Zhang Enzhao: Structural reform of CCB is moving steadily; institutional transformation is showing initial results.

 ●    Structural reform and institutional transformation show clear results and business performance scores a good beginning

●     Taking the lead in using economic and capital leverage to promote the rational development of credit business

●     Carefully building a long-term internal risk control system up to the international standards and strengthening risk management by using information technologies

●     Initial preparations for the shareholding reform go on smoothly and the reform advances steadily as scheduled

●     The reform of personnel incentive mechanism makes clear achievements, with 4,400 management personnel surviving the competition for remaining on job and 1,100 failing or being fired

●     The nomination system for the presidents of 38 class-one branches and the general managers of all the departments of the head office has been changed into a tenure system and the management system of tenure is adopted.

●       Accelerating structural reform and institutional transformation and trying to meet the requirements of regulators at the earliest date possible.

 

In the morning of April 27, China Construction Bank held a press conference at which President Zhang Enzhao and other senior executives of related departments took questions from domestic and overseas journalists on the business performance of CCB in the first quarter, the shareholding reform, the structural reform and institutional transformation in a face-to-face manner.

The first quarter witnesses a good beginning and the credit business develops rationally

Talking about the major business performance in the first quarter of this year, Zhang Enzhao said that in the first quarter the business of China Construction Bank develops stably and healthily, the operating performance grows by a big margin, asset quality is improved steadily and the momentum of “two cuts” of NPL is maintained, which builds a good beginning for the year-round work and create additional conditions for the success of the shareholding reform.

In the first quarter this year, the operating profits of both the domestic and overseas business of CCB before tax and provisions against loans and other assets amounted to RBM 15.97 billion, RMB 3.91 billion higher than that of last year with an increase margin of 32.4%, including RMB 15.88 billion of operating profit for domestic business, an increase of RMB 3.88 billion over the previous year, and RMB 94 million of operating profit for overseas business, up RMB 27 million over last year. Classifying into five categories, the non-performing loans of both the domestic and overseas branches dropped by RMB 2.8 billion and the ratio of non-performing loans stood at 8.77 %, decreasing by 0.35 percentage point. The domestic deposit balance of CCB totaled RMB 3,115.3 billion, up RMB 153.2 billion or 5.17% over the beginning of this year. In particular, while the excessive growth of investment and scale of projects under construction trigger even higher amount of currency credit, CCB maintained stable growth of extending loans. The first quarter witnessed a total increase of RMB 57 billion of credit extended by CCB in the domestic market, accomplishing 21% of year-round credit increase plan and keeping pace with the schedule.

According to Zhang Enzhao, the above figures well indicate the achievements of CCB in following the operational and management principles of modern shareholding commercial banks, changing operational philosophies, making full use of the mechanism functions, taking initiative to readjust and control the total amount of credit and guiding the credit structure.

Introducing advanced international EVA financial management standards and promoting the concept of maximizing profits and value.

Zhang Enzhao noted that CCB has conducted several financial management reforms and the bank’s financial management concept and methods are moving towards those of leading international counterparts. In 2002 CCB introduced the EVA index which is widely adopted by well-known international companies and banks to assess and evaluate the business performance of the bank and allocate bonus to its branches according to the result of the index, which greatly fuels the shift of the focus of the operational concepts to enhancing profits and pursuing maximum value and promotes the healthy development of all businesses within the bank and the steady enhancement of operating performance.

This year, learning from the regulatory rules of the international banking community and the operating principles adopted widely by leading commercial banks, CCB initiated the budget management method with core on economic capital discipline, trying to establish a dual discipline mechanism in which the economic capital restricts the total amount of risk assets, guides the improvement of performance and leads the effective allocation of credit and financial resources. Judging by the performance in the first quarter, the economic capital budget management method has shown initial result of controlling the total amount of risks through mechanism operation. Based on different industry risk measurement, CCB has set up different economic capital allocation coefficients which effectively guide the readjustment of credit mix. Credit categories with relatively high quality and low economic distribution coefficient show clearly higher growth rate than the average.

Risk management and internal control are being strengthened and a comprehensive risk internal control system is gradually taking shape.

