Text: Qin Nan
Source: Fortune Unicorn
Zhongyuan Bank, in the past two years because of the frequent receipt of fines and well-known, on the other hand, in the recent major banks to reduce the growth rate of the forecast at the same time, Zhongyuan Bank directly came to a sub-indicator year-on-year decline in expectations, this kind of "hanging upside down, reversing" behavior makes it a number of city commercial banks "outlier".
Specifically, on May 30, the bank issued a notice of shareholders' meeting on the Hong Kong Stock Exchange and announced a number of important proposals, including the 2024 financial budget. It is worth noting that its 2024 financial budget shows that the bank has planned an overall decline in key indicators such as scale, efficiency, and quality.
Regardless of the total asset scale, bank efficiency and quality indicators, Zhongyuan Bank has made a pessimistic expectation of decline, for this comprehensive deterioration of the financial budget, some investors expressed doubts, that this is the Zhongyuan Bank in the face of severe external economic environment challenges to adopt a "rotten" strategy, but from the current problems faced by Zhongyuan Bank, this may be a more pragmatic embodiment of the management.
01
Three major problems in business
Zhongyuan Bank, as a provincial corporate bank in Henan, has been established for 10 years since its establishment in December 2014. The significant growth in its asset scale is mainly due to the formal absorption and merger of Luoyang Bank, Pingdingshan Bank and Jiaozuo China Travel Bank in May 2022, which made Zhongyuan Bank's asset scale exceed one trillion yuan in one fell swoop, ranking eighth among urban commercial banks in China.
After the reform and reorganization, Zhongyuan Bank has total assets of more than 1.2 trillion yuan, 18 branches, more than 700 business outlets, more than 20,000 employees, and 17 subsidiaries.
Zhongyuan Bank achieved both asset and revenue growth in 2023, achieving operating income of 26.183 billion yuan in 2023, a year-on-year increase of only 2.2%, but net profit showed a downward trend.
In 2023, the net profit will be 3.206 billion yuan, a year-on-year decrease of 16.2%; net profit attributable to shareholders of the parent company was 3.221 billion yuan, down 11.8% year-on-year.
In an in-depth analysis of the profit-side indicators of Zhongyuan Bank's financial report, we observed that the significant decline in Zhongyuan Bank's net profit last year was directly related to the sharp increase in operating expenses.
From the perspective of revenue, although Zhongyuan Bank can still maintain revenue growth, but from the perspective of subdivision, the sustainability of revenue has shown a declining trend.
First of all, in terms of net interest income, the bank achieved 22.263 billion yuan at the end of December 2023, a year-on-year increase of 4.6%, of which the expansion of business scale contributed significantly to the increase in net interest income, reaching 5.358 billion yuan, but due to the change in yield or interest payment rate, the net interest income decreased by 4.371 billion yuan.
In terms of non-interest income, due to the decrease in fee income from wealth management business, Zhongyuan Bank's net fee and commission income was RMB1.319 billion, down 26.1% year-on-year.
In addition, from the perspective of cost, although Zhongyuan Bank has achieved revenue growth since the merger, its business is still in the transition period of integration, which has invisibly exacerbated costs and expenses, resulting in a gradual imbalance in the ratio between revenue and cost.
According to the financial report data of previous years, from 2020 to 2023, the cost-to-income ratio of Zhongyuan Bank has increased year by year, reaching 35.61%, 35.95%, 39.05% and 40.07% respectively, approaching the regulatory warning line of 45%.
If we further refine the operating expenditure indicators, we can clearly see the significant impact of the two major segments of business and management expenses and asset impairment losses on the profit side. In 2023 in particular, the values of both sectors have increased significantly compared to 2022.
First of all, in terms of operating and management expenses, as of the end of December 2023, the bank's operating expenses reached RMB10.862 billion, an increase of RMB584 million, or 5.7%, year-on-year.
This was mainly due to the year-on-year increase in depreciation and amortization and other general and administrative expenses attributable to the absorption of all assets, businesses and branches of the three banks undertaken after the merger, of which depreciation and amortization increased by 19.1% year-on-year and other general and administrative expenses increased by 13.2% year-on-year.
