In 2023, the issuance of licenses for banking wealth management subsidiaries has shown a noticeable slowdownAs of now, no new licenses have been granted to small and medium-sized banksThis raises questions about the underlying reasons for such a trend and the strategies that these banks can employ to optimize their existing wealth management offeringsA recent interview with industry insiders sheds light on these developments.

The slowdown in license issuance can be traced back to various regulatory adjustmentsBy the end of June 2024, 32 wealth management companies have been established, among them six state-owned banks and twelve joint-stock banks that have been granted licenses to operate wealth management subsidiariesOver the years, as regulatory bodies have been scrutinizing the market, the pace at which these licenses are issued has gradually decreasedFrom the inception of the first batch of wealth management subsidiaries in 2018, there was a flurry of approvals from 2019 to 2022. However, the only new approval in 2023 was for Zhejin Wealth Management, and as of now, the current year has seen no new licenses awarded

This signals a cooling off period for the exuberant establishment of wealth management units that characterized the post-2018 landscape.

Among the many city commercial banks and rural commercial banks that are eager to acquire these licenses, one noteworthy example comes from Changsha BankDuring a recent earnings conference, a bank representative confirmed that they are in constant communication with regulatory bodies about the approval process for establishing a wealth management subsidiaryNotably, Changsha Bank has expressed intentions to pursue this since 2018. Similarly, banks like Chengdu Bank, Qilu Bank, and Shunde Rural Commercial Bank have all expressed plans to establish wealth management units, yet progress has been stagnant.

Dong Ximiao, chief researcher at Zhaolian, discusses the current state of commercial banks, most of which have successfully established wealth management subsidiaries

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He notes that the flurry of new license approvals has plateaued, transitioning into a regular operational phase where regulatory bodies issue licenses based on maturity and readiness, adopting a “one by one” approval strategyAs such, mid-sized banks with substantial operational capabilities and large-scale wealth management product offerings may still find opportunities for license approval.

According to Ye Yindan, a researcher at the Bank of China Research Institute, there is an escalating issue of resource wastage due to excessive competition within the wealth management sectorThis has led to problems like product homogeneity and declining returns, alongside weakening risk control across many wealth management subsidiariesAs a preventative measure against harmful competition, regulators are opting for stronger oversight of existing subsidiariesEncouragement is being directed towards innovation in product offerings, enhancement of risk management, and improved customer service, rather than blind expansion into new markets.

For those small and medium-sized banks without licenses, the limitations on directly issuing wealth management products do not inhibit their participation in the wealth management market

In response to the scarcity of license resources and losses in intermediary business revenue, these banks are increasingly advocating for the sale of third-party wealth management products.

The market for wealth management ancillary sales continues to grow, with a rising number of institutions seeking collaborationOne striking statistic from the first half of 2024 indicates that among the 31 operational wealth management firms, three solely rely on their parent banks for sales, while 28 have expanded their distribution channels by partnering with non-parent banksBy June 2024, 511 agencies were involved in the distribution of wealth management products, showcasing a 20-agency increase since the start of the year.

From the standpoint of smaller banks, collaborations with large banks' wealth management subsidiaries, insurance firms, and fund companies have become increasingly common

For instance, Zhejiang Hecheng Rural Commercial Bank is currently enhancing its offerings in open-ended and cash management wealth products, diversifying their product linesThey ensure transparency by clearly stating the risk profiles associated with the products sold and stipulating that they operate solely as a distributor without bearing responsibility for investment risks, repayment, or management.

The trend of distribution serves as a pivotal channel for smaller banks in their quest to engage in wealth managementYe Yindan suggests that by collaborating with licensed wealth management subsidiaries and fund companies, smaller banks can leverage their existing customer bases and offline services to offer external products, thereby increasing client retention and revenue streams while simultaneously enhancing their wealth management capabilities.

However, many ambitious smaller banks that have yet to secure licenses are not willing to solely rely on distribution channels for the growth of their wealth management operations

Industry insiders indicate that there is a significant movement among these banks to refine their organizational structures and systems to meet the standards required for future license acquisitionLarger banks listed on the A-Shares market are likely to have a favorable chance at obtaining a wealth management license due to their substantial asset bases.

Dong Ximiao asserts that establishing a wealth management subsidiary may not be the best option for smaller banks with asset scales under 100 billion yuanThese banks face talent shortages, capital constraints, and licensing challenges and are encouraged to seize the limited window before the distribution of wealth management products opens to third parties, focusing on overhauling their distribution systems and cultivating skilled advisorsThey need to evolve into comprehensive "wealth management supermarkets" to attract and retain both existing and new investors alike.

Ye Yindan adds that although unlicensed smaller banks are unable to issue their own management products like their licensed counterparts, they can strategically leverage their unique market advantages

By concentrating on specific customer demographics and providing tailored wealth management solutions, they can navigate around the limitations imposed by their current statusMany smaller banks maintain strong channels within local markets, giving them access to numerous local enterprises, individual operators, and high-net-worth clients whose wealth management needs are often unique and highly tailored.

With many clients seeking more personalized investment strategies, unlicensed banks can offer dedicated advisory services that assist clients in developing their investment portfolios while enhancing their wealth management capabilities.

This year, as banks progressively lowered their deposit rates making savings less appealing, wealth management has surfaced once again as a key revenue growth driver for banksFurthermore, recent regulatory changes surrounding wealth management products have led to the gradual removal of guaranteed returns, bringing about fluctuations in value and increased liquidity risks.

Dong Ximiao notes that the asset management sector is fundamentally about acting as a steward for clients’ investments while balancing safety, returns, and liquidity in the face of market volatility and diversified investor demands

The transition to value-based products will pose enduring challenges in achieving this balance for banks and wealth management companies.

Moreover, underwent changes need not only to reflect in product structures but also necessitate significant enhancements to risk management and pricing abilitiesYe Yindan relates that the transformative phase in the asset management industry compels banks to not only better adapt to market fluctuations but also develop robust capabilities for identifying, assessing, and managing various investment risks, ensuring that a product’s net asset value accurately reflects its underlying risksBanks must strive to establish comprehensive risk management frameworks capable of aligning value fluctuations with market risks.

In a bid to foster a stable development of the wealth management market in China while safeguarding investors’ rights, recent regulatory measures place further scrutiny on the presentation of past performance data of wealth management products

It is critical that historical performance demonstrates transparency, providing investors with clear insights into potential risks and genuinely reflecting the management team's investment proficiency.

According to a representative from Tianyancha Data Research Institute, it is essential for banks to periodically publish product net value reports and detailed risk assessments, making it easier for investors to access real-time data and historical performanceThis transparency is key to bolstering investor confidence and engagement.

Lastly, Dong Ximiao advocates for banks and wealth management firms to prioritize attracting and nurturing specialized talentThe emphasis should lie in enhancing comprehension of macroeconomic landscapes and financial markets, strengthening research and asset allocation capabilities to cater to the diverse needs of investorsCollaborative efforts among regulatory bodies, financial institutions, and investors are crucial to dismantling the rigidity associated with investment returns, thereby promoting the healthy and sustainable advancement of the banking wealth management industry.