Lenders bet big on wealth management units

Subsidiaries can help in transition to high-quality development, say industry experts

Commercial lenders in China are establishing their own wealth management subsidiaries in response to the banking regulator's call to end implicit guarantees for principal and interest payments on wealth management products.

ABC Wealth Management Co Ltd, a subsidiary of Agricultural Bank of China Ltd, officially opened for business in Beijing on Thursday and launched a series of new products. ABC is the last of the five major commercial banks to set up a wealth management subsidiary.

"China's wealth management industry will embrace a historical transition of business models and a comprehensive restructuring of its ecosystem. The establishment of ABC Wealth Management is an important measure taken by the Agricultural Bank of China to carry out supply-side structural reform in the financial sector, further implement new regulations on the asset management industry, push for high-quality development of the real economy, and actively tackle changes in the wealth management industry," said Zhou Mubing, chairman of Agricultural Bank of China, the country's third largest commercial lender by assets.

He said the newly formed subsidiary will build its digital asset management capabilities, which are centered on digital transformation of the bank, and strengthen collaborative development of the bank and the subsidiary under the premise that risks associated with the wealth management company are isolated from its parent bank.

The establishment of ABC Wealth Management came after similar moves were made by four other large State-owned commercial lenders. BOC Wealth Management Co Ltd, a wholly owned subsidiary of Bank of China Ltd, started operations on July 4, following the footsteps of wealth management subsidiaries launched by Industrial and Commercial Bank of China Ltd, China Construction Bank Corp, and Bank of Communications Co Ltd.

Joint-stock commercial lenders such as China Everbright Bank Co Ltd, China Merchants Bank Co Ltd, and Industrial Bank Co Ltd, and a few city commercial banks, also obtained regulatory approval to establish wealth management subsidiaries. So far, over 30 commercial banks have announced plans to set up their own wealth management arms.

One of the biggest advantages for the wealth management subsidiaries of commercial banks is that new regulations governing the asset management sector allow these subsidiaries to invest directly in stocks, whereas banks were previously forbidden from entering the field.

The volume of new funds that will flow into the stock market is expected to account for 10 to 15 percent of the outstanding amount of wealth management products (WMPs).Considering that the amount of non-principal protected WMPs was 22 trillion yuan ($3.1 trillion) at the end of 2018, about 2 to 3 trillion yuan will flow into the secondary market, said Yang Rong, an analyst at CSC Financial Co Ltd, in a research report.

However, compared with fund management companies, banks' wealth management subsidiaries are usually less professional and lack experience in stock market investment. Therefore, at the initial stage of development, they look forward to cooperating with other market entities to launch products in this field by learning from others' experience while developing their own abilities and building professional teams at the same time, said a manager of the wealth management subsidiary at Bank of China Ltd, who declined to give his name because he is not authorized to speak to the media.

Yang with CSC Financial said in the report: "At the beginning, fixed income and cash management products are still two major asset categories for the wealth management subsidiaries of commercial banks. With the improvement of their research and equity investment abilities, the subsidiaries will increase their asset allocation in equities. Over the medium and long term, after banks set up wealth management subsidiaries, China will further enrich its team of institutional investors and increase the proportion of direct financing. The money flowing into the equity market will also increase steadily."

BOC Wealth Management will launch equity products by digging into opportunities for stock market investment through its collaboration with professional entities. The existing WMPs issued by BOC Head Office have already followed hot spots in the market such as tech companies seeking listing on the STAR Market, the Nasdaq-style technology board on the Shanghai Stock Exchange.

As the regulator does not allow banks to invest in wealth management product assets directly in the STAR Market, BOC invested in the STAR Market through a fund of funds - a pooled investment fund that invests in other types of funds rather than investing directly in bonds, stocks, and other types of securities.