Secondly, in terms of asset impairment losses, Zhongyuan Bank will reach 12.56 billion yuan under this indicator in 2023, an increase of 1.37 billion yuan or 12.2% compared with 2022. The financial report explained that this was mainly due to the bank's continued increase in provisions to effectively improve its ability to offset risks. From the perspective of long-term trends, Zhongyuan Bank's asset impairment loss expenses have continued to increase in recent years, especially after 2022, which began to rise sharply. According to the data, from 2019 to 2023, the bank's asset impairment loss expenses were 7.148 billion yuan, 7.849 billion yuan, 7.64 billion yuan, 11.19 billion yuan and 12.56 billion yuan respectively.
It is worth noting that from the perspective of the composition of asset impairment losses, the highest proportion is not the common loan impairment loss, but the impairment loss derived from investment securities and other financial assets. In 2023, this part of the loss will account for nearly 50% of the total asset impairment loss, reaching 6.142 billion yuan.
For a long time, Zhongyuan Bank's investment securities and other financial assets are dominated by low-yield, low-risk government bonds and bank bonds, which accounted for 48.5% and 24.7% respectively in 2023.
The proportion of corporate bonds, trusts and asset management plans is relatively low, of which the asset scale of trust plans is slightly larger, accounting for 7%, with a scale of 27.558 billion yuan.
However, it is worth noting that compared with low-risk government and bank bonds, the trust and asset management assets held by banks have higher returns, but they are also accompanied by higher risks. In the current environment of declining interest rates and economic recession, trust risks in the financial industry are frequent, and most of the impairment losses of financial assets of more than 6 billion yuan accrued by Zhongyuan Bank are likely to come from the assets of the trust plan, which has caused a certain erosion on the profit side.
Therefore, in summary, Zhongyuan Bank is facing three major problems in its operation: narrowing interest rate spreads, rising costs after bank mergers, and financial assets facing certain risks due to the economic situation.
02
Frequent fines are collected, and high-level blood is changed
While the performance of Zhongyuan Bank is unsatisfactory, the bank's increasingly serious internal control problems in recent years are a major reason for the current performance "reversal", and at the same time, with the exposure of internal control problems, the senior management of Zhongyuan Bank has undergone a "big change", but can this trick really work in the future?
First of all, from the penalty card, Zhongyuan Bank has received a number of regulatory penalties from 2023.
In 2023, Zhongyuan Bank will receive 14 regulatory fines for various violations, with a total fine of 12.38 million yuan. Among them, the Xinxiang branch of Zhongyuan Bank was fined 3.6 million yuan for failing to review the capital of the project loan, the Xuchang branch was fined 1.5 million yuan for embezzlement by employees, and 780,000 yuan was fined for transactions with unidentified customers.
In less than half a year in 2024, Zhongyuan Bank received several fines of varying degrees, on May 24, Luoyang Branch was fined 400,000 yuan for failing to perform due diligence in pre-loan investigation, while Xinxiang Branch and Xuchang Branch also received large fines of 3.6 million yuan and 1.5 million yuan respectively in the first half of the year. The problems involved are all problems such as due diligence in pre-loan investigation, due diligence in post-loan management, and inadequate review of project loans.
Behind the frequent penalties is the continuous increase in the non-performing loan ratio of banks.
According to the financial report data, the total non-performing loans of Zhongyuan Bank reached 14.452 billion yuan, an increase of 1.253 billion yuan or 9.49% compared with the end of the previous year. The increase was accompanied by an increase in the non-performing loan ratio to 2.04%, an increase of 0.11 percentage points from the end of the previous year.
According to the five-level classification of loans, the proportion of normal, subordinated and doubtful loans of Zhongyuan Bank will all decline in 2023, while the proportion of concerned and loss-making loans, as potential sources of non-performing loans, will show an upward trend. Among them, the proportion of concerned loans increased from 2.6% to 3.25%, and the proportion of loss loans increased significantly from 0.42% to 1.36%.
However, the bank's current loan-to-loan ratio is only 3.15%, which obviously cannot fully cover the non-performing portion of concerned and loss-making loans, indicating that Zhongyuan Bank has deficiencies in terms of credit quality and provision level.