When introducing how CCB strengthens risk management and internal control, Zhang Enzhao pointed out that to tighten risk control at the very beginning the bank has conducted three rounds of reforms of the credit business management mechanism, establishing a check-of-balance credit management mechanism of separating front office from the back office, credit examination from credit extending and operation from regulation and setting up the examination system of meeting of specific personnel in charge of credit examination and approval and the responsibility system of credit operation and credit examination and approval. The credit risk rating and early warning system independently developed by CCB has been implemented throughout the bank. The comprehensive risk management and internal control system launched in 2003 has developed the initial shape. At present the risk management platform project is being formally implemented throughout the bank.

Zhang Enzhao said that to build up the independence and authority of internal audit, the bank has reformed the traditional system of building internal audit departments at different levels which report to the senior executives of the branches at the corresponding level and established a relatively vertical internal audit system in which regulations of the head office and branches are conducted respectively and the auditing departments should report to the head office. The head office set up eight audit departments in accordance with geological location directly under its control which make direct audit for class-one branches, and the auditors are under the direct management of the head office. The reform of the audit system helps improve the intensity and effectiveness of audit supervision by the head office and adds to the strength of the system to monitor business operation.

The personnel and incentives mechanism is reformed and excellent managerial personnel are promoted.

Zhang Enzhao said that at the beginning of 2003 CCB launched the overall reform of the personnel and incentives mechanism which involved the reform of the personnel system, employment system, remuneration system and training system. The objective of the reform is to build a new HR management system of “promoting capable employees and raising their remuneration; cutting the remuneration of or even firing the incapable ones”. After one year, the result of the reform has started showing. At present effort is made to build and improve the market-oriented HR management system as required by the State Council and the CBRC.

In terms of the personnel system reform, the classification of the three major positions of managerial staff, business staff and professional technical staff and a competition system are established. In 2003, throughout the CCB 9 managerial staff at the vice general manager level in the head office, 579 senior managerial staff and more than 3,800 business staff come to their current management positions through competition, and over 1,100 managerial staff failed the competition or were discharged from the management positions. The traditional nomination system for the managerial staff at the class-one branch level and those at the vice general manager level or above of the head office has been changed into the tenure system and a responsibility system for the presidents of class-one branches and the general managers of various departments of the head office during their tenure is established. 

As to the reform of the employment system, the labor contract system for all the employees is implemented and the labor relations are standardized consequently. Since 1998 CCB has started recruiting talents for important positions from abroad following the general practice in the international market.

With regard to the remuneration system reform, linking remuneration with the EVA index and focusing on management of the total remuneration, distribution of employee remunerations and the annual salary system of the senior executives of class-one branches, CCB initially established the distribution system of linking the total remuneration of specific branches and departments with their business performance and the remuneration of employees with the their position responsibility and contributions, breaking up the old equalitarian distribution model.

Institutional optimization and flat reform prove to be effective and competitiveness is enhanced.

When answering questions of the journalists, Zhang Enzhao said that a flat reform has been launched throughout the bank. All the branches located in municipalities directly under the central government and those directly under the CCB head office or controlled by the head office have changed the previous four-tier structure into a three-tier or dual structure. Except a few exceptions, all the other branches located in the provincial capital cities have adopted the three-tier management system and most class-two branches realized direct management of city business outlets. The flat reform greatly enhances the spread efficiency of decisions within the bank and the market response capacity and services. The sophisticated operation of branches is improved considerably, with the proportion of multi-functional outlets increasing from 55% at the end of 2002 to 68% in the first quarter this year.

The pilot shareholding reform moves on steadily and is being pushed forward as planned in a step-by-step manner.

When talking about the pilot shareholding reform of CCB, Zhang Enzhao noted that at the very beginning the shareholding transformation of CCB has paid close attention to adopting international standards and practices and is conducted in line with domestic and international laws and regulations. In response to the requirement of the regulatory authorities that CCB should take the lead in conducting comprehensive reform, since July 2002 CCB has invited auditors, lawyers, management consulting companies and overseas lawyers to make audit, assessment and inspection throughout the bank. At present, the on-spot auditing assessment and survey have basically finished. As required by the Hong Kong Stock Exchange, we have also evaluated the properties owned by the bank and the leasing properties.

