Detailed Report for Industrial and Commercial Bank of China
Name
Instructor
Course Name
Date
Outline
- Overview
- History of ICBC
- Industrial and Commercial Bank of China (ICBC) Operation and Business
- Conclusion
- Works Cited
- Appendix
Overview
The banking industry in china has over the years undergone reforms and development. The PBOC bank was the sole bank that operated the Chinese financial system from the year 1949 to the year 1979. This bank single-handedly dealt with all the functions payments and lending systems as well as deposit taking. In an effort by the Chinese government to introduce reforms and modern systems of banking, PBCO bank was stripped off some of its businesses such as foreign exchange and international trade financing. These businesses were instead handed over to the Bank of China (BOC) in 1979. Other functions such as the fixed investment & construction as well as agriculture functions were given to the Agricultural Bank of China (ABC). The top tier structure of the Chinese banking was formed in the early 1990s. This top tier embodied a number of cooperatives, financial companies, and nine joint stock commercial banks. The non banking institutions in the Chinese financial system may be categorized into the following institutions: finance companies, TICs (trust and investment companies), financial leasing companies, urban credit cooperatives, and rural credit cooperatives. The banking system in china has for a long time been under the tight control of national government in terms of lending decisions, setting interest rates, as well as lending targets.
After 1990 however, the government of china introduced the three policy banks which reduced the level of government control over the banking system in china. These three policy banks included: the Agricultural Development Bank of China (ABC), the State Development Bank of China, and the Export-Import Bank of China. Consequently, these specialized banks became part of the big banks owned by the state. According to an argument advanced by Demirgüç and Levine (20), the establishment and the ultimate dominance of the largest state owned banks in china reduced the level of competition in the Chinese banking industry. With the entry of numerous banks that are not owned by the state, however, in the late 1990s there has been a drastic decline in the concentration ratio in the Chinese banks. Even though the largest four banks owned by the Chinese government continue to control a substantial amount of the assets in the banking sector, china has over thirty thousand financial institutions that are not banks as well as banks that are carrying on their businesses as legal entities.
It has been severally stated that in recent times, the amount of NPLs within the four big banks owed by the government of china poses a significant dilemma for the banking sector in china. The only viable means through which the problem NPLs could be solved was through reducing the amounts particularly in the big five banks to normal levels. In this spirit, the central government of china since the late 1990s undertook the responsibility of improving the capital base, the quality of assets, and risk management in the banking sector. These aspects were improved by the Chinese government for purposes of transforming the state owned banks to meet international standards. In so doing, these state owned banks could be listed in the international capital market. It therefore, follows that in an effort to improve the capital adequacy of these banks, it was necessary for the Chinese government to reduce the level of NPLs.
According to a study conducted by Bekaert et al (37), the system of private and government ownership of Chinese banks provided a very huge advantage to the Chinese banks particularly during the global financial crisis. This fact could be eluded from the fact that during the global financial crisis, three of the Chinese banks held the largest market capitalization across the globe. Unlike other banks in the world, the Chinese banks were never affected by the predicament of financial instability thus, enabling the economy of china to cross through the financial crisis unaffected.
History of ICBC
The Industrial and Commercial Bank of China (ICBC) was one of the four largest state owned banks that operate in china. This bank was formed in 1984 and it basically specialized in commercial transactions as well as financing. The establishment of this bank was part of the reforms undertaken by the Chinese government which started around 1978 in the banking industry. After its establishment, the ICBC took over from the central bank of china, PBOC, the functions of commercial banking. The Industrial and Commercial Bank of China (ICBC) went on with its specialized functions of commercial banking until 1993. The bank stretched its network of distribution and operation, enhanced their focus on risk management and profitability, and strengthened their management systems and financial accounting. The establishment of three policy banks in 1994 stripped of all functions carried out by ICBC and other banks that were owed by the state particularly those functions relating to policy lending. Consequently, the Industrial and Commercial Bank of China (ICBC) and other banks owned by the government such as the Agriculture Bank of China, Bank of China, and China Construction Bank, formed the four largest commercial banks within china and they operated on a more commercial basis.
