JPMorgan Chase & Co. pays Jamie Dimon $1.21 million for every $1 billion of profit at the biggest U.S. bank. Industrial & Commercial Bank of China Ltd., the world’s most profitable, gives its top executive $9,400.
That pay-to-performance gap is set to widen this year. The state-controlled Chinese lender, led by Chairman Jiang Jianqing, may post second-quarter net income of $9.63 billion on Aug. 30, while Bank of China Ltd. will probably report $5.44 billion tomorrow, according to analysts’ estimates. New York-based JPMorgan last month reported a 9 percent decline to $4.96 billion following its trading loss in London.
Pay hasn’t kept pace with earnings in China, where government-appointed bankers have escaped the ire directed at overseas rivals for losing money on complex derivatives, money laundering or rigging rates. Still, the banks’ shares remain weighed down by concern that slowing economic growth will trigger defaults by developers and local governments.
“Chinese banks are risk averse due to culture, a different executive compensation structure” and the profitability of their lending operations, said Himanshu Shah, chief investment officer of Shah Capital Management in Raleigh, North Carolina. However, the banks are changing and will “resemble their Western counterparts to a great extent over the next five years.”
Jiang’s 1.96 million yuan ($308,000) in compensation for 2011 included 589,500 yuan that will be distributed over three years starting in 2012, depending on his performance, according to an exchange filing by ICBC in May. The bank, whose biggest shareholder is China’s state-run Central Huijin Investment Co., didn’t say if his pay last year included bonuses deferred from 2010.
His total pay has increased about 50 percent since the bank’s IPO in 2006, when ICBC didn’t have a deferred-compensation program. The lender’s net income has soared more than fourfold to a record 208.3 billion yuan in that period.
Jiang, 59, became president of ICBC in 2000 and chairman in 2005. The son of a Shanghai doctor, he had joined the lender in 1984 after stints working at farms and in a coal mine during China’s Cultural Revolution.
Like other key party and government posts, the top jobs at ICBC and other large state-owned banks and companies are assigned by the ruling Communist Party’s central organization unit. The executives, who are also party members, are under the oversight of its disciplinary committee.
Dimon, who is both chairman and chief executive officer of JPMorgan, was awarded total 2011 compensation of $23 million, including a salary, bonus and stock options. The 56-year-old was the highest-paid banker among 50 CEOs at the largest U.S.-based financial companies, according to the Finance 50 annual ranking by Bloomberg Markets.
The CEO, who is struggling to contain damage from a botched derivatives trade that has cost the bank at least $5.8 billion, has said any impact on his pay would be decided by the board. JPMorgan shares had slumped 9.2 percent by the end of last week since Dimon disclosed the “egregious” failure on May 10.
In the U.K., HSBC Holdings Plc said it would pay CEO Stuart Gulliver, 53, as much as 13.3 million pounds ($21 million) including long-term bonuses for last year, making him Britain’s best-paid banking chief. Local rival Barclays Plc awarded Bob Diamond, 61, as much as 12.5 million pounds.
HSBC last month posted an 8.3 percent drop in net income for the first half to $8.44 billion while keeping its place as Europe’s most profitable lender. Accused of laundering money for Mexican drug lords and wrongly selling payment-protection insurance and derivatives to British clients, the London-based bank set aside $2 billion to cover fines and lawsuits.
Diamond and Barclays Chairman Marcus Agius, 66, were forced to resign last month following criticism from lawmakers and the Bank of England for that lender’s role in the Libor scandal. The bank was fined a record 290 million pounds in June by U.S. and U.K. regulators for attempting to rig the London interbank lending rate.
China’s top bankers have escaped the tarnish of such scandals in recent years. The state-run lenders were transformed from almost insolvent institutions with spiraling defaults a decade ago with the help of more than $650 billion in bailouts. The four largest banks, all based in Beijing, went on to raise a combined $64.5 billion through first-time share sales starting in 2005 and now rank among the seven biggest by market value in the world.
ICBC, the largest, may report second-quarter earnings rose 10 percent from a year earlier to 61.2 billion yuan, according to the average of 12 analysts’ estimates. The bank’s lending margins probably narrowed and fee-income growth slowed, Lawrence Chen, an analyst at Standard Chartered Plc in Hong Kong, said Aug. 9.
Shares of ICBC fell 1.3 percent to close at HK$4.41 in Hong Kong trading today. China Construction Bank Corp. was down 0.9 percent, Bank of China declined 1.3 percent and Agricultural Bank of China Ltd. lost 1 percent. The four banks have fallen by an average 2.9 percent this year, compared with the Hang Seng index’s 7.9 percent gain.
Jiang’s annual compensation has stagnated in the last two years, the bank’s annual reports showed. China’s largest lender has frozen salaries for management this year, the 21st Century Business Herald newspaper reported May 29, citing people it didn’t identify. ICBC press official Wang Zhenning declined to comment.
