The balance of structured deposits has dropped 48.2% to CNY267 billion (US$40.9 billion) as at the end of 2020 year-on-year (YoY) as the Chinese commercial bank scaled-down its issuance.
Accordingly, the proportion of structured deposits for the total deposits from 11.2% to five percent during the same period. The impact was limited due to a 16.8% increase of deposits at CNY5.4 trillion at China Merchants Bank (CMB), according to the bank’s annual report ended in December 2020.
The ‘historical’ rise at the bank led by Tian Huiyu (pictured) was attributed to the rapid growth of M2 and the bank’s wider adoption of digital banking in 2020. The momentum is expected to slow down in 2021 due to a drop of the M2 rate.
‘[CMB] will continue to strengthen the volume and price control of high-cost deposits such as structured deposits and large-denomination certificates of deposits and guide the cost of deposits from customers to go downward,’ stated the bank in the report.
The balance of the funds raised from off-balance sheet WM products ranked second in the market
Chinese commercial banks, which feature 12 joint-stock banks including CMB, China Citic Bank and Guangfa Bank, were required to reduce the outstanding balance of structured deposits to two-thirds of the level seen at the end of 2019 as of December 2020 as Chinese regulators aimed to curb their lending cost led by an unprecedented high issuance of structured deposits in 2019.
In the meantime, the structured product market in China is in a landmark transition shaped by the New Regulation on Asset Management, which was announced in mid-2018 with a grace period till the end of 2021. The rules have prohibited wealth management (WM) products from offering principal protection, which are booked off-balance sheet and valued through their net asset.
Old v new
The products in conformity of the new regulation are known as ‘new products’ while the principal-protected WM products are ‘old products’.
At the end of 2020, the balance of new products at CMB increased 1.4x to CNY1.7 trillion YoY, which lifted its proportion for total WM products to 67.8% from 31.22%, as the commercial bank ‘continued to upgrade, reduce and withdraw old products’.
Specifically, the balance of WM products at CMB Wealth Management, a wholly-owned subsidiary of CMB established in July 2020, rose 11.9% to CNY2.5 trillion as at the end of 2020 YoY. ‘Among them, off-balance sheet WM products accounted for 99.97%; the balance of the funds raised from off-balance sheet WM products ranked second in the market,’ according to the bank.
SRP database shows CMB is among the top structured product issuers in China having issued 1,175 products in 2020, 802 of which were structured deposits while 363 WM products. The state-owned bank in May 2020 rolled out its first structured WM product linked to quantitative investment strategy (QIS) index - the Multi-asset Momentum Allocation (MMA) index calculated by Citic Securities, and won the Best Index Provider award at SRP China Awards.
In July 2020, the People’s Bank of China issued the Optimising Transition Arrangement under New Regulation on Asset Management and Guiding the Smooth Transformation of Asset Management Business, which requires the banks to dispose of eligible risky assets associated with its WM business by back-to-balance sheet arrangement including those under the investment financial assets.
Based on the rules, CMB completed the disposal of such WM assets with a total principal amount of CNY12.7 billion and recorded asset loss provision of CNY12.1 billion.
The bank posted a net profit of CNY97.3 billion in 2020, up 4.8% YoY, of which CMB Wealth Management contributed CNY2.5 billion. Its net operating income climbed 7.6% to CNY290 billion as the net interest income and net non-interest income rose 6.9% and 8.8% to CNY185 billion and CNY105 billion, respectively.
Click here to view China Merchants Bank’s FY20 annual report.