China's Biggest Bank Branches Out

ICBC is betting that its partnerships with Allianz, American Express and Goldman Sachs can make it as powerful globally as it is at home.

NOT MANY HEADS OF GLOBAL BANKS EARN LESS THAN JIANG JIANQING, chairman of Industrial & Commercial Bank of China Ltd. Jiang’s $260,000 salary last year was less than 1 percent of the $27.8 million JPMorgan Chase & Co. paid Jamie Dimon.

Jiang has been making plenty of money for ICBC shareholders. ICBC’s stock price almost doubled from its $22 billion initial public offering in October 2006— the world’s largest—to 5.87 Hong Kong dollars on June 6. The bank’s market cap- italization of US$275 billion that day was almost twice that of JPMorgan, making ICBC the largest publicly traded financial institution on the planet. Jiang’s war chest contains $130 billion in cash and near-cash securities—enough to buy a bank as big as Citigroup Inc. at its early-June market value.

That’s not enough for Jiang, who became the bank’s president in 2000 and its chairman in 2005. “ICBC wants to be the most-profitable, most-pre-eminent and -respected bank in the world,” he says, sipping tea in the executive suite of his 10-story Beijing headquarters, where potted plants known as fuguizhu, or fortune bamboo, are strategically placed outside offices for good luck. Jiang, who understands English but always speaks Mandarin Chinese in public, has led ICBC on an international acquisition spree, paying $6 billion for stakes in banks in Africa, Indonesia and the Chinese autonomous region of Macau.

He has also formed strategic partnerships with three heavyweights of global finance: New York investment bank Goldman Sachs Group Inc., which owns a 4.9 percent stake in the bank; Munich-based insurer Allianz SE, which has 1.9 percent; and New York–based credit card issuer American Express Co., which owns 0.4 percent. “I believe he’s one of the most effective and visionary corporate leaders in China today,” J. Michael Evans, Gold- man’s Hong Kong–based Asia chairman, says of Jiang. Goldman’s stake is worth $13.36 billion—five times what the com- pany paid for it in January 2006, nine months before the IPO.

As he guides ICBC in its expansion, Jiang will need help from his well-con- nected partners. Until recently, ICBC has faced virtually no competition from inter- national banks, which have only 2 percent of the Chinese market, says Nicholas Lardy, a specialist on Chinese banks at the Washington-based Peter G. Peterson Institute for International Economics. The Chinese government regulates inter- est rates, meaning ICBC can pay as little as 0.72 percent on deposit accounts yet lend the same funds out at 7.47 percent. “The interest rate spreads are extraordi- nary,” Lardy says. “They have been oper- ating in a very protected environment.”

That environment is changing. China’s benchmark CSI 300 Index plunged 34.6 percent this year as of June 6. Global growth is stalling, and China’s economy, which was hit by an inflation rate of 8.5 percent in the year ended in April, is facing additional price pressures from the rising cost of materials needed for reconstruction following the May 12 earth- quake that left almost 70,000 dead and caused 30 billion yuan ($4.5 billion) of damage, according to government figures. Deutsche Bank in a June 2 report estimated the reconstruction cost at 500 billion yuan. Just 5 percent of the buildings and homes destroyed were insured, according to the China Insurance Regulatory Commission.

Even before the quake, China’s growth was slowing as the government tried to cool a red-hot economy that has soared an average of 10 percent a year for three decades. “This bank has not been tested in a cyclical downturn,” says Laurie Cang, a Beijing-based analyst at Moody’s Investors Service.

ICBC also has to battle the same problem as other Chinese banks: a culture of corruption that in 2007 resulted in banks’ falling victim to 1.84 billion yuan in fraud, embezzlement and other “irregularities,” according to the China Bank- ing Regulatory Commission.

During the past five years, three of China’s most senior bankers have been jailed. So far, ICBC has avoided high-level scandals. “Out-and-out corruption in the industry remains a major issue,” says Stephen Vickers, 51, chief executive officer of International Risk Ltd., a Hong Kong– based consulting firm. “I am not sure whether ICBC has been lucky or focused.”

Low salaries in China keep the threat of corruption alive, Vickers says. Senior bankers within China earn as little as $50,000 a year, according to Richard Hoon, CEO of I Search Worldwide Pte, a Singapore-based recruitment firm that has an office in Beijing. Abroad, Jiang has to pay competitive wages. “This is something we need to address quickly because two different systems will give rise to confidence disputes,” Jiang says. “We have a stock option plan under discussion.” Jiang’s own modest package includes a chauffeur-driven black Audi. Even so, his pay is only equivalent to that of a middle-ranking department head in Hong Kong or Singapore, Hoon says.

