Banks change tack to cut losses

BOCOM to set up new subsidiary for greater presence in asset management

Bank of Communications Co Ltd became the nation's first large State-owned commercial bank to establish a wholly owned asset management subsidiary to strengthen risk control and improve its asset management capability.

The bank announced on Thursday the plan to establish BOCOM Asset Management Co Ltd in Shanghai with a registered capital of no more than 8 billion yuan ($1.25 billion), to be funded by the bank's own capital. The subsidiary's business scope will include investment and asset management, subject to regulatory approval.

"The investment meets the bank's needs of adapting to changes in the internal and external economic and financial environment, and striving to enhance its market competitiveness," Bank of Communications said in an announcement posted on the websites of the Shanghai and Hong Kong stock exchanges.

"It's beneficial for the bank, under the new regulatory policies and market environment in the asset management field, to strengthen risk control and risk isolation and achieve professional operations and management of asset management business, thereby improving the overall financial service level for our customers, and enhancing the ability of the bank in terms of serving the real economy, creating value and overall risk resistance," the bank said.

The announcement follows similar moves by several other listed commercial banks to set up their own wholly owned asset management subsidiaries, including China Merchants Bank Co Ltd, China Everbright Bank Co Ltd and Shanghai Pudong Development Bank Co Ltd.

In April, China's central bank, along with the country's banking, insurance and securities regulators and foreign exchange administration, issued a joint guideline to regulate financial institutions' asset management businesses. According to the new rules, if a financial institution's primary business does not include asset management, it should set up its own asset management subsidiary as an independent legal entity to strengthen risk management.

"Establishing an asset management subsidiary will prevent risks arising from the asset management business from spreading to the parent bank," said Zeng Gang, director of banking research at the Chinese Academy of Social Sciences' Institute of Finance and Banking. He said investors will now only be able to hold the parent bank financially responsible for losses equal to the extent of its investment in the subsidiary, rather than the full extent of any losses, as had been expected previously.

"The yet-to-be-formed subsidiaries will operate according to the new asset management regulations and are therefore unlikely to be used by commercial banks as an instrument of regulatory arbitrage. They will help transform the banks' current asset management practices, improve the level of investment professionalism and strengthen the talent pool," Zeng said.

Earlier this year, Bank of Communications announced that BOCOM Financial Asset Investment Co Ltd, another wholly owned subsidiary, commenced operations on Feb 5 with a registered capital of 10 billion yuan. Unlike BOCOM Asset Management, BOCOM Financial Asset Investment is mainly engaged in debt-to-equity swaps and other supporting businesses. The other four largest State-owned commercial banks have also set up financial asset investment subsidiaries to carry out debt-to-equity swaps.