Diverse Investment Styles of Banks

In the ever-evolving landscape of banking, self-operated investment by banks stands as a fundamental aspect of financial operationsThis practice involves banks utilizing their own capital for investment purposes, impacting both their balance sheets and profit marginsOver the past five years, the proportion of self-operated investment assets in listed banks has remained relatively stable, hovering around 28% to 29%. The significance of these investments becomes even clearer when we examine their influence on the income statements of banksFrom 2012 to the first half of 2023, the contribution of self-operated investment income to overall banking performance has surged from a modest 1.39% to an impressive 8.76%, indicating a growing reliance on these investments for profitability.

The nature of a bank's self-operated investment is generally conservative in styleAn analysis of the balance sheets reveals that these investments can be classified into several categories: trading financial assets, debt investments, other debt investments, and investments in other equity instrumentsBetween 2018 and the first half of 2023, debt investments constituted the largest share of self-operated investments for listed banks, stabilizing at approximately 62% to 64%. Other debt investments accounted for a steady 20% to 23%, while trading financial assets made up about 14% to 15%. Notably, investments in other equity instruments remained significantly lower, ranging from 0.05% to 2.5%.

In accordance with new accounting standards for financial instruments, investments have been reclassified into three categories: AC (Amortized Cost), FVOCI (Fair Value Through Other Comprehensive Income), and FVTPL (Fair Value Through Profit or Loss). As of the end of the third quarter of 2023, self-operated investments within listed banks demonstrated a substantial allocation to AC and FVOCI, together accounting for 84.34% of total investments

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Among these, AC represented 63.66%, FVOCI 20.68%, while FVTPL comprised 15.66% of the portfolio.

Typically, credit remains the priority asset class for banksThe investment volume exhibits a markedly "passive" characteristicIn circumstances where the loan-deposit growth spread widens, banks tend to increase their financial investments, as seen with Agricultural Bank of China and Zhejiang Commercial Bank in 2023, where an expanding spread prompted a marginal uplift in investment growthConversely, a narrowing spread often leads to a retraction in financial investment growth, which has been particularly evident among banks such as Postal Savings Bank of China, Bank of Communications, China Merchants Bank, and Industrial Bank.

In 2023, state-owned banks experienced a positive loan investment growth spread, contrasting with the slower loan growth rates observed in joint-stock banksThe demand for real economy financing has been gradually recovering, with state-owned banks reaffirming their roles as leaders in credit supply, exhibiting strong lending capabilitiesMeanwhile, joint-stock banks have taken a more conservative approach, passively adjusting their debt allocations toward bonds.

By the end of 2023, state-owned banks recorded a credit growth rate of 12.9%, surpassing their financial investment growth by 0.6 percentage pointsIn contrast, seven joint-stock banks reported a credit growth of only 7%, falling behind financial investment growth by 1.2 percentage pointsMarginally, both state-owned and joint-stock banks have seen their credit investment growth spread converge to zeroIn the entire year of 2023, the credit investment growth spread among state-owned banks has narrowed compared to the first half of the year, primarily driven by an increased allocation to local government bonds in the latter half.

Overall, state-owned banks have maintained a strong emphasis on bond allocation, while joint-stock banks witnessed a decline in financial investment growth

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In 2023, both categories of banks experienced a quarter-on-quarter drop in bond allocation growthDespite a minor decrease in year-on-year growth to 12.27% in financial investment for state-owned banks, they continued to maintain a high allocation growth rateThe proportion of financial investments in their interest-earning assets escalated further to 35%. On the other hand, joint-stock banks saw their financial investment growth decline by 2.41 percentage points to 8.19%, with the proportion of such investments in interest-earning assets shrinking by 0.41 percentage points to 34.78%.

Differentiating self-operated investment assets further reveals a classification based on purpose, distinguishing between allocation portfolios (corresponding to AC+FVOCI) and trading portfolios (linked to FVTPL). The prevailing trend suggests that banks exhibit a relatively conservative self-operated investment styleFrom 2018 through the first half of 2023, the allocation portfolio comprised roughly 85% of total investments, while the trading portfolio maintained a smaller share of around 15%.

As of mid-2023, a significant portion—approximately 92.43%—of investments within the structure of listed banks' self-operated investments comprised underlying asset investments such as bonds, equities, and public fundsIn contrast, investments in non-underlying assets, including private funds and asset management products, accounted for a mere 7.56%. This distribution strongly indicates that the foundation of self-operated investment lies chiefly in the realm of underlying assets.

However, the process of self-operated investments is not without constraints, influenced by both internal and external factorsInternally, the requirements for asset-liability management dictate a balancing act between risk and returnsFor instance, interest rate risk management establishes limits on the exposure to interest rate fluctuations inherent in bond investments

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Additionally, internal funds transfer pricing (FTP) factors into the cost of self-operated investments; higher FTP rates may drive banks toward riskier assets with potentially higher returns.

On the external front, regulations impose distinct boundaries on the types and scope of self-operated investment activitiesUnder regulatory frameworks established by the "new capital requirements," banks are more inclined to favor investment products that conserve capitalThe inclination towards various debts reflects an enhanced willingness to allocate funds to lower-risk weighted investments, such as general bonds issued by local governmentsConversely, there is a diminished appetite for riskier investment assets that attract higher credit risk weight penalties.

Moreover, liquidity regulation requirements shape the preferences for self-operated investment portfoliosTo comply with the liquidity coverage ratio (LCR), banks may gravitate toward investments in government bonds, policy bank bonds, and other secure debt instruments, ensuring their portfolios remain robust against liquidity constraints.

As of mid-2023, the scale of self-operated investments for listed banks reached approximately 77.24 trillion yuan, a surge of 21.7 trillion yuan since 2019. The years spanning from 2019 to 2021 saw a reduction in regulatory pressure, allowing market influence to recuperate and stabilizing year-on-year growth ratesConversely, in 2022, the prolonged environment of loose liquidity, coupled with subdued demand for real economy financing, saw year-on-year growth reboundBy 2023, however, tightening regulatory constraints, along with a high base scale, hindered rapid growth across self-operated investment growth.

In the context of self-operated investment structures, the share of standardized assets has risen notably, with bond investments maintaining their leading position

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