Bad debts could be another challenge, says Marc Faber, who manages $300 mil- lion at Marc Faber Ltd. in Hong Kong and doesn’t own ICBC shares. “If you are the largest bank in China, it’s impossible to know what every one of the bank lending officers is doing,” Faber says. “If Citibank and UBS don’t know, what hope has ICBC?”

The obstacles Jiang has to overcome are as huge as the bank he’s running. With assets of $1.25 trillion, ICBC has 17,000 branches and 170 million personal banking customers—equivalent to the populations of Russia and Canada combined. Those branches have traditionally been known for the length of their queues rather than the quality of service, says Emmanuel Daniel, president of The Asian Banker, a Singapore- based consultancy and publisher that sells research to ICBC and other main- land banks. “It’s the bank Chinese com- plain most about,” Daniel, 45, says.

Of those branches, 648 are in the Sich- uan region that’s been devastated by the earthquake. Five bank employees died in the disaster, 28 were injured and most of the branches were damaged. All have now resumed operation, according to ICBC. Mortgages in Sichuan province make up only 0.5 percent of ICBC’s total loan book, and only 5 percent of those were in the quake-affected areas, according to BNP Paribas, which estimates ICBC’s maxi- mum losses could be 1.08 billion yuan.

Jiang has trimmed the bank’s bad loans to 2.7 percent of the 4.1 trillion yuan total loan book from 34 percent when he took over as president in 2000. Still, ICBC is vulnerable to bad loans should China’s economic growth slow, according to a 2008 report by New York–based Moody’s, which gives ICBC its fifth-highest rating—A1—for its long-term foreign- currency debt. It gives the bank a D–, the third-lowest rating, for its stand-alone financial strength, discounting government support. “There’s very little transparency,” Faber says.

By the end of March, ICBC had written down $448 million in U.S. subprime mort- gage losses—a pittance compared with $1.5 billion at rival Bank of China Ltd. and $386 billion of credit losses and writedowns worldwide on subprime, mostly at American and European banks and securities firms. Jiang says he’s put risk controls in place. “It is the lifeline of a bank,” he says. “Without it, the faster you grow, the sooner you will fail.” All loans of more than 1 billion yuan have to be signed off on by ICBC President Yang Kaisheng, 59. “ICBC is a conservative bank,” says William Fong, who helps manage $10 billion, including ICBC shares, at Baring Asset Management Asia Ltd. in Hong Kong. “In this environment, that has turned out to be a good move.”

Jiang says his bank is more than equipped to handle any economic down- turn in China. Loan growth has averaged 10 percent annually, lower than the Chinese industry average, he says. “We have deliberately slowed down loan expansion to prepare ourselves for economic volatility in China,” he says.

Last year, ICBC’s profit soared 65 per- cent to 81.5 billion yuan. “With the weakened U.S. banks, Chinese banks are in a great position to take market share,” says Mark Mobius, who oversees $47 billion of emerging-market stocks at Templeton Asset Management Ltd. in Singapore. Templeton funds owned 94.4 million ICBC shares worth the equivalent of $72 million at the start of June, according to data compiled by Bloomberg.

Despite his professed conservatism, Jiang pounces when he spies a target he wants to acquire. Last year, he made the biggest foreign investment ever by a Chinese company when he spent $5.5 billion for a 20 percent stake in Johannesburg- based Standard Bank Group Ltd., Africa’s biggest lender.

Standard Bank and ICBC started talk- ing secretly about a partnership in June 2007 when Jiang met Standard CEO Jacko Maree at an International Monetary Conference meeting in Cape Town, Maree says. Four months later, the ICBC purchase was announced. “The transaction was completed in record time,” says Maree, 52, who kept his job. Last year, he earned the equivalent of $2.5 million—10 times Jiang’s salary. “We have been very impressed with our interactions with ICBC,” Maree says.

Chinese corporations have been scour- ing the globe for acquisitions, especially in Africa, where they’re buying mining assets and oil fields. Standard Bank, which operates in 18 African countries, had a profit last year of 13.65 billion rand ($1.8 billion), up 30 percent from 10.52 billion rand in 2006. Standard Bank and ICBC are each contributing $250 million to a $1 billion fund that will invest in natural resources such as metal ores, oil and natural gas.

