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Bank of China (HKG:3988) is a joint stock commercial bank, meaning it combines features of a partnership, with features of a corporation. It is one of four banks owned by the state of China. It is only listed in the Hong Kong Stock Exchange and the Shanghai Stock exchange (stock code:601988). It has a comprehensive system aimed at individuals and organizations, with products from simple deposits and credit cards, to international finance and foreign currency exchange, to loans and credit; it also offers insurance. These packages and products, however, fall under three main headings: commercial banking, investment, and insurance. Within these three headings, personal and corporate clients are subheadings.
As a joint stock organization, the company sells fully transferable stock, but unlike a full fledged corporation in which there is limited liability, which means that the consumer only lose the amount invested in, a joint stock organization has unlimited liability, meaning that no matter what the amount of money invested in, the consumer can lose unlimited amount of money if the company sinks. While buying shares in Bank of China is possible, the majority of shareholders in the company are connected with the government, making the government the ultimate authority of the Bank of China. While there has been a move to make banks more public, they remain mostly under government control.
Net interest income for the Bank of China for 2006 RMB121,371 million, up from RMB101,008 million the year before, and RMB88,435 million in 2004. Total assets RMB5,327,653 million, up from RMB4,740,048 million in 2005, and 2004 assets were RMB4,265,221 million.
[edit] History
Bank of China was founded in 1912 during the time of Sun Yatsen. Formerly it was the Da Qing Bank and was created in the Da Qing premises in Shanghai. 1928 saw the bank changed into a government charted international exchange bank. In 1929, the first overseas branch of the Bank of China was created in London. In the following 20 years, 34 more branches were started. From 1912 until 1949, when Mao Zedong became head of China, the Bank of China was the central bank of China and a specialized foreign trade bank. 1949 saw it change once again into a state designated bank and in 1950 saw its first board of directors meeting since changing into a specialized bank. 1986 Bank of China was the first bank to offer credit cards, as it created the Great Wall Credit Card. 1994 saw the bank become a state owned bank. 2001 saw ten of the member banks of the Bank of China group merge together into the Bank of China as we know it today. This helped further operations in Hong Kong, as well as reconstruct much of Bank of China. 2002 saw Bank of China Hong Kong get listed on the Hong Kong Stock Exchange. 2004 was the year Bank of China became a joint-stock commercial bank. The year before, however, in 2003 was the year when it was named the pilot for the reforming of the state owned commercial banks by becoming a joint-stock commercial bank.
[edit] Business Overview
While there are three main areas that Bank of China covers:commercial banking(94.19%), investment banking(1.57%), and insurance(.86%), the Bank of China is made up of the Bank of China(Hong Kong) Limited, Bank of China Group (merged state owned banks), Bank of China International. The core of the business is commercial banking, which includes all type of corporate, personal, and financial markets.
[edit] Commercial Banking
[edit] Corporate Banking
This division of Bank of China caters to personal, corporate, and financial market clients. Corporate clients (which includes foreign entities, state owned corporations, private entities, as well as government agencies) have access to loans, deposits, cash management services, settlements, trade finance, clearing (funds which checks are drawn payed out to the holder of the account), and bill discounting. Corporate clients also represent the bulk of this divisions earnings as they make up 50.92% of the earnings at 32,278 million RMB. As this being the core of the division, this is the core of the strategy, to seek out good quality (high net worth) corporate clients and to establish a cooperative connection with the client. At the moment, there are 1500 financial institution clients and 41,000 corporate clients. While large corporate entities are the key customers of the commercial banking division, Bank of China is experimenting with small and medium sized corporate entities in 11 cities of the Yangtze River Delta area.
Deposits in this sector grew, as domestic deposits grew 16.6% to RMB160.8 billion. Foreign currency deposits increased by 7.3% from 2005 to RMB237.4 billion at the end of 2006. Net interest income for this sector has grown from RMB51,304 million in 2005 to RMB55,809 million in 2006. Loans came out to RMB1,245.1 billion, an increase of 13.59% from last year. Foreign currency loans were RMB304.5 billion representing an increase of 4.2% compared to last year. The market share for Bank of China for foreign currency loans was 29.12%, giving Bank of China the biggest market share.
[edit] Personal Banking
This sector of the division provides deposits, personal loans, banks cards, wealth management, and settlement. The retail customers were 140 million, with deposits accounting for RMB183 million and foreign currency deposits accounting for RMB35 million. The core strategy for this sector is to boost revenues at low risk, and the structure of this sector to make it more streamline for easier use for consumers.