The Industrial and Commercial Bank of China (ICBC) designed its first website in 1997, and also introduced a country wide telephone banking later in the year that followed. In a joint venture, the ICBC and the Hong Kong Bank of East Asia obtained seventy five percent stake of the ICBC-BEA Finance Company. After the ICBC acquired the Union Bank, the ICBC- Asia Company was formed in 2000. In the same year, ICBC introduced mobile banking, online commercial and private banking services, telephone banking services, and online business-to-business services. The presence of the Industrial and Commercial Bank of China (ICBC) in china was further boosted by the acquisition of about 25 % stake of shareholding in the China Insurance Holdings as well as in the China Insurance International Holdings.
During the end of the year 2002 the Industrial and Commercial Bank of China (ICBC) introduced Banking @ home which was a novel personal internet product. The Industrial and Commercial Bank of China (ICBC) acquired Fortis Bank Asia through ICBC – Asia and later changed the name of this bank to Belgian Bank from the original name, Fortis Bank Asia. In 2005, the ministry of finance in china injected capital into the four big banks owned by the state including the Industrial and Commercial Bank of China (ICBC). Lerner & Wan are of the view that the addition of more foreign currency reserves in these banks was aimed at strengthening the quality of assets as well as capita base (116). The central government of china further established four companies for purposes of asset management. These asset management companies included: China Great Wall Asset Management Corporation, China Huarong Asset Management Corporation, China Orient Asset Management Corporation, and China Cinda Asset Management Corporation. In the ICBC bad assets were transfer through Huarong Asset Management Corporation, one of the four companies formed by the central government of china for purposes of asset management. In 2005 however, was changed to a joint stock limited company from a bank owned by the state.
The Industrial and Commercial Bank of China (ICBC) faces some challenges in its commercial banking operations. One of these challenges includes competition from other foreign banks. Before joining the World Trade Organization (WTO), the central government of china protected Chinese banking sector from foreign competition. In light of the above the Chinese government did not allow foreign banks to operate their businesses using the Chinese currency particularly while dealing with their customers from china. The government had also put in place strict geographical limitations on foreign banks establishment within the territorial integrity of china. Nonetheless, after china became a member of the World Trade Organization (WTO) in the year 2006, the entry restrictions on foreign banks were lifted. In addition, the local currency business limitations on the foreign banks customers were also scrapped. Further the Chinese government lifted any form measures that involved non-prudential restriction of foreign banks in terms of operation as well as ownership. This process opened up the Chinese banking sector to foreign banking corporations thus increasing competition within the Chinese banking sector. For this reason, the Chinese banks hand to drastically enhance their business strategies as well as their service delivery for purposes of competing favorably with the foreign banks for a space in the global and local market (Barton & Wilson 44).
Lack of transparency in the Chinese banking sector was another big challenge within sector. Over the years, Chinese banking industry applied risk-based capital rules; nevertheless, the consistency in the application of such rules equitably among all the industry players left a lot to be desired in the banking sector. The accounting standards that were adopted by all the listed Chinese banks after 2007 has gone a long way in strengthening the standards of accounting within the banking industry in china thus, restoring the confidence of international investors and indeed the public at large.
Industrial and Commercial Bank of China (ICBC) Operation and Business
It is worth noting from the onset that the ICBC is basically a commercial bank which provides a number of services including among others: e-banking, wholesale banking, corporate banking, international business banking, and personal banking services. The bank also provides support towards the development of medium-sized enterprise, primary industries, key enterprises, pilot projects, and a number of infrastructure constructions. The Industrial and Commercial Bank of China (ICBC) has a number of segments which includes: personal banking, bank card, corporate banking, as well as e-banking (Lerner & Wan 98). During the year 2005, ICBC Bank had RMB 3, 289.6 billion in total loans, in total assets; the bank had RMB 6,456.1 billion, RMB 5,736.9 billion in total deposits, and RMB 171.6 billion in their total operating income. Studies show that by 2005, the Industrial and Commercial Bank of China (ICBC) was one of the Chinese largest corporation banks in terms of corporate deposits and discounted bills, as well as outstanding corporate loans. In addition, the bank had personal customers not less than 150 million and corporate banking customers exceeding the mark of 2.5 million. By the year 2006, ICBC has established more than ninety eight representative offices, overseas branches, outlets, and subsidiaries. The fee-based banking operations of the Industrial and Commercial Bank of China (ICBC) included: custody service businesses, bank cards, investment banking, agency services, wealth management, clearing and settlements, and electronic banking.
