Posted on Aug 18, 2011 by Sergio Ulloa
Ping An Insurance (Group) Co, China's second largest insurer, announced a 33 percent rise in first-half profits this week, at the top end of market expectations
. As the company's premium income and investment returns have continued to expand, the insurer also plans to increase its stake in a Chinese bank to further strengthen its banking and asset management operations.
In a statement released to the Shanghai stock exchange, Ping An reported that the group's net income for 2011 had climbed to CNY12.8 billion (US$2 billion), or CNY1.67 (US$0.26) a share, from CNY9.61 billion (US$1.5 billion) a year earlier
. The Shenzhen-based company noted that net premiums were able to grow by 39 percent for the period despite a slowdown in automobile sales in China and tightened regulation over bancassurance policies. Individual insurance premiums rose 29 percent, while Ping An's industrial insurance business reported a 36 percent advance. An improved focus on telemarketing and agents helped contribute to a 38 percent year-on-year rise in revenues to CNY133.81 billion (US$20.9 billion), while total equity was up 20 percent from 2010 to CNY134.33 billion (US$21 billion). The company also reported that total assets hit CNY1.31 trillion (US$200.4 billion) by the end of June, an 11.8 percent increase from the end of last year.
It was the performance of the firm's banking sector that drew the most attention. Ping An noted that net profit from its banking businesses more than doubled to CNY2.4 billion (US$375 million) in the first half of 2011, accounting for nearly a fifth of the group's total net profit of CNY12.76 billion (US$1.9 billion). Ping An Bank, a subsidiary of the group, contributed CNY1.21 billion (US$181 million) towards the total net profit, a 34.9 percent increase over last year, with a capital-adequacy ratio (CAR) of 10.78 percent. In an attempt to capitalize on its success in the financial services sector and establish itself as a major player in the Asia Pacific region, Ping An plans to inject up to CNY20 billion (US$3.1 billion) in fresh capital into its other majority-owned banking unit, Shenzhen Development Bank Co. This would be the second time
Ping An has injected funds into the bank, having increased their stake to 52 percent from 30 percent at the end of June.
Shenzhen Development Bank has contributed CNY1.18 billion (US$180 million) towards Ping An's net profits so far this year. The investment will be used to replenish the bank's capital base, which had lowered to near the minimum levels required by Chinese law to operate. According to the latest figures, Shenzhen Development Bank held capital in June equal to 10.58 percent of total risk-weighting assets, with a minimum CAR of 10.5 required for banks of its size in China. Concerns were raised by a recent regulatory ruling, which could lift capital requirements further to 11.5 percent if Shenzhen Development Bank is declared systemically important. Once the deal is completed, Shenzhen Development Bank expects its CAR will improve to 13 percent, adding in a statement that "The capital replenishment will enable the bank to further expand its assets and businesses, and help it achieve sustainable profit growth."
Many other banks in China have undergone similar fundraising efforts in order to bolster their capital positions in the face of volatile global financial markets. Chinese insurance companies have duly invested in bank stocks because they believe bargains have begun to surface on expectations that the market has bottomed out following the sharp falls due to the global market turmoil earlier this summer
For Ping An, the investment in Shenzhen Development Bank comes as part of the company's ambitious long term plan to become a full-service financial services conglomerate, with equally proficiency in cross-selling insurance, banking and investment operations. Ping An have used HSBC as a model, who in fact hold a 16 percent stake in the Chinese insurer. According to Ping An, it's business from non insurance operations (banking, securities, trusts) now contribute 27 percent of its net profit, up from 23 percent in 2010, and management are keen to see this continue. Injecting money into Shenzhen Development Bank will further accelerate the development of banking and investment business within the group's business portfolio. Insurance industry analysts predict that these moves could help Ping An to perform better than its biggest rival China Life. Having a more diversified business portfolio will ultimately help protect the insurance company from adverse market volatility in the future.
The Chinese insurance market itself may become more diverse in the near future, with the introduction of prominent Hong Kong-based companies perhaps on the horizon. Speaking at a financial forum on Wednesday, China's Vice Premier Li Keqiang told attendees that Beijing has plans to grant greater access for Hong Kong's services sector on the massive mainland Chinese market. Li, viewed by some as a likely candidate to replace Premier Wen Jiabao, singled out Hong Kong-based insurance companies in particular, and stated that they could soon be allowed to establish separate branches and play a bigger role on the mainland as well as take up ownership stakes in their mainland Chinese subsidiaries. Li closed by saying such implementing such policies would be "consistent with our policy of opening to Hong Kong first under the 'one country, two systems' and aimed at taking mainland-Hong Kong economic and financial cooperation to a new high."
Many Hong Kong insurance companies already recognize the importance of the mainland market
. According to The Office of the Commissioner of Insurance (OCI), over ten percent of all insurance premiums collected this year were from policies issued to Mainland Chinese visitors. These mainland customers are expected to drive between a 20 to 30 percent annual growth rate in the country's total premiums this year alone. China has become the second largest economy in the world, with an emerging middle class population ready to spend on insurance
and investment-linked products. This emerging investor class presents significant opportunities to financial markets like those in Hong Kong that are of close proximity and particularly convenient to them. Hong Kong insurance companies that can present innovative, cost-effective and secure insurance products and services not yet entrenched on the mainland will be rewarded with a tremendous potential client base.
Insurance Companies Mentioned
Ping An Insurance (Group) Co. of China Ltd.
Ping An Insurance is the first integrated financial services conglomerate in China that blends its core insurance operations into securities brokerage, trust and investment, commercial banking, asset management and corporate pension business to create a highly efficient and diversified business profile. The group was established in 1988 and headquartered in Shenzhen, Guangdong Province, China.