'Big five' lenders eye wealth unit potential

Large State-owned commercial banks are likely to take the lead in setting up independent subsidiaries focusing on wealth management business, analysts said.

China's banking and insurance regulator announced on Sunday it had given approval to Industrial and Commercial Bank of China Ltd, the country's largest State-owned commercial lender by assets, to establish a wealth management subsidiary.

So far the regulator has accepted similar applications from multiple commercial banks, while many others are also planning to do so.

The five largest State-owned commercial banks have all obtained regulatory approval since Dec 26 for the establishment of their own wealth management subsidiary. The China Banking and Insurance Regulatory Commission said the "Big Five" banks are speeding up preparations for the opening of wealth management subsidiaries as soon as possible and for enlargement of the institutional investor group, so as to provide the real economy and financial markets with more new funding that meets compliance requirements.

"Considering that the regulator has significantly shortened the process of granting preparatory approvals to Bank of China Ltd and China Construction Bank Corp, and that many banks - especially large ones - have almost completed the preparatory work in terms of organizational frameworks, operating systems and staffing, the first batch of wealth management subsidiaries are expected to be formally established around the middle of this year," said Yang Yu, an analyst at the Shanghai-headquartered Hwabao Securities Co Ltd, in a research note.

Establishing wealth management subsidiaries will help improve the overall level of valuation for banks by releasing risks associated with implicit guarantees and rigid redemption for banks' wealth management products.

Besides, compared with banks' wealth management department, subsidiaries can make better use of their sales channels and improve their investment capabilities, thus increasing their market share in asset management and the intermediary business incomes of banking groups, according to CSC Financial Co Ltd.

As of Jan 19, nearly 30 banks had announced their plans to set up asset management or wealth management subsidiaries.

For China's "Big Five" commercial banks, the registered capital of their wealth management subsidiaries ranges from 8 billion yuan to 16 billion yuan ($1.18 billion to $2.36 billion). The amount drops to 5 billion yuan for joint-stock commercial lenders, and varies from 1 billion yuan to 3 billion yuan for city and rural commercial lenders.

The subsidiaries which opened for business first will enjoy first-mover advantage and will be able to enhance the comprehensive competitiveness of their parent banks, said Liao Zhiming, an analyst at Wuhan-based TF Securities.

He estimated that the number of banks' wealth management subsidiaries may surpass 50, as most of the commercial lenders whose assets totaled over 300 billion yuan or whose volume of wealth management was at least 30 billion yuan have a strong willingness to establish such kind of subsidiaries.

"Now that the regulator has allowed funds raised from products publicly offered by banks' wealth management subsidiaries to be directly invested in shares, the subsidiaries could suitably raise their allocation to stocks when the shares they intend to buy are undervalued," Liao said.

He expected that investment allocation to shares by banks' wealth management subsidiaries will increase gradually along with the improvement of their research and investment capabilities and enrichment of their client structures.