Summary of Key Points
The banking industry has moved beyond the era of easy profits, entering a phase characterized by narrowing net interest margins and re-evaluating risks. Risk strategy is no longer just a compliance issue in the back office; it is crucial for determining whether a bank can remain competitive. Different banks are showing significant differences due to variations in their risk strategies and approaches: China Merchants Bank (CMBC) has maintained its position in the retail sector by accurately timing its moves, while Ping An Bank has faced retail risks due to misjudging market trends. Chengdu Bank and Changsha Bank have found success by aligning their business with local government initiatives. To thrive in this competitive environment, banks need to adjust their risk strategies in four key areas: focusing on niche markets, enhancing services, innovating investment methods, and expanding overseas.
Risk Strategy: From a Back-Office Constraint to a Lifeline
In the past, banks focused on risk capital allocation (how much capital to use to manage risks and generate returns), but this approach is no longer sufficient. The new strategy integrates risk management into every aspect of business operations, turning it into a competitive advantage. This includes three key aspects:
1. Survival First: Regulatory requirements emphasize avoiding financial crises, so banks' primary focus is now on safety and compliance, rather than profit growth. For example, 63 rural commercial banks in Liaoning were merged into a provincial bank, and rural banks in Henan were consolidated due to inadequate risk management.
2. Integration of Business and Risk: Banks should not operate in isolation. Many focus on KPIs while ignoring risks, which can lead to unexpected issues. A good risk strategy determines where to invest, which areas to take risks in, and which to avoid, such as avoiding high-risk consumer loans.
3. Adaptation to Economic Cycles: Being too conservative during economic upturns or too aggressive during downturns can be detrimental. Excellent banks move their risk management departments to the forefront, expanding credit card and micro-loan services during good times and reducing high-risk assets during tough periods.
Differentiation of Retail Banks
In recent years, retail banking has become a competitive area, but results have varied greatly:
- CMBC: CMBC entered the retail market early and expanded during economic growth, building a strong customer base. Now, it is cautious during economic downturns, focusing on high-quality customers and specific regions.
- Ping An Bank: Ping An attempted to transform into a retail bank in 2016 by focusing on credit cards and consumer loans, but the timing was poor. The rapid expansion of personal loans led to increased bad debts, forcing it to reduce high-risk assets.
Regional Banks: Finding Success Through Local Government Partnerships
When the retail market was crowded, some regional banks succeeded by aligning their business with local governments and infrastructure projects:
- Chengdu Bank: By focusing on infrastructure projects supported by the Chengdu-Chongqing economic strategy, it has grown significantly, rising from 18th to 9th in the industry ranking.
- Changsha Bank: It expanded its credit and government-related loans, participating in fiscal payments and social security systems, thus securing a stable source of low-interest deposits.
Future Directions for Banks
To overcome challenges such as narrowing net interest margins and loan risks, banks need to adjust their risk strategies in the following four areas:
1. Niche Markets: Small and medium-sized banks should focus on specific markets rather than competing directly with larger banks.
2. Service Orientation: Instead of relying solely on loans, they can earn income from service fees (e.g., through wealth management services).
3. Innovative Investment: For new industries like high-tech manufacturing and AI, banks can use investment companies to balance loan risks with potential returns.
4. International Expansion: Large banks can expand overseas to diversify their customer base and reduce geographic risks.
In Conclusion
The focus in the banking industry is no longer on speed but on long-term sustainability. Whether a bank can adapt its risk strategy to economic cycles and find the right position will determine its success. This has been true in the past decade and will likely continue in the next ten years.