Construction Bank, the world’s second-largest lender by profit, may post a 10 percent gain in net income on Aug. 26 to 50 billion yuan, according to the analysts’ estimates. Pay for its chairman has varied, dipping to 1.57 million yuan in 2008 before climbing to as much as 1.83 million yuan in 2010.
The executives aren’t motivated by their salaries because “they are more concerned about their career path as a government official,” said Oliver Rui, a professor of finance and accounting at the China Europe International Business School in Shanghai. “They are half professional, half politician.”
Press officials at the four largest lenders declined to comment on compensation levels.
The top four banks are on a list published in the official People’s Daily of more than 50 state-owned enterprises whose chairmen are ex officio treated as deputy ministers. That means a position at the top of a state-owned bank can be a stepping stone to a higher government position.
Guo Shuqing, for instance, was plucked from his position as Construction Bank chairman in October to become head of the nation’s securities watchdog. Xiang Junbo, who was named chairman of Agricultural Bank in 2009 and had been president since 2007, was re-assigned to run the country’s insurance regulator last year.
Profit growth at Agricultural Bank, now led by Jiang Chaoliang, may be the highest among its competitors with an 18 percent advance. The lender will report on Aug. 29.
Bank of China, the nation’s third biggest by assets, may post a 5 percent gain in earnings to 34.6 billion yuan when it reports results tomorrow, while No. 5-ranked Bank of Communications Co. will probably report a 12 percent increase to 14.7 billion yuan on Aug. 30, according to the estimates.
The profit growth at Chinese banks may not be enough to appease investors who are increasingly concerned that rising defaults, weaker credit demand and lower lending profitability will start to erode earnings. China’s economic growth has decelerated for six quarters, leading the central bank to cut interest rates twice this year.
Authorities are allowing banks greater flexibility in setting interest rates. The central bank sets official deposit and lending rates and this year began allowing banks to pay premiums on deposits and give deeper discounts on loans, narrowing their interest margins.
Bad loans at the nation’s 3,800 lenders have already increased for a third straight quarter, the China Banking Regulatory Commission said in an Aug. 15 statement, marking the longest streak of deterioration in eight years.
The defaults are in part because of the easy credit doled out by the banks in recent years to propel China’s recovery following the U.S. subprime crisis. About 45 percent of China’s 54.7 trillion yuan of outstanding loans at the end of 2011 were made over just three years. Tighter monetary policy amid China’s efforts to curtail inflation made some of that credit sour.
Some investors, including Aberdeen Asset Management Plc, have shunned shares of China’s state-controlled banks because of such state intervention in lending operations.
“We don’t feel that Chinese banks are run for the benefit of shareholders,” Peter Elston, head of Asia-Pacific strategy at Aberdeen in Singapore, said by telephone. “The largest state-owned Chinese banks are instruments through which the government implements fiscal policy rather than commercial enterprises that are profit oriented.”
Aberdeen’s regional funds don’t own shares in the biggest state-run Chinese banks, and the firm has invested only in China Merchants Bank Co. through a country fund, said Elston.
The heads of the largest Chinese state-run banks have to follow the edicts of their biggest stakeholders, said Rui of CEIBS.
“The interests of the CEOs are perfectly aligned with the interest of the largest shareholder: the government,” said Rui. “In that sense, the compensation doesn’t matter much.”
The government owns stakes in the four banks through the Ministry of Finance as well as Central Huijin, the investment unit of China Investment Corp., the sovereign wealth fund.
Huijin and the finance ministry together control about 70 percent of ICBC and 79 percent of Agricultural Bank, according to the banks’ 2011 annual reports. Huijin owns about 57 percent of Construction Bank and 68 percent of Bank of China, the banks said in their reports for last year.
Executives at some smaller Chinese banks benefit from less government interference as well as better pay.
Merchants Bank and China Minsheng Banking Corp. pay their presidents more than 5 million yuan a year, while vice presidents at those firms earn more than 3 million yuan, according to their annual reports. Merchants Bank is controlled by a state-owned company, which has a 19 percent holding in the lender, while Minsheng isn’t backed by the government.
Richard Jackson, president of Shenzhen-based Ping An Bank Co., was paid 8.69 million yuan for 2011. The Briton had previously worked for Citigroup Inc. in countries including Poland and Korea. Ping An Bank, whose parent company is part owned by HSBC, had assets of 1.26 trillion yuan at the end of 2011, compared with ICBC’s 15.5 trillion yuan.
A spokeswoman for Ping An Bank didn’t answer a call to her mobile phone or return a text message seeking comment.
The country head of an overseas bank in China may be paid even better, with an annual compensation of more than 10 million yuan, according to recruitment firm Robert Walters Plc.
“The salary gap between Chinese bankers with their foreign counterparts will narrow as Chinese bankers adopt international standards and become more market-oriented,” said Carter Yang, managing director of Robert Walters China in Shanghai. “But the change will come gradually.”