Boot-camp methods prop up China’s most profitable bank

AT BANK OF TAIZHOU CO., trainees are pushed to count money with lightning speed, toughened up by ex-instructors from the People’s Liberation Army and mobilized to go after delinquent borrowers with the subtlety of an infantry battalion.

The boot camp ethos would seem laughably bizarre if it weren’t for this: Bank of Taizhou is being called China’s most profitable lender and has delivered industry-beating loan margins since at least 2013.

The little-known bank is achieving these results by employing a lending model from Germany to scrutinize its borrowers, the thousands of entrepreneurial industries ranging from small equipment makers to plastic molding companies in the southeastern coastal province of Zhejiang.

By forging a model for the rest of China, Bank of Taizhou’s success shows that it’s possible to lend to small businesses — a sector long neglected by banks that accounts for more than half of gross domestic product — and make good money doing it.

There’s not a lender in China that beats Bank of Taizhou for profitability and asset quality, UBS Group AG concluded after picking over the financial statements of 237 banks across the country.

“This bank just stuck out” on almost every metric, said Jason Bedford, the Hong Kongbased UBS analyst who led the study and plowed through the filings.

The risk-profiling system was brought in by a microfinance expert from Germany, Joern Helms, who was hired as the bank’s first foreign recruit. Known as IPC lending after the German consulting firm that originated it and where Helms had worked previously, it’s being held up by the World Bank as a guide for small-business financing.

“I disagreed with the view that small businesses are difficult to assess and small businesses are risky,” said Helms, 44, who stepped down as a Bank of Taizhou vicepresident in 2014 after almost a decade with the bank and now serves as a Shanghai- based adviser to the company. “What we added was a systematic approach to measure repayment capacity.”

Big banks are reluctant to lend to small businesses, instead concentrating more of their lending on state- owned enterprises. Industrial & Commercial Bank of China Ltd. extended 16%of its loans to small and micro businesses last year, a proportion unchanged from 2015.

Small-business lending is one part of China’s finance industry not expected to draw foreign interest, even as the government announced last week a plan to remove limits on ownership. Global banks in China are instead targeting large companies with cross-border businesses and wealthy individuals.

The government has been trying to free up more cash for banks to lend to businesses that typically find it difficult to get credit, and keep the transactions in the officially regulated system. Some of China’s smaller, regional banks are more engaged in shadow financing than traditional lending, according to an August report by UBS. Unregulated loans have bloated the shadow banking industry to an estimated 122.8 trillion yuan, according to Nomura Holdings, Inc.

Zhejiang, especially the city of Wenzhou, where Bank of Taizhou also has a branch, became notorious in 2011-2012 for its shadow banking crisis, when dozens of business owners went bankrupt or committed suicide after not being able to repay loans to underground lenders, causing the government to intervene to increase funding for small businesses. While borrowing from shadow lenders remains an option, “the good businesses don’t have to go there,” Helms said.

Bank of Taizhou, which makes average loans of about $50,000 and whose shareholders include Geely Automobile Holdings Ltd., is showing up China’s banking behemoths. Return on equity was 29% last year, more than double the typical 13% among peers. ICBC, the world’s largest lender, managed 15%.

“It works because they’re a local bank, they know what’s going on, and they have a lot of information about their customers,” said Oliver Rui, a professor at the China Europe International Business School in Shanghai.

To be sure, the labor-intensive nature of IPC lending swelled Bank of Taizhou’s cost-to-income ratio to 36%, compared with an industry average of 28%. Of the bank’s 10,000-strong work force, some 4,000 are account managers. —