In the ever-evolving landscape of Chinese banking, the issuance of wealth management company licenses has entered a phase of noticeable slowdown since the beginning of this yearAs of now, no new licenses have been awarded to small and medium-sized banks, raising questions about the underlying reasons for this trend and how these banks can optimize their existing wealth management operationsTo uncover insights on this issue, industry experts were consulted.

Historically, the growth trajectory of banks establishing subsidiaries for wealth management has been remarkable, with the first set of licenses granted back in 2018. By mid-2024, the landscape had seen a total of 32 wealth management companies, with the lion's share of licenses going to six state-owned banks and twelve joint-stock banks, illustrating a concentration among major players in the marketAnalysts have observed that the pace at which regulatory bodies approve new licenses has visibly decelerated

The years 2019 through 2022 had witnessed a deluge of approvals, whereas since 2023, only a single approval for Zhejin Wealth Management was recordedAs it stands, the lack of new wealth management subsidiary licenses in 2023 has intensified speculation about the regulatory environment for smaller banks.

Despite this challenging terrain, an increasing number of city commercial banks and rural commercial banks are vying for such licensesFor instance, during a recent earnings announcement, Chansha Bank representatives emphasized their ongoing dialogue with regulatory authorities regarding their pursuit of a wealth management subsidiaryThis ambition isn’t isolated; other banks such as Chengdu Bank and Shunde Rural Commercial Bank have also expressed intentions to establish their wealth management arms, yet tangible progress remains elusive.

Economic experts like Dong Ximiao, Chief Researcher at Zhaolian, clarify that the bulk of licenses has already been granted to major commercial banks

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The earlier phase of aggressive setup has now transitioned to a more normalized establishment cycle, with regulators adopting a cautious “one approved, one established” approachThis cautious methodology suggests that while significant opportunities exist for small and medium-sized banks to receive licenses, it remains contingent on demonstrating substantial operational capacity and the ability to manage significant assets.

As the Chinese banking industry grapples with intensified competition and the saturation of the wealth management market, it is vital that banks reconsider their strategies in light of these developmentsYe Yindan, a researcher at the Bank of China Research Institute, notes that the rapid growth and saturation of the wealth management sector have inadvertently precipitated a fragmentation of resources among banksChallenges such as product homogeneity, declining returns, and inadequate risk management have emerged as pressing concerns

Regulatory entities are increasingly focused on amplifying their oversight of existing wealth management subsidiaries while incentivizing them to concentrate on innovation, risk management enhancements, and client service improvements rather than engaging in reckless competition.

For small and medium-sized banks that lack the necessary licenses to directly issue wealth management products, opportunities for participation in the wealth management market have not vanishedIn a bid to compensate for losses in intermediary income, these banks are quickly adapting to become distribution agents for wealth management products rather than relying solely on traditional product issuanceThe trend is evident as the number of distribution agencies continues to rise, with many wealth management companies proactively seeking collaboration with distribution partnersStatistics from the first half of 2024 indicate a diversified approach across licensed banks, with a substantial majority of products from wealth management firms being marketed through various channels, including partnerships with other banks.

From the perspective of smaller banks, collaborations with large banks, insurance firms, and fund companies are being established to invigorate their distribution of wealth management products

For example, Zhejiang Hecity Rural Commercial Bank is actively laying the groundwork for open-ended, cash management, and closed-end wealth management products, striving for diversification and transparency regarding product risksBy clearly delineating the responsibilities associated with distribution channels and emphasizing their role as facilitators rather than primary risk bearers, these banks enhance client trust and clarify their value proposition in the wealth management sphere.

However, many capable smaller banks, currently without licenses, are not content to merely settle for distribution rolesDiscussions within the industry reveal that these banks are actively recalibrating their organizational structures and systems to meet the evolving regulatory requirements in preparation for eventual license acquisitionLarger banks with more substantial asset bases stand a better chance of securing licenses, indicating a potential shift in the competitive landscape.

Dong Ximiao points out that for smaller banks with total wealth management products under 100 billion RMB, establishing a subsidiary may not be the ideal strategy

Given the constraints around talent, capital, and licenses, these banks should take advantage of the current non-competitive landscape concerning third-party distribution rights to develop comprehensive distribution systems while introducing data exchange platforms and professional wealth advisorsHe proposes that smaller banks should strive to create unique wealth management repositories to cater to the diverse needs of investors.

Despite the challenges posed by the absence of licenses, smaller banks possess untapped strengths in local markets, enabling them to cater to a unique demographic of clientele, including individual entrepreneurs and affluent customersBy concentrating on distinct market segments and offering tailored wealth management services, these banks can break through existing growth barriersFor instance, customized wealth advisories or asset allocation services can enhance these banks’ competitive edge and client retention strategies.

As interest rates on savings deposits decline, the allure of traditional banking products wanes, pushing banks to seek new growth channels via wealth management initiatives

The landscape post-asset management regulations showcases an ongoing shift towards risk-conscious product structuresThe transition to net-worth-based products introduces volatility and liquidity risks that banks must navigate diligently.

Dong identifies the balancing act that the banks and wealth management companies face: maintaining security, yield, and liquidity within their offeringsThe net-worth conversion phase necessitates that banks enhance their risk assessment capabilities, ensuring product offerings accurately reflect underlying asset risksThis involves a robust risk management framework and proactive responses to market fluctuations, enabling transparent communication with investors about associated risks.

In an effort to safeguard investor rights and contribute to the stable evolution of China's wealth management market, regulatory entities are enacting strict guidelines around the representation of historical performance data for wealth management products

It is essential that any historical performance disclosures accurately reflect management capabilities and provide investors with a comprehensive understanding of product risks.

Research from Tianyancha Data Institute highlights that banks should focus on communicating crucial information through regular reporting of product performance and potential risksThis will foster greater engagement and assurance among investors.

Dong's recommendations for the future involve banks and wealth management firms prioritizing the recruitment and training of specialized professionals capable of conducting market analyses while enhancing investment strategiesUltimately, a concerted effort among regulatory bodies, financial institutions, and investors will be vital to familiarizing investors with their responsibilities and freedoms, paving the way for a robust and sustainable development path for the wealth management sector.