Jiang says he aims to boost the proportion of ICBC’s profit earned abroad to 10 percent after three or four years, up from 3 percent in 2007. “The Chinese say that the fragrance of a good wine travels afar, and we used to think our size gave us influence,” Jiang says. “Now we are aware that without a global brand, there’s no influence.” Bank of China, for instance, is only two-thirds the size of ICBC in assets but has 600 branches outside China, five times as many as ICBC.

In 2006, Jiang snapped up a 90 percent stake in Surabaya, Indonesia–based PT Bank Halim Indonesia, which gives ICBC access to the world’s fourth-largest country, with a population of 240 million. ICBC paid just 90 billion rupiah ($9.65 million) for its share in the bank, which had assets of $50 million. In 2007, ICBC bought control of Seng Heng Bank Ltd., the No. 2 lender in Macau, an autono- mous region of China whose casino industry rakes in more money than the Las Vegas Strip and whose economy grew 27 percent last year. Jiang paid casino billionaire Stanley Ho 4.7 billion patacas ($585 million) for his 80 percent stake. Jiang says he’s also interested in acquiring control of Bangkok-based ACL Bank Pcl, a lender with 13 branches.

In late May, ICBC lost its bid to buy Hong Kong’s Wing Lung Bank Ltd. ICBC is an also-ran in Hong Kong, where Bank of China’s iconic 70-story headquarters looms over the 37-story ICBC tower. Bank of China ranks second only to HSBC Holdings Plc in the special administrative region, greater China’s leading financial center and the country’s main source of capital. ICBC has only 42 branches in Hong Kong compared with London-based HSBC’s 300 and Bank of China’s 280.

For now, Jiang says, he has no plans to buy U.S. assets. “Even though asset prices are very low and many good assets can be bought, we just don’t know where the bot- tom is,” he says. “Emerging markets are better because they offer faster growth.”

U.S. investments haven’t panned out well for one of ICBC’s largest shareholders, China Investment Corp. The state-owned wealth fund, which owns 35 percent of ICBC, last year paid $8 billion total for stakes in Morgan Stanley and Blackstone Group LP, the world’s biggest buyout firm. As of June 6, CIC’s Blackstone stake, purchased for $3 billion, had lost almost 40 percent of its value.

Jiang is also using his war chest to build an international branch network to follow Chinese corporations as they expand overseas. Since 1993, the bank has opened 112 branches stretching from the global financial centers of Frankfurt, London, Singapore and Tokyo to Almaty, Kazakhstan. Its Moscow branch opened in November. Next on its list: Doha, Qatar; Dubai; New York; and Sydney. “Chinese companies are going abroad, first as purchasers and exporters,” Jiang says. “Increasingly, they will become producers, investors and builders. We need to follow them to satisfy their need for financing.”

ICBC’s corporate clients, which account for half of its business, include 493 of China’s top 500 companies, Jiang says. ICBC has announced cooperation agreements with Raleigh, North Carolina– based Lenovo Group Ltd., the Chinese- owned personal computer maker that in 2005 bought the PC division of International Business Machines Corp. ICBC also has agreements with China Communications Construction Co., the world’s biggest builder of ports, and Aluminum Corp. of China Ltd., the country’s biggest producer of the lightweight metal. Aluminum Corp.’s parent, known as Chinalco, this year teamed up with New York–based Alcoa Inc. to pay $14.5 billion for a 9 per- cent stake in Rio Tinto Group, the world’s biggest iron ore miner.

At home, Jiang is revamping ICBC’s retail network to cater to China’s increasingly affluent population. The country has 345,000 U.S.-dollar millionaires, according to the October 2007 Asia-Pacific Wealth Report released by Merrill Lynch and Capgemini. ICBC is opening 3,000 wealth management centers and has introduced elite banking counters for customers with account balances of at least 300,000 yuan.

To help reduce the notoriously long lines at branches, Jiang is embracing Internet banking and automated teller machines. Last year, 37 percent of ICBC’s transactions were electronic, up from just 3 percent in 2000, he says. By year-end, the percentage will be 42 percent, he pre- dicts. “Within 10 years, it’s possible we can shift 80 percent of transactions to Internet E-banking,” he says.

Jiang’s efforts have only partly satisfied customers such as Tian Qilin, a Beijing- based computer programmer who does most of his banking with ICBC. “The queuing issues are still there,” Tian, 31, says. He adds that electronic banking helps. “They have improved a lot since becoming a listed company,” he says.

