HONG KONG: CCB International (Holdings), the Hong Kong investment banking unit of China Construction Bank, will launch six yuan-denominated private equity funds, as a means of reducing reliance on traditional lending.

CCB International plans to manage more than 10 billion yuan in these funds next year, a senior executive told Reuters yesterday. The bank is also close to launching a $1 billion private equity fund in Hong Kong that plans to invest in financial institutions such as Bank of Shanghai and Huatai Insurance Co.

Driven by the attractive profitability non-lending businesses could generate, leading banks on the mainland have been shifting their expansion efforts away from traditional banking businesses in recent years.

"Profits from the traditional banking business are very small; (so) banks have to expand to wealth management to enrich their portfolios," said Linus Yip, a strategist with First Shanghai Securities.

"Wealth management is far more profitable than traditional banking businesses, especially when the financial market is good," he said.

Xu Xiaolin, managing director of CCB International Wealth Management Ltd, said the yuan-denominated funds will focus on industries that include environmental protection, healthcare and cultural businesses.

Major state lenders including CCB, Bank of China and Industrial and Commercial Bank of China have all set up mutual fund ventures and are looking to expand into the insurance business.

Last month, CCB was reported to buy controlling stakes in Hong Kong's Taifook Securities, in order to get a solid footing in the profitable retail securities market.

NWS Holdings, Taifook Securities parent group, said in a statement to the Hong Kong stock exchange that it was in talks to sell its 61.86 percent interest in Taifook, but did not disclose a buyer.

Buying Taifook Securities would be a good supplement to CCB's business segments, analysts say.

Market watchers believe mainland lenders are expanding outside their traditional lending business to stay competitive, because they are confronted with reduced interest margins and plenty of non-performing loans.

Excessive loans in the first half of this year have knocked down the banks' capital ratio, at the end of last year; the six largest lenders on the mainland had average core capital of a little more than 10 per cent. By the third quarter this year, that fell to 8.9, which was a record rate of decline, according to Credit Suisse.

However, Standard & Poor's analyst Liao Qiang said the country's banks were caught in a dilemma, given the central bank's commitment to its moderately loose monetary policy and the banking regulator's concern over bad loans.

"China's banks need to find a balance in the different stance taken by the authorities. While keeping lending growing in pace with Beijing's target, the banks need to be better at scrutinizing loan quality," Liao said in a report.

(HK Edition 12/10/2009 page4)