Source: 21CBN By: Li Yumin
“NPLs are garbage in others’ eyes, but for AMCs, they are misallocated resources, the difference between AMCs and other financial institutions is to turn garbage into treasure”, said President of COAMC, Mr. Zhang Zi’ai in an interview with the journalist of 21CBN.
Mr. Zhang believes that with the commercial transformation of AMCs, the cause of and disposal means of NPLs nowadays and the macro-economic situation are completely different from those in 1990s. Therefore, he said that in the new situation, AMCs should have a new approach to the old business, and upgrade the operation means of NPLs.
Mr. Zhang said frankly that, according to the principle of One Company, One Policy by the State Council on the reform of AMCs, COMAC has preliminarily established the two-wheel driven business model of Asset Management + Insurance. At present, COAMC has submitted reform application to regulators, and the plan is in the process of examination and approval. In the near future, COAMC will go through the trilogy of shareholder structure reform, introduction of strategic investors and listing.
New Approach to Dispose NPLs
21st Century: In the Report on Financial NPLs Market 2014 issued by COAMC in December, you mentioned that the emergence and disposal of this round of NPLs was completely different from those at the end of last century, and AMCs need to upgrade disposal means. In recent years, what are COAMC’s innovations on disposing NPLs?
Zhang: In today’s market, NPLs are different from policy NPLs at the end of last century: firstly, AMCs do not have long-term fund from PBOC’s relending; now it is a market behavior, you have to finance in the open market. The fund has its cost, term and risks. Secondly, the macro situation is different. In the past, China’s economy grew at a high speed, the asset price was in the rising cycle, even if we only had one approach to dispose NPLs, we could make money only by hoarding NPLs.
Nowadays the macro-economy has changed structurally, so in the new situation we should have a new approach to do the old business, and upgrade our way of operating NPLs.
First, we should allocate some long-term (3 to 4 years) capital to the commercially purchased NPLs, even set up NPLs and M&A funds (with proper leverage) to focus on commercially purchased NPLs business.
Second, we should actively play the role of financial risk controller to help banks and other financial institution to overcome temporary difficulties. Furthermore, through transforming the wholesale business into retail business, we could establish new upstream and downstream markets of NPLs, sort out NPLs, sell those of no restructuring and appreciation value to other investor, and dispose, restructure and operate those of value.
Third, we should upgrade our way of operating NPLs. COAMC must transform from the original simple disposal approach to investment banking and value-added operation. We could learn the experiences of foreign investment banks, implement the concept of rebuild and revive NPLs (to save those worthy enterprises, and make them contribute to the society instead of sentencing them to death), and develop those NPLs with high added value. For example, in M&A, AMCs could look for industry leaders as partners to restructure enterprises in crisis through collective funding, asset injection and project establishment by using their talents, market share, management and technology upgrading capability.
For those enterprises that have no fundamental problems but only face liquidity crisis due to the break of capital chain, AMCs could also actively get involved in operation through various means like bailout by capital injection, acquisition by debt reduction, restructuring by asset stripping, debt restructuring and freezing, seeking government support and trusteeship management. All kinds of investment banking and financial methods could be mixed in application, such as acquisition + disposal + investment + financing; mezzanine and credit guarantees of loan and equity, etc.
Fourth, we should innovate on the business scope of NPLs. NPLs are not only from banks, but also financial institutions, even non-financial institutions, projects and enterprises in crisis. The NPLs business should expand from package disposal to bailout by capital injection, acquisition by debt reduction and trusteeship and restructuring of enterprises.
21st Century: As domestic economy goes downward, disposing non-performing loans becomes more difficult. There are people in asset management companies confessing that their business is in a confusing stage. In your opinion, should the four asset management companies go back to their main expertise which is disposition of NPLs, or focus more on other business realms? In your current businesses, which ones are the most commercially sustainable and profitable?
Zhang: NPL business is the cornerstone of all asset management companies. Seen as “waste” by others, non-performing loans are the “mismatched resources” to asset management companies. The difference between AMCs and other financial companies is that AMCs “turn waste into treasure” like artists turn seemingly useless tree roots into sculptures. Disposing financial risks is AMCs’ responsibility. As the economy slows down, a large quantity of non-performing loans emerge; asset management companies should use their expertise to handle NPL business with great effort, so as to perform the responsibilities as a stabilizing force to the economy.