To build a sound financial foundation for the shareholding reform, CCB especially set up a leading group of digesting legacy assets in October 2003. Participated in by over 2,000 bank staff, the task of digesting loss loan and part non-credit asset losses was completed at the end of last year. A strict responsibility system has been introduced. Since the beginning of this year the task of finding out who is responsible for the written-off asset losses has been carried out, and up to now the task of defining responsibilities has basically come to an end and those who are held responsible are punished severely.

To support the shareholding reform and advance the management reform comprehensively, CCB in September last year invited leading international management consulting companies to assist in developing the overall framework of the reform objectives and implementation channels covering the development strategies, corporate governance structure, organizational structure, risk management, financial management, marketing management, HR management and corporate culture, which builds the structural reform and institutional transformation of CCB on advanced international levels from the very beginning. With over half year’s work the management reform consulting project has made achievements.

Seven key tasks should be accomplished to accelerate the management system reform.

When introducing the next steps of the shareholding reform, Zhang Enzhao said that based on the success of the restructuring at the initial stage the reform of the management system will be accelerated. CCB has formed the management system reform leading group and office in charge of organizing, guiding and pushing forward the reform. Following the requirement of the CBRC for the reform of corporate governance structure, CCB will soon raise the 2004-2007 master plan and launch key reform measures involving the governance structure, organizational structure, risk control and financial management. The master plan will be implemented on a yearly and quarterly basis. The major tasks in the future include the following:

First, finishing all the work involved in the establishment of the shareholding company and establishing the standard shareholders’ meeting, Board of Directors, Board of Supervisors and the senior management.

Second, building and improving the scientific decision-making system, internal control mechanism and risk management system. In 2004, a set of standards on the internal control system are implemented throughout the bank, the overall planning for the risk management reform is developed, systematic risk management is improved, the rationality of strategic decision-making is enhanced, the automatic control of business transaction process is launched and the risk management tools, models and processes are consolidated. On the basis of strengthening the management of credit risk, the market risks and operational risks are incorporated into the concept of risk management and the corresponding organizational system, policy system, decision-making system and assessment system of risk management departments are set up.

Third, implementing the reform of organizational structure. The functions of front, middle and back offices will be clearly defined and a special marketing department targeted at key customers will be set up following the advanced international model. In the long and mid-term, architecture of separating the front, middle and back offices, with focus on the management of vertical business units supplemented by the management of horizontal branches will be established. In 2004, the flat management reform of those city branches which are directly controlled by the head office or under its direct management and all the class-two branches and outlets in provincial capital cities will be completed basically. As a further step, the layout of business outlets will be optimized and efforts to close down or merge those outlets with relatively poor performance and raise the proportion of outlets in key areas and areas will be intensified.

Fourth, deepening the reform of the employment and personnel system and building a market-oriented HR management system and effective incentives mechanism. On the one hand, the performance evaluation of employees should be linked with the generation of bank values. Key performance index system should be developed for all the major posts and the remuneration system and the new key performance index system should be combined together. On the other hand, the management process and plan for key professionals should be established. The HR recruitment management system should be set up based on the market principles and the training and career development plan be formed.

Fifth, implementing prudent accounting policy, strengthening financial management and raising the transparency of information disclosure. The new version of the Accounting System of Financial Businesses should be adopted, and the accounting should be gradually integrated with international practices. A transparent information disclosure system should be built and improved.

Sixth, reorganizing business process with focus on customers following the principle of sophisticated operation and gradually realizing vertical business management. The marketing and service system focusing on customers should be built, products and service innovation should be accelerated, marketing capacity targeted at the best customers in the target market should be enhanced and core competitiveness should be improved.

Seventh, application of information technologies should be enhanced and comprehensive management and service functions should be improved. The implementation plans at different stages and the timetable for application of information technologies throughout CCB should be developed in details. The management system of technological application should be improved, the implementation and supervision mechanism concerning the technological application system should be built and the improvement of the unified management information system throughout the bank should be accelerated.

Upon answering the questions of journalists at home and abroad, Zhang Enzhao pointed out firmly that to build a modern financial enterprise is a gradual process and evolves endlessly as well. Our goal for the next three years is to raise the profits and efficiency of CCB to the leading levels of domestic commercial banks, build CCB into a modern shareholding commercial bank with international competitiveness and thus match towards the business performance of leading Asian and world banks as well.