion) bilateral loan agreement ICBC has made with Poland’s mBank through its new Warsaw branch, the designated headquarters for expansion into central and eastern Europe. The loan was the Chinese bank’s first move into that market. On Wednesday, ICBC also announced it had setup an investment subsidiary with a 1 billion budget to invest in infrastructure projects in the region.

The bank’s move defies the retrenchment trend among global European banks. On Tuesday, John Cryan, chief executive of Deutsche Bank, the No. 4 European bank, told analysts it has closed the accounts of 750,000 customers, shut down branches in Poland and is undertaking closer scrutiny of returns against the risks and capital charges involved in its risk-weighted assets.

Marco Yau, equity analyst at CLSA in Hong Kong, said ICBC’s expansion plans were part of state-sanctioned policy. “As China’s own economy slows down, the bank needs to find new growth drivers, and these countries may just offer the growth it is looking for,” Yau said. “To be fair, it would have faced even greater challenge in expanding into developed markets.

“ICBC is proud of its achievements on Belt and Road. It is already involved in 18 countries and has some 120 entities set up. By entity count, it has already surpassed Bank of China’s international reach and it has over 200 projects underway on the Belt and Road countries.”

Bank of China is the most global of the Chinese banks, with 24 per cent of its profits derived from international markets, accordingly to its latest annual report. ICBC, in comparison, derived 6.3 per cent of its operating income from international markets last year, according to Yau. At the end of 2015 ICBC’s reported overseas assets reached US$280 billion.

Both banks posted flat growth in their 2015 results. This year, analysts are forecasting negative revenue growth for ICBC, at a full-year average of -0.6 per cent, according to Reuters data.

“It’s too early to comment on the quality of the revenues these [international] projects may represent,” Yau said.

But on risk, he notes that ICBC does apply single country lending limits and board approvals are required for projects exceeding its internal risk thresholds. As a top state-owned bank, ICBC’s board includes high flying international bankers and ex regulators.

Grace Wu, senior director at Fitch Ratings, said that even with its latest expansion, the overall international revenue contribution to ICBC is too small for the rating agency to materially assess as part of its risk rating.

Meantime, as ICBC steps into the breach where other international banks have retreated, it has succeeded in elevating its place in the eyes of local institutions.

“ICBC is an important partner for us. We are happy to further extend the good cooperation,” said Hans-Dieter Kemler, head of financial markets at mBank, the recipient of ICBC’s latest loan.