Jiang is using his tie-ups with foreign partners to gain expertise in new businesses at home. Ameri- can Express CEO Kenneth Chenault says he personally negotiated a card-issuing partnership with Jiang and that the talks led to an enduring friendship. Chenault, 57, says he wishes he could match wits on the golf course with Jiang, who doesn’t play the game. “He likes to win and I like to win, so I think it would be a very good match,” Chenault says.

American Express is focused on capturing affluent, creditworthy, traveling Chinese as customers, Chenault says. “China is critical for our success because of the size of the market and the strong opportunities for consumer and corporate cards,” he says. Since 2006, ICBC has been issuing American Express personal and corporate cards across China. Chenault declines to say how many. In all of China, only 70 million people had credit cards at the end of 2007, according to the People’s Bank of China, the country’s central bank. That’s still a 75 percent increase over 2006. ICBC is the biggest issuer with 23.3 million cards.

Though the number of cardholders is growing rapidly, Jiang says, ICBC is being cautious. In smaller countries such as Korea, everyone has one or two or three credit cards, “but the most important thing is that we must carefully check the credit rating of the applicant,” Jiang says. “We don’t want to see a subprime credit card crisis in China.”

Allianz’s werner Zedelius, a Munich- based management board member in charge of emerging markets, says he spent months of late-night negotiations in Beijing before thrashing out a deal with Jiang. The German insurer’s Chinese unit, Allianz China Life Insurance Co., sells its products through 900 ICBC branches in the six Chinese provinces in which it’s licensed—a market of 300 mil- lion people. After the January 2006 deal, Allianz’s premiums in China leapt by almost 150 percent to 288 million euros ($445 million) last year compared with a 29 percent rise in Asia overall.

“It has given us a great additional base for our business,” Zedelius, 50, says. In return, he says, Allianz will try to help Jiang fulfill his international ambitions. “We will open as many doors as we can,” he says.

Goldman and ICBC have links going back to the early 1990s, when ICBC started looking at investing in bonds, according to Edward Naylor, a Hong Kong–based Goldman spokesman. Today, the bank is helping train ICBC managers. Since June 2006, 100 ICBC executives have attended courses at Goldman’s New York training center for its own managing directors and selected clients, known as Pine Street. Among the tutors is Gerald Corrigan, 66, former president of the Federal Reserve Bank of New York, who teaches a course on risk management.

ICBC is also gaining international expertise from the presence on its board of Christopher Cole, 49, Gold- man’s New York–based chairman of investment banking. ICBC also has four independent directors, including for- mer Goldman President John Thornton, 54; former Hong Kong Finance Secre- tary Antony Leung, 56; and Qian Yingyi, 52, a professor of economics at the University of California, Berkeley. “Our board is quite international,” Jiang says. “And we expect to have more independent directors with international experience in the future.”

Jiang, the son of a Shanghai doctor, says he had no experience in banking until he joined ICBC in 1984. As a teenager, Jiang, like millions of other Chinese during the Cultural Revolution, was dispatched to the countryside to labor in the fields. After six years spent farming, he worked in a coal mine for 21⁄2 years in a town in the mountains in Henan province.

Chenault says those tough times have left their mark. “Jiang’s a self-made man,” he says. “He has both very strong values and a strong work ethic.”

In the years after Deng Xiaoping came to power in 1978 and began opening up the economy, Jiang was able to quit the coal mine and attend college, graduating with a degree in accounting from Shanghai University of Finance and Economics in 1984. That same year, the government created ICBC to take over all of the commercial banking functions of the central bank, making it the largest of the four state-owned banks.

Jiang joined as an accountant. “I just wanted a job,” he says. “I didn’t even know what a bank did.” Jiang gradually rose through the system, becoming presi- dent in 1993 of an ICBC branch in Pudong, a tract of land across the river from downtown Shanghai that had been designated for development as the main- land’s financial hub. Two years later, Jiang was named president of the Bank of Shanghai; and two years after that, president of ICBC’s Shanghai branch. In 1999, he moved to Beijing as vice president at ICBC before being named its president in 2000 and chairman in 2005.

One glaring omission from Jiang’s résumé is experience overseas—some- thing many of his senior managers also lack. International acquisitions will increasingly take up their time, says Warren Blight, an analyst in Hong Kong for London-based investment bank Fox- Pitt, Kelton Asia. “Top management has to be involved in these purchases,” Blight says. “They cannot delegate things as important as this to people down the line. It’s an area of concern the market has not focused on.” If Jiang wants to meet his goal of making ICBC the world’s best bank, the coal miner– turned-accountant will have to master the ways of international markets as well as he did those at home.

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