For purpose of achieving international standards of banking, the Industrial and Commercial Bank of China (ICBC) designed several steps to achieve this goal. These steps included adopting a financial reorganization that attempt to reduce the problem of non-performing loan and improve the adequacy of capital, designing efficient operation systems that are at par with the global standard of banking, developing a risk management system that is modern, and setting up viable mechanisms for corporate governance. Further, the Industrial and Commercial Bank of China (ICBC) embarked on novel reforms in its operational system, these reforms generally focused on risk management, operational efficiency, and improving customer services. In the words of Barton & Wilson, the bank specifically worked to improve on the operation of the treasury, personal banking, reorganizing the structure of operational through management layers as well as through reducing the number of branches, designing a comprehensive system of review and a viable platform of reporting to support a centralized financial and capital management, enhancing the incentive structures of employee for instance through developing a viable program of profit sharing, and finally through enhancing risk management and internal control systems (54).
The Industrial and Commercial Bank of China (ICBC) further forged collaboration with Goldman Sachs for purposes of strengthening the bank’s internal controls and risk management, corporate governance practices, asset management; enhance their treasury operations and their capabilities on non-performing loan disposal, as well as strengthening their investment banking operations and corporate banking (Barton & Wilson 56). The bank did not cease to enhance their customer service, risk management, and the bank’s support on its card business.
Quinn and Toyoda, (24) are of the view that in the banking industry, the aspect of risk management is very vital. In this respect, the Industrial and Commercial Bank of China (ICBC) has over the years implement a viable risk management framework for purposes of covering risks associated with bank operation, credit, market, and liquidity. The risk management framework was supported by advanced information technology and as such enhancing the quality of the Industrial and Commercial Bank of China (ICBC) assets to the enhanced risk management strategies. Prior to the introduction of the law governing commercial banking, the capabilities to manage risk by ICBC and other specialized banks owned by the state were quite restricted. Nevertheless, the passage of the law enabled these banks and the Industrial and Commercial Bank of China (ICBC) in particular to be able to take control in their risk management strategies as well as carry out their business in a more commercial point of view.
According to a study conducted by Kaplan and Scholar, the sustainable and stable growth in the revenue of the ICBC bank over the years is a clear reflection of the strong momentum within the bank operations. In 2010 for instance, the bank in the first three months registered a net profit of about RMB 41.725 billion. This profit exceeded the one registered in the previous year (2009) by about 19%. In addition, the earnings per share during the year 2010 were RMB 0.12. The earnings per share increased by about 9 percent compared to the previous year (54).
Conclusion
Over the past few decades, the banking system in china has been under the tight control of national government in terms of lending decisions, setting interest rates, as well as lending targets (Diamond 760). The government of china however, introduced the three policy banks in the late 1990s which reduced the level of its control over the banking system in china. These three policy banks included: the Agricultural Development Bank of China (ABC), the State Development Bank of China, and the Export-Import Bank of China. The system of private and government ownership of Chinese banks provided a very huge advantage to the Chinese banks particularly during the global financial crisis (Kennedy, & Matthew 33). The Industrial and Commercial Bank of China (ICBC) was formed in 1984, it was one of the four largest state owned banks that operate in china. This bank was basically established to deal exclusively with commercial transactions as well as financing. One of the challenges faced by the banking sector in china was competition from other foreign banks.
According to Kennedy & Matthew, before china joined the World Trade Organization (WTO), the central government of china protected Chinese banking sector from foreign competition (55). The government did this through enforcing geographical limitations on foreign banks establishment within the territorial integrity of china. In addition, foreign banks were not allowed to operate their businesses using the Chinese currency particularly while dealing with their customers from china. After china became a member of the World Trade Organization (WTO) in the year 2006, the entry restrictions on foreign banks were removed (Gompers & Joshua).
After its establishment, the ICBC took over from the central bank of china, PBOC, the functions of commercial banking. After its establishment, the ICBC took over from the central bank of china, PBOC, the functions of commercial banking. The Industrial and Commercial Bank of China (ICBC) has a number of segments which includes: personal banking, bank card, corporate banking, as well as e-banking. ICBC has established more than ninety eight representative offices, overseas branches, outlets, and subsidiaries. The fee-based banking operations of the Industrial and Commercial Bank of China (ICBC) included: custody service businesses, bank cards, investment banking, agency services, wealth management, clearing and settlements, and electronic banking.
