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Bank of China, Everbright Bank fined US$2.2 million for flouting asset management rules

China's banking regulator imposed multimillion-yuan fines on two banks for violating rules on wealth management products, the first such penalty since they came into effect in January.

The fines were imposed on Bank of China and China Everbright Bank and their wealth management units, both of which were established by their parent companies in 2019.

The rules seek to stamp out shadow banking risks by imposing stringent requirements such as leverage limits and banning malpractices like providing investors with an implicit guarantee against losses.

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Bank of China and its wholly-owned wealth management unit were fined 6.6 million yuan (US$991,000), while China Everbright Bank and its wealth unit were penalised 8.3 million yuan, according to the China Banking and Insurance Regulatory Commission (CBIRC) on Friday.

China Everbright Bank and its wealth unit were penalised 8.3 million yuan by the mainland's banking regulator. Photo: AFP alt=China Everbright Bank and its wealth unit were penalised 8.3 million yuan by the mainland's banking regulator. Photo: AFP>

"Leading state-owned banks have rarely been subjected to such penalties as they generally have more stringent internal risk management than other commercial banks," said Chen Shujin, an analyst at Jefferies. "The fines underscore how banks are still adjusting their businesses to fully comply with the new rules."

Since details of the new rules was announced in August 2018, banks had until the end of 2021 to align themselves with the new requirements. To adhere to the changes, Chinese banks have set up dedicated wealth management subsidiaries.

The CBIRC said on Friday that the two banks and their subsidiaries had products that flouted regulatory requirements. This included exceeding a 30 per cent market cap on a single security held by all wealth products marketed by a bank and crossing a leverage limit that caps total assets to net assets at 140 per cent for open-end mutual funds.

Chinese banks continue to actively developing their wealth management business to compensate for the sluggish growth in their interest income, which has been weighed down by reducing lending rates to borrowers as banks heed Beijing's call to support the economy ravaged by the Covid-19 pandemic.

Banks still have room to grow their fee and commission income from wealth management services, analysts said.

The country's wealth management segment grew 12.1 per cent to 29 trillion yuan, servicing 81 million investors in 2021, according to a report issued by China Central Depository & Clearing.

The banks' wealth subsidiaries, meanwhile, reported a combined net profit of 24.4 billion yuan in 2021, more than double from 2020, an EY report on China's banking sector from May showed.

"With the new regulations, the new wealth management business model will also face challenges in customer onboarding, investment research capability, risk management capability and system optimisation," Kelvin Leung, EY's Greater China financial services banking and capital markets leader, said in the report.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2022. South China Morning Post Publishers Ltd. All rights reserved.