Bucking Trend, ICBC Issues More Scrutinized Investment Products

The Industrial and Commercial Bank of China (ICBC), the world’s largest bank by assets, is pumping up its wealth management business even as much of the industry has been issuing fewer new products.

The rapid rise in the value of wealth management products (WMPs) on ICBC’s books is striking, considering that regulators are taking aim at China’s $16 trillion asset management industry in an effort to stave off systematic financial risk.

ICBC had 3.37 trillion yuan ($493.3 billion) of WMPs on its balance sheet at the end of June, up from 3 trillion at the start of year, and up 25% from the 2.7 trillion yuan reported in the first half of 2017, according to the bank’s first-half financial report on Thursday.

The increase comes in the face of regulatory tightening as authorities look to catch up with the explosive growth in WMPs in recent years. Draft rules posted in April aimed to end the implicit guarantees on returns offered by many providers, regardless of the profitability of the underlying asset, while also introducing more-stringent rules governing the types of projects that WMPs can invest in.

In July the central bank announced it will delay implementation of the rules until the end of 2020, out of fear that greater instability might result if financial institutions rushed to adopt them too quickly. Nevertheless, banks were already beginning to adjust their product offerings. In April, the number of new WMPs issued in China declined 20.4% from a month earlier to 10,849, the lowest since October. Even in 2017, regulatory tightening led sales in new WMPs to grow just 1.69%, after a staggering 23.63% between 2016 and 2017.

Yet ICBC is bucking the trend, leading the way for Agricultural Bank of China Ltd. and Bank of China Ltd., which saw the number of WMPs on their respective balance sheets each rise by 5% in the first half. On the other hand, China Merchants Bank, thought to be the second-largest issuer of these investment products, saw its balance of WMPs shrink by 4% over the same period, to 1.8 trillion yuan. Meanwhile, the value of China Construction Bank Corp.’s WMPs fell 7%.

Industry insiders suggested that ICBC could be taking more WMPs onto its balance sheet because its size and clout gives it a better understanding of regulators’ thinking. That might have allowed it to anticipate that banks will have until 2020 to shift some of its more-opaque WMP offerings, while other lenders have been more in the dark. Another analyst said that the increase might be due to the fact that the bank has also managed to attract a wealthy client base more interested in higher-risk, higher-return products.

Still, ICBC has seen its profits from WMPs decline by 20% due to factors such as the introduction of value-added tax payments, the bank said in its half-year report.

ICBC recorded a strong performance in the first half, with revenues growing 7% and profits rising 4.9% to 160.44 billion yuan, according to its interim results released. Its net interest income, which is the spread between what the bank pays out and earns on interest, rose 11% to 277.62 billion yuan, almost double last year’s figure.

Of its 3.37 trillion yuan of WMPs, around 900 billion yuan is invested in nonstandard credit assets, which the China Banking Regulatory Commission defines as those not traded on the interbank market and securities exchanges. That makes them less transparent, which is why they are the main target of the tighter new rules. While ICBC executives said that half of this 900 billion yuan of nonstandard WMP products will expire by 2020, the bank may have a hard time disposing of the remaining 450 billion yuan afterward.

This story has been updated to correct the language regarding the 3.37 trillion yuan worth of ICBC’s WMPs.

Contact reporter Ke Dawei (daweike@caixin.com)