Caixin
Jul 03, 2019 05:54 AM
FINANCE

City Commercial Banks Get Go-Ahead for Wealth Management Units

Bank of Hangzhou is the first city commercial bank to win approval to set up a wealth management unit. Photo: VCG
Bank of Hangzhou is the first city commercial bank to win approval to set up a wealth management unit. Photo: VCG

Two medium-sized lenders received regulatory approval to set up wealth management subsidiaries, becoming the first city commercial banks to follow state-owned rivals in becoming eligible to run such units.

Bank of Hangzhou, in the eastern coastal province of Zhejiang, became the first city commercial bank to receive approval from the China Banking and Insurance Regulatory Commission for a wealth management subsidiary. The wholly owned unit will have a registered capital of 1 billion yuan ($146 million), according to a statement issued by the bank on Monday.

Bank of Ningbo, also in Zhejiang, won regulatory approval to set up a similar unit, the bank said Tuesday.

The banks will start preparation for the new units and submit further applications to local regulators to open for business, the banks said.

Setting up a designated wealth management unit will allow banks to operate with fewer restrictions on investments using wealth management funds under rules released late last year governing commercial banks’ asset management businesses.

As part of a tough regulatory framework for the entire asset management industry, the rules aim to create a firewall around banks’ wealth management businesses. The goal is to separate them from banks’ other operations in an effort to break any implicit guarantee that these investments will be bailed out if they sour. The $4 trillion bank wealth management product (WMP) industry has been the major building block of China’s shadow banking system and a focal point of regulators’ clampdown on financial risks over the past few years.

Banks have raced to set up wealth management units. A total of 31 banks have disclosed plans to set up WMP units as of April, according to Ernst & Young. About half of the applicants are city commercial banks.

Before Bank of Hangzhou, the CBIRC granted approval for wealth management subsidiaries to six big state-owned banks — Bank of China (BOC), Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of Communications, Agricultural Bank of China and the Postal Saving Bank of China.

The wealth management units of CCB and ICBC became the first to start operations earlier this month, while BOC has won clearance to open business.

Three national joint-stock banks — China Merchants Bank, Everbright Bank and Industrial Bank — also received approvals.

Analysts said regulatory approvals have come faster than they expected.

A source close to regulators told Caixin that the CBIRC set different schedules for the reviews for different types of banks. Because of the large number of city commercial banks, reviews will be carried out in batches and mainly take into account applicants’ wealth management business size and business track records.

By the end of 2018, Bank of Hangzhou had 193.2 billion yuan in outstanding value of WMPs, including 197 billion yuan of nonguaranteed products, according to a company report.

Bank of Ningbo had 259.4 billion yuan of outstanding WMPs by the end of 2018, the company’s financial report showed.

Although a wealth management unit gives banks greater room to manage the products, setting up a unit is still a costly business, said Zeng Gang, an expert at the National Institution of Finance and Development, in a research report.

The rules for banks’ wealth management units require a minimum registered capital of 1 billion yuan. But if a bank’s wealth management business is smaller than 100 billion yuan, it will reduce the capital efficiency of the bank, Zeng wrote in the paper.

According to the rules, banks will have six months to prepare for the new entities after receiving CBIRC approval. The regulator will review preparations before granting licenses to start the businesses.

Contact reporter Han Wei (weihan@caixin.com)

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