House of the Year, China – China Construction Bank

Asia Risk Awards 2012 winner: China Construction Bank – House of the Year, China

Huang Zhiling, CCB

China-watchers are split into two camps when it comes to the country's future economic growth: the bears and the bulls. For the former the rise in non-performing loans (NPLs) has become a key metric as the Middle Kingdom slips from its decade-long period of 10% annual growth to a likely 8% for 2012.

Keeping on top of the deteriorating state of corporate and personal loans has been one of several areas where China Construction Bank (CCB) has demonstrated a prudent approach to risk management in a challenging environment - meaning the bank retains its House of the Year China title.

Huang Zhiling, chief risk officer at CCB in Beijing, says that in the first half of the year asset quality has been sound due to a careful assessment of risk. The bank has a customised credit and risk management policy according to different sectors and customer types.

"CCB can calculate the default rate for more than 100,000 corporate customers. We can do credit approvals for more than 30 million retail customers by credit scorecard and can predict customers' credit quality," he says.

CCB's latest results are testament to its tenacious approach to risk management. The Chinese bank reduced its NPL ratio from 1.09% to 1.00% in the past six months and bolstered its core capital adequacy ratio from 10.97% to 11.19%. It made these improvements while also increasing business, with customer deposits rising nearly 10%.

Huang says that since the early part of 2011 the bank has focused on the management of bad loans. "We now pay close attention to post-lending management and have a monitoring system for post-lending activities. This includes a fortnightly meeting where our business managers and risk managers sit together to discuss risk management policy and assess where risks lie. If we see any likelihood of NPLs or recent signals we take action."

Huang gives the example of last August when the bank noticed a contraction in business to the steel sector and started to take measures to control lending to steel trading customers.

CCB is also one of the earliest Chinese banks to implement measures for Basel III, which the country's regulator intends to bring in from 2013. The bank already has an internal rating system for credit risk and a loss given default model and Huang says he is also implementing this approach for market risk. "We have integrated all transaction data into our financial business risk management system, which includes capital measurement and stress measurements as well as risk limits and risk monitoring.

CCB is also at the cutting edge when it comes to derivatives pricing with the bank upgrading its systems and adopting the latest expertise when it comes to credit value adjustment (CVA), which will come into play in 2013 with the introduction of Basel III.

CCB is being helped in this regard by Bank of America (BoA) - the US firm that slashed its one-time 10% holding in the Chinese bank to 1% in 2011, with Huang saying the Chinese bank wanted expert help to understand this aspect of risk management. "We want to use best practice to manage counterparty credit risk and are developing systems now to manage our exposures," he says.

According to Benson K. Chan, senior vice-president at BoA in North Carolina, this help came in a variety of forms. He says that in June, a BoA team conducted a shared experience session covering a broad array of CVA related topics including definitions, calculation approaches, reporting, and Basel III requirements.

"As part of the BoA and China Construction Bank strategic assistance agreement, risk teams from both banks have been collaborating to improve CCB's approach to managing counterparty credit risk," says Chan. "The team has been working on a multi-generational plan to enable CCB to deploy consistent methodologies and processes for exposure calculation and collateral management across the enterprise. The team will continue the CVA shared experience later this year during a visit to the US by the CCB team."