In an effort to achieving international standards of banking, the Industrial and Commercial Bank of China (ICBC) took several steps which among others include: adopting a financial reorganization that attempt to reduce the problem of non-performing loan and improve the adequacy of capital, designing efficient operation systems that are at par with the global standard of banking, developing a risk management system that is modern, and setting up viable mechanisms for corporate governance. The bank adopted a risk management framework that was supported by advanced information technology and as such enhancing the quality of the Industrial and Commercial Bank of China (ICBC) assets to the enhanced risk management strategies. The bank was able to control its risk management system after the passage of the law governing commercial banking on their capabilities to manage risk.
Works Cited
Barton, Newell, & Wilson, George. Dangerous markets: managing in financial crisis, John Wiley & Sons, Inc, 2003. Print.
Bekaert, Harvey, et al. “Growth Opportunities and Market Integration,” Review of Financial Studies 62. 2 (2007): 1081-1138. Print.
Diamond, Peter. The role of a stock market in a general equilibrium model with
technological uncertainty, American Economic Review 57. 4 (2009): 759 – 776. Print.
Gompers, Paul, and Joshua Lerner. An analysis of compensation in the I.S. venture capital partnership, Journal of Financial Economics 51. 1 (1999): 3-44. Print.
Kaplan, Steven, & Schoar, Antoinette. Private equity performance: return, persistence, and cash flow, Journal of Finance 60. 4 (2005): 1791 – 1823. Print.
Kennedy, Simon, & Matthew, Benjamin. Central banks face rising pressures from
Politicians, Bloomberg publishers, 2007. Print.
Lerner, Joshua, & Wan, Wong. Smart institutions, foolish choices? The limited partner performance puzzle, Journal of Finance 52. 2(2007): 97– 126. Print.
Mukherjee, Andy. Asian central banks should follow South Korea’s lead, International Herald Tribune, 2004. Print.
Quinn, David, & Toyoda, Anthony. “Does Capital Account Liberalization Lead to Economic Growth?” Review of Financial Studies 2.1 (2008): 1403-1449. Print.
Appendix
Balance Sheet
Period ending Dec 31, 2011 Dec 31, 2010 Dec 31, 2009 Dec 31, 2008
Assets
Cash And Cash Equivalents 276,592,000 566,322,000 292,234,000 265,069,000 Short Term Investments 429,747,000 174,701,000 101,975,000 78,715,000 Net Receivables1, 199,896,000 1,167,434,000 1,215,647,000 1,114,253,000 Inventory1, 954,000 2,206,000 3,400,000 4,563,000 Other Current Assets1, 621,142,000 1,334,595,000 1,064,294,000 623,616,000
Total Current Assets 3,554,065,000 3,293,161,000 2,731,855,000 2,116,143,000 Long Term Investments 2,484,096,000 1,881,780,000 1,864,197,000 1,735,374,000 Property Plant and Equipment – – – – Goodwill 5,350,000 4,891,000 1,420,000 – Intangible Assets – – – – Accumulated Amortization – – – – Other Assets – – – – Deferred Long Term Asset Charges 18,696,000 10,746,000 5,833,000
Total Assets 11,785,053,000 9,757,146,000 8,683,712,000 7,508,751,000
Liabilities
Current Liabilities
Accounts Payable 10,705,009,000 8,819,165,000 7,639,311,000 6,725,375,000 Short/Current Long Term Debt 189,457,000 109,536,000 328,928,000 145,251,000 Other Current Liabilities 26,473,000 46,545,000 38,393,000 32,154,000
Total Current Liabilities 10,944,689,000 9,035,235,000 8,028,067,000 6,902,121,000 Long Term Debt 78,842,000 45,632,000 54,560,000 63,817,000 Other Liabilities – – – – Deferred Long Term Liability Charges – – – – Minority Interest – – – – Negative Goodwill –
Total Liabilities 11,111,160,000 9,154,471,000 8,145,341,000 7,042,287,000
Stockholders’ Equity
Misc Stocks Options Warrants – – – – Redeemable Preferred Stock – – – – Preferred Stock – – – – Common Stock 334,019,000 334,019,000 334,019,000 334,019,000 Retained Earnings 240,466,000 166,934,000 100,518,000 24,342,000 Treasury Stock 99,408,000 101,722,000 103,834,000 108,103,000 Capital Surplus – – – – Other Stockholder Equity – – – –
Use the order calculator below and get started! Contact our live support team for any assistance or inquiry.
[order_calculator]