From the perspective of industries, the top three industries with the highest non-performing loan ratios last year were agriculture, forestry, animal husbandry and fishery, real estate, and accommodation and catering, with non-performing loan ratios of 7.42%, 4.56% and 3.74% respectively. It is worth noting that the non-performing ratio of the real estate industry decreased the most, down 127 basis points from 5.83% in 2022, and the amount of non-performing loans also decreased by about 297 million yuan.
In order to solve the problems faced by Zhongyuan Bank, Zhongyuan Bank has carried out a high-level "blood change" in the past two years
Previously, the former senior management of Zhongyuan Bank has been investigated for various issues, including Xu Nuojin, the second chairman of the board of directors, and Dou Rongxing, the first chairman of the board, Zhao Weihua, the former vice president, Wei Jie, the former vice chairman, and Jia Jihong, the deputy chairman of the board of supervisors. Such frequent changes indicate the significant shortcomings of Zhongyuan Bank's internal control mechanism, and also reflect the fact that the bank's top management has reached the point where it has to change the leadership group.
According to statistics, the number of management changes in Zhongyuan Bank in 2023 will be as high as 19, far exceeding the 3 in the whole of 2022. Among them, there were 8 changes in the members of the Board of Directors, 9 changes in the members of the Board of Supervisors, and 2 changes in the members of the senior management.
03
When the new officials take office, they advance by retreating
In 2023, the bank will also usher in a new management force, namely the "post-70s" combination - the new chairman Guo Hao and the new president Liu Kai.
Judging from his resume, Guo Hao was born in 1974 and has a deep financial background and rich work experience in government departments. He served in the Financial Working Committee of the Beijing Municipal Party Committee, the Beijing Municipal State-owned Assets Supervision and Administration Commission, the Beijing Municipal Development and Reform Commission, and other departments, and was later transferred to Hebi, Henan Province, where he served as Deputy Secretary of the Municipal Party Committee, Acting Mayor, and Mayor.
Liu Kai, born in 1971, has been deeply involved in the banking system, and has served as the director of the office of the Zhengzhou Central Branch of the People's Bank of China, the secretary of the Party Committee and the president of the Anyang Central Branch of the People's Bank of China, and the assistant director of the Financial Market Department of the People's Bank of China. Since December 2014, he has joined Zhongyuan Bank and has served as a member of the Party Committee, Vice President, Deputy Secretary of the Party Committee, and Acting President.
Both of them have rich experience in the banking and financial system, and perhaps relatively young and energetic senior executives may be able to bring a different management model to Zhongyuan Bank and lead Zhongyuan Bank out of the current predicament.
From the perspective of the current strategy of the top management of Zhongyuan Bank, in the face of the greater pressure of the economic situation in Henan, the top management decided to adopt the strategy of "retreating as advance" in 2024, actively reducing the scale, and responding to market challenges in a restrained way of development, which is also highly consistent with the guidelines of the regulatory authorities at the recent Lujiazui meeting, emphasizing the shift from simple pursuit of scale expansion to high-quality development, especially in the current context of continuous narrowing of bank spreads.
According to the "2024 Financial Budget Report", based on the group's caliber data, Zhongyuan Bank's total assets are expected to drop to 1.32 trillion yuan in 2024, a decrease from 1.3464 billion yuan at the end of 2023. In terms of efficiency indicators, it is expected that the group's net profit will reach 2.587 billion yuan in 2024, a decrease of about 19.31% from 3.206 billion yuan in 2023; In terms of quality indicators, Zhongyuan Bank will control the non-performing loan ratio at the end of 2024 to 2.25%, slightly higher than 2.04% in 2023.
As a leading enterprise in the financial field in Henan Province, Zhongyuan Bank has been shouldering the mission of "building a first-class urban commercial bank" since its establishment in 2014 by the merger of 13 urban commercial banks in Henan Province, and is committed to building a stable financial ecosystem.
At present, Zhongyuan Bank is actively adjusting its development strategy, taking the initiative to slow down the pace of expansion, and solving the problem of stock assets by "retreating to advance", which may also be the first step to deal with the old burdens and realize the phoenix nirvana under the current economic situation.