Net interest income for this sector was RMB36,414 million in 2006, up from RMB32,202 million in 2005. Deposits in RMB in 2006 were a staggering 1,602.755 billion. Market share in this area was 9.92%. Foreign currency deposits were $575.851 billion, an increase of $32.209 billion. Personal loans were RMB443.6 billion, an increase of RMB63.6 billion from 2005. Foreign loans constituted RMB139.1 billion, a decrease of RMB3.9 billion from the previous year. Wealth management saw the establishment of 97 new wealth management centers, which makes the total 297.
[edit] Financial Market Business
This sector deals with foreign exchange, precious metal transactions, bond transactions, foreign currency bond investments, financial derivatives, financing notes & bills, commodity futures, asset management, and foreign currency wealth management. Operations are conducted in five key trading centers: Hong Kong, New York, London, Beijing, and Shanghai. Its main strategy is strengthen its position in the domestic financial market, while strengthening its brand image in the financial market. It is also looking at growing its global trading and investment, while making itself more innovative.
Net interest income for this sector was RMB29,869 million, up from RMB18,053 million. RMB currency investment portfolio's exceeded RMB400 billion. Transactions in foreign markets in the inter-bank market reached 17,210.
[edit] Investment Banking
Bank of China's investment division works through its entity Bank of China Group Investment (BOCG Investment). Business lines are corporate equity investments, distressed asset investments, fixed asset investments, management, and property management services. The main strategy that this division employed was making alliances with rival investment banks, government entities, private financial institutes, and other asset/investment groups in different areas of investment. 2006 was when this division successfully acquired SALE, which allowed Bank of China to enter into the aircraft leasing industry. Total assets for this division totalled HKD44.189 billion, with after tax profit of HDK1.947 billion.
[edit] Insurance
Bank of China works through its entity Bank of China Insurance or (BOCG Insurance). The insurance that is covered is property, liability, credit/bond, short term health, accident, and reinsurance of all previous insurance programs mentioned. Core strategy of this division is to work through 6 branches of 3 entities (Bank of China Insurance Company Limited, Eastern Pearl Insurance Advisers Limited, and Ford Ease Investment Limited) and three associated companies (Bank of China Group Life Assurance Company Limited, Luen Fung Hang Insurance Company Limited, and DongFeng Peugeot Citroen Auto Finance Company Limited).
Since it began, more than 10 years ago, this division has been getting stronger, to the point where the network is very strong. Gross premium income for this group was HDK1,213 million and assets were HDK4.845 billion.
[edit] Trends & Forces
[edit] Currency Exchange
The Renminbi (RMB) has reached a new high of 7.65 for one dollar. This new high marks the appreciation of the RMB by 5.94% over the past two years. The effect this has to make Chinese own products cheaper and more investments coming in due to the cheapness of the RMB, but on the flip side American goods are expensive and investment abroad is more expensive for the Chinese. This has made it so that holding foreign currency and foreign currency settlement transactions have become less desirable for Chinese consumers.
[edit] State Policies
Due to changes in the macro-economic control policy of the State, competition between banks has increased. Bank of China has had to restructure some of its products and service, not just on a local but a global level to stay competitive. This has also meant creating a bigger customer base, as is evident in its looking out for small and medium sized corporate customers.
[edit] Interest Rates
Due to increase interest rates, RMB dominated deposits have increased. At the same time, as interest rates have increased, this has hurt loan borrowers as they have to pay higher interest rates, which has led to an increase in early loan repayments.
[edit] Bond Rates
RMB bonds experienced an upward yield due to tighter money policies, while the overall bond market experience a downturn. The yield curve has now flattened, meaning that short term and long term debt instruments are neither higher nor lower than the other. Which means the amount of money that the consumer gets back, a percentage of the total money investment, is the same for short term maturities and long term maturities. The market environment is now quite unfavorable, but the stock market has stayed strong. Even in this unfavorable environment, the Bank of China has still been able to capture profit opportunities.
[edit] Competitive Landscape
China in 2002 joined the WTO, which not only gave it access to foreign markets, but also added foreign competition. Though foreign banks are restricted in some of the dealings they can do (e.g. foreign banks cannot give regular service to Chinese, but only specialized service) the competition that Bank of China faces is
Lately Bank of China has developed an information sharing platform ("Guidelines on Corporate Banking Product Innovation and Management") for the Bank's products, to avoid confusing policies over product overlap (e.g. Wells Fargo). Other improvements the strengthening of its trade financing brand "Da" (means "access") products, also introducing its "Back-Flow International Factoring" product that solves technical problems in international factory business, the first bank to do so. It has met success by the factory community. It acquired SALE in 2006, an aircraft leasing company, which helped increase its banking business platform.
Bank of China has improved its centralize personal loan approval business to make it more efficient by upgrading the system and making more streamline and fast the reviewing and approving process. In this way the personal lending business of Bank of China has been able to become more competitive.
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