Indeed, in a sluggish macro-economy and market, disposition of NPLs becomes harder, making profits from the disposition becomes harder also. But these are no reason to hide from NPL business. Solution to these problems is innovation, combining various investment banking approaches for restructuring and value-added operations, instead of simple disposition.
NPL business and other businesses do not contradict each other, instead they can be combined. Besides NPL business, AMCs mainly engage in investment banking businesses such as asset management, investment, and financing, which is also an important source of profit. Financial businesses are all affected by cyclical fluctuations and NPL business are more so; financing and investment businesses also fluctuate but are overall more sustainable.
The Origin of the “Two Engines” Strategy
21st Century: Compared to other companies whose subsidiaries are relatively small, COAMC’s holding companies especially the insurance company is very advantageous. Is this the main factor in implementing the “Insurance + Asset Management” Dual Engines Strategy? Also, there is a source saying that after COAMC’s reform, its IPO will be different than that of Cinda’s, in that COAMC will go public independently without some of the holding companies.
Zhang: The “Two Engines” Strategy is based on our judgment of market prospect, combined with global wisdom and our experiences. In the global market, Allianz and PIMCO’s case is a successful example of the “Insurance + Asset Management” model. The abundant product line better serves the clients’ needs; pooling of clients and distribution channels facilitates cross-over sales in the group; and the coordination between insurance and asset management business on capital needs and branding has pushed the Allianz Group forward in strategic synergetic development. After decades of growth, Allianz holds the highest premium income in Europe, the second highest worldwide; and the value of assets under its management ranks the second highest worldwide.
In domestic market, we are in the midst of an emerging insurance and asset management markets. Currently the depth and density of China’s insurance coverage is much lower than those of Japan, Hong Kong, Taiwan or other Asian countries and regions. Hypothetically speaking, after ten years when insurance depth and density in China matches other Asian countries and regions, premium revenue is estimated to reach 9 trillion yuan, which is five times than the current 1.7 trillion yuan; compound growth rate will reach 18%.
According to global experiences, China’s wealth management industry will soon enter the era of rapid development once GDP per capita exceeds USD5000. In 2014, China’s trust market scale has exceeded 13 trillion yuan; other asset management businesses are also growing robustly. Wealth management market is developing by leaps and bounds. In 2012, nationwide total value of personal investable assets was approximately 73 trillion yuan, among which the high net worth individuals had over 33 trillion yuan in investable assets. Assuming the annual growth rate is 10%, five years later personal investable assets will exceed 110 trillion and high net worth individuals’ investable assets will exceed 50 trillion yuan, bringing bigger room for demand in wealth management.
According to the “One Company One Policy” principle in AMC reform brought forward by the State Council, combining our business advantages and core competitiveness, COAMC has established a business model of “Asset Management + Insurance” Dual Engines. While keeping our advantage in NPL business, we flexibly utilize various financial functions, seek other forms of asset management, and at the same time elevate insurance business, so as to provide a full range of financial services to clients.
Based on this strategic positioning, COAMC has already submitted the report on restructuring to the supervisory body, which is currently under review. Focusing on the goal of restructuring, all departments of COAMC is carrying out the necessary preparatory work, such as auditing and assessing, business adjustment, management and control enhancement.
21st Century: What do you expect from COAMC after restructuring? After the company makes its commercial transformation, which advantages will emerge?
Zhang: In the near future, COAMC will take the three routine steps of joint-stock reform, introduction of strategic investors, and IPO. COAMC will operate with the standard of outstanding listed companies, pursue high-quality, sustainable goals, and choose a genuine market-oriented path. It will build on its comparative advantages, cultivate distinct core competitiveness, and elevate itself to the next level of building a leading whole value-chain financial services group.
After commercial transformation, COAMC’s many strengths will start to show. First is capital strength. At present COAMC group has approximately 40 billion yuan net capital; after we introduce strategic investors and go public, capital strength will certainly grow. Second is group synergy. COAMC’s comparative advantage is a relatively complete range of licenses that enable us to provide comprehensive financial services. COAMC group’s strategic synergy will be the new growth highlight for the company’s sustainable development. Third is business and policy innovation. COAMC will restructure and optimize its internal management according to advanced global concepts and standards. Its multi-tiered management system will be more scientific, standard, and synergic, allowing management efficiency and ability to be elevated. Fourth is strategic positioning. Backed by great capital strength and a modern financial corporate system, supported by corporate innovation and group synergy, COAMC will surely achieve sustainable development with “asset management + insurance” as engines.
