Lenders bet big on wealth management units

Subsidiaries can help in transition to high-quality development, say industry experts

Commercial lenders in China are establishing their own wealth management subsidiaries in response to the banking regulator's call to end implicit guarantees for principal and interest payments on wealth management products.

ABC Wealth Management Co Ltd, a subsidiary of Agricultural Bank of China Ltd, officially opened for business in Beijing on Thursday and launched a series of new products. ABC is the last of the five major commercial banks to set up a wealth management subsidiary.

"China's wealth management industry will embrace a historical transition of business models and a comprehensive restructuring of its ecosystem. The establishment of ABC Wealth Management is an important measure taken by the Agricultural Bank of China to carry out supply-side structural reform in the financial sector, further implement new regulations on the asset management industry, push for high-quality development of the real economy, and actively tackle changes in the wealth management industry," said Zhou Mubing, chairman of Agricultural Bank of China, the country's third largest commercial lender by assets.

He said the newly formed subsidiary will build its digital asset management capabilities, which are centered on digital transformation of the bank, and strengthen collaborative development of the bank and the subsidiary under the premise that risks associated with the wealth management company are isolated from its parent bank.

The establishment of ABC Wealth Management came after similar moves were made by four other large State-owned commercial lenders. BOC Wealth Management Co Ltd, a wholly owned subsidiary of Bank of China Ltd, started operations on July 4, following the footsteps of wealth management subsidiaries launched by Industrial and Commercial Bank of China Ltd, China Construction Bank Corp, and Bank of Communications Co Ltd.

Joint-stock commercial lenders such as China Everbright Bank Co Ltd, China Merchants Bank Co Ltd, and Industrial Bank Co Ltd, and a few city commercial banks, also obtained regulatory approval to establish wealth management subsidiaries. So far, over 30 commercial banks have announced plans to set up their own wealth management arms.

One of the biggest advantages for the wealth management subsidiaries of commercial banks is that new regulations governing the asset management sector allow these subsidiaries to invest directly in stocks, whereas banks were previously forbidden from entering the field.

The volume of new funds that will flow into the stock market is expected to account for 10 to 15 percent of the outstanding amount of wealth management products (WMPs).Considering that the amount of non-principal protected WMPs was 22 trillion yuan ($3.1 trillion) at the end of 2018, about 2 to 3 trillion yuan will flow into the secondary market, said Yang Rong, an analyst at CSC Financial Co Ltd, in a research report.

However, compared with fund management companies, banks' wealth management subsidiaries are usually less professional and lack experience in stock market investment. Therefore, at the initial stage of development, they look forward to cooperating with other market entities to launch products in this field by learning from others' experience while developing their own abilities and building professional teams at the same time, said a manager of the wealth management subsidiary at Bank of China Ltd, who declined to give his name because he is not authorized to speak to the media.

Yang with CSC Financial said in the report: "At the beginning, fixed income and cash management products are still two major asset categories for the wealth management subsidiaries of commercial banks. With the improvement of their research and equity investment abilities, the subsidiaries will increase their asset allocation in equities. Over the medium and long term, after banks set up wealth management subsidiaries, China will further enrich its team of institutional investors and increase the proportion of direct financing. The money flowing into the equity market will also increase steadily."

BOC Wealth Management will launch equity products by digging into opportunities for stock market investment through its collaboration with professional entities. The existing WMPs issued by BOC Head Office have already followed hot spots in the market such as tech companies seeking listing on the STAR Market, the Nasdaq-style technology board on the Shanghai Stock Exchange.

As the regulator does not allow banks to invest in wealth management product assets directly in the STAR Market, BOC invested in the STAR Market through a fund of funds - a pooled investment fund that invests in other types of funds rather than investing directly in bonds, stocks, and other types of securities.

Currently, the total volume of BOC's wealth management products is about 1.2 trillion yuan, among which the volume of net-asset-value WMPs is nearly 200 billion yuan. Net-asset-value WMPs refer to non-principal protected WMPs with floating interest rates - similar to open-end funds that are bought and sold on demand at their net asset value.

Regulators require financial institutions to break implicit guarantees for principal and interest payments on wealth management products, leading to a gradual transition of such products toward net-asset-value WMPs to reflect risks on a timely basis. "People in general are glad to buy wealth management products that have an expected return of 4 or 5 percent so as to feel less stressed about their investment. But banks take the pressure for this kind of WMPs, so regulators want banks to reduce the volume of such products," said the manager at BOC Wealth Management.

"Under the current regulations, the requirements on risk management for newly issued WMPs are higher than before. To attract more investors, we must manage the products smoothly so that they will generate better returns while the investors are taking risks to some extent," he said.

Promoting a transition of products, ABC Wealth Management launched four main types of wealth management products on Thursday, ranging from cash management, fixed income, equity to hybrid products.

It also launched two featured products. One is specialized in agribusiness-related investments to satisfy farmers' demands in wealth management and support rural vitalization. The other is focused on investments in green bonds, green asset-backed securities, and credit assets of companies that perform well in regard of environmental protection, social responsibility and corporate governance.

In general, the first batch of WMPs launched by banks' wealth management subsidiaries include enhanced fixed income products, hybrid capital market investment solutions, and characterized private equities, covering the areas of composite investments across multiple markets, said Yang Yu, Cai Mengyuan and Fan Wenjing, analysts at Hwabao Securities Co Ltd, in another report.

"Compared with traditional WMPs, the new products are characterized by diversified investment strategies, equity allocation growth, extended maturity, the upgrading of risk levels, and the lowering of investment thresholds. These features reflect an important direction for the transition of banks' wealth management products in a new era of asset management," the analysts said.

Currently, quasi money market funds account for over 60 percent of BOC's net-asset-value WMPs. That percentage is similar to its peers in the banking industry. But there is more to do for BOC Wealth Management in terms of the investment in equities of non-listed companies, equity products, and debt capital markets, with the aim of better serving the real economy, which refers to the part of the economy that produces goods and services, said the manager with BOC Wealth Management.

Like the other four large State-owned commercial banks, BOC will still keep its asset management department after the establishment of a wealth management subsidiary because over 80 percent of the bank's existing WMPs were issued in the name of its head office.

The asset management department of BOC Head Office will entrust the operations of the bank's WMPs to the newly formed subsidiary. The head office will gain excess returns and take investment risks for the existing WMPs, while the subsidiary will charge asset management fees.

Unlike BOC, the Industrial and Commercial Bank of China Ltd and China Construction Bank Corp will keep the operations of their existing WMPs at the head office.

Encouraged by regulators, the wealth management subsidiaries of commercial banks will establish a market-oriented performance evaluation mechanism, which will give stronger incentives and higher pressure to their employees than the parent companies.

jiangxueqing@chinadaily.com.cn

(China Daily Global 08/13/2019 page10)