21st Century: In recent years, the four asset management companies have had enormous growth. In 2013, COAMC’s profit exceeded 10 billion, and it maintains a high growth rate during the first half of 2014. What do you think are the main factors for the huge profit growth? And can these factors sustain COAMC’s development in the long run?
Zhang: In the past few years, COAMC’s big profit growth results from three factors. The first is a good working environment created by supervisory authorities. Relevant authorities have been hugely supportive and helpful in the AMC reform.
The second is market opportunities and COAMC’s own advantages. China’s financial system has not yet matured; and there are still many weak links in the economy that do not have access to financial services, for example the large amount of companies that cannot afford financing or do not have access to it. This phenomenon shows that there are huge demands for financial services in the market, and our domestic financial market still has tremendous growth potential. Asset management companies have adjusted themselves to market demands, and cultivated their own advantages by choosing differentiated growth models. By innovation and expanding business realms, AMCs have efficiently provided financial services to clients, earned their recognition, and achieved robust development as well as making up for the shortfalls in the financial structure.
The third is comprehensive businesses that ensure stable profit growth. AMCs have various financial platforms that provide diversified services. When one business might be sluggish due to market changes, others can be making great progress. This model allows COAMC to ensure stable growth even in a bearish market.
However, high growth rate is often periodical, stability and sustainability is the healthy way. As domestic economy goes into a new stage, asset management companies should also cater to the new reality; innovate development models; not only focus on speed and size, but quality and performance. When we equip ourselves with better skills, we can truly achieve sustainable development.
A New NPL Market
21st Century: Speaking of the source of non-performing loans, commercial banks are the usual contributors. In your opinion, will the size of non-performing loans from commercial banks consistently grow in 2015? What is the acceptable range of non-performing rate in the banking industry?
Zhang: In recent years, NPL balance and ratio in commercial banks keeps rising, but NPL ratio still remains comparatively low. By the end of November 2014, NPL ratio of domestic bank was 1.31%. The highest NPL ratio in domestic history was 30%; before ABC finished its IPO, its NPL ratio was as high as 6%-7%. Horizontally speaking, the average NPL ratio in the world is 4%; Europe holds the highest 7%; North America, Latin America and the Caribbean have 2% and Eastern Asia and the Pacific have approximately 1.5% NPL ratio.
Bad loans from banks are expected to grow in the coming future. This is determined by the new development stage and specific macro environment of China’s economy.
However, domestic financial risks are within control and are unlikely to be systematic. But industry-wide, regional or individual financial risks might occur according to our forecast; and this does not exclude medium or small size banks or other financial institutions.
21st Century: There are more and more players in the NPL market today, such as provincial level asset management companies. Will they become strong competitors to the four major AMCs? Will the landscape of the whole industry change?
Zhang: The four major national AMCs are the pioneers and leading force of China’s NPL market. During years of NPL business, AMCs have fostered a complete set of skills and expertise for NPL disposition; they nurtured strong teams of competent professionals; created nation-wide service networks and cultivated powerful client bases. Their diversified financial services meet the many demands of clients, which serve as a “moat” of non-duplicable advantages and strengths. The four AMCs are well known for their capital strength and professionalism. Besides the four national AMCs, there are quite a few other players in the market. It is because of more and more participation that the NPL market is bound to be more diversified, its businesses more robust and its mechanism more mature.
In the past few years, non-performing loans are rapidly growing in the Eastern coastal region. In order to dissolve regional financial risks, regional asset management companies were born in accordance with the model set up by central government in 1999 when dealing with bad loans from state-owned banks and companies. These provincial AMCs take on the bad loans from local financial institutions and financing platforms. Overall regional and national AMCs remain a competing and cooperating relationship. In the short term, there might be more cooperation than competition; in the long term however, there will be more competition than cooperation. Even when we are competing, local asset management companies can trigger the “catfish effect”, which can bring progress to the four national AMCs. However, the landscape of China’s NPL market will not be easily changed; the four national AMCs are the leaders of the market.
