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Beneath the controversial sky-high appearance fees and generous remuneration packages of senior executives, Huaxing Bank's declining performance in recent years has gradually been exposed.

Text/Daily Financial Report Zhang Heng

Recently, the "sky-high conference appearance fees" of Huaxing Bank executives have attracted great attention from the market.

The incident originated from the 2023 annual report previously disclosed by Huaxing Bank, which showed that the remuneration of the bank's directors and supervisors consists of three items: basic allowances, due diligence allowances, and meeting subsidies. Among them, the standards for meeting subsidies vary. For example, each person can receive 15,000 yuan for each on-site meeting of the board of directors/board of supervisors; each person can receive 5,000 yuan for each on-site meeting of the board of directors/board of supervisors. It is understood that the bank held 13 board meetings and 33 board of directors special committees last year. As a result, many media have calculated that if the bank's directors attend these two meetings in full attendance, they can receive a meeting subsidy of 360,000 yuan.

As the storm continued to ferment, on August 9, Huaxing Bank issued a response on its official website, saying that the relevant reports were untrue, and at the same time stated that the company's main operating indicators are currently in compliance with regulatory requirements and that its business development is in good condition. However, in this statement, Huaxing Bank did not specifically point out which salary-related content was untrue, but simply summarized the media reports with a short sentence of "taking things out of context, changing concepts, and distorting interpretations."

On the same day the announcement was released, "Daily Financial Report" wanted to learn more about the accurate data of the bank's 2023 annual report, but suddenly found that the annual report information for that year could not be found on Huaxing Bank's official website. What's interesting is that the 2023 annual report, which was originally in the "no such report" status, returned to the information disclosure column the next day and can be viewed at any time.

However, after comparing it with the bank's 2023 annual report disclosed on April 30, 2024, Daily Financial Report found that in the updated annual report, the previous content about meeting subsidies had been quietly deleted, and replaced by "due diligence allowances and meeting subsidies will be paid based on the attendance of directors and supervisors at meetings and the performance of their duties."

So, what is Huaxing Bank's intention in doing so? What new contents in the revised annual report on its official website are worth our in-depth discussion?

Huaxing Bank is caught in the spotlight after its executives were exposed for paying sky-high "appearance fees"

Judging from the fact that Huaxing Bank has been pushed into the spotlight recently due to reports related to salary, the main issues involved are nothing more than two things: one is the sky-high "appearance fees" of the bank's senior executives; the other is the salary level that is far ahead in the industry.

Huaxing Bank recently made changes to these two controversial issues in its 2023 annual report.

First, let's look at the sky-high "appearance fee". The bank's annual report previously disclosed on China Money Network shows that in addition to the due diligence allowance of 5,000 yuan per person per month for equity directors and shareholder supervisors, the basic allowance of 5,000 yuan per person per month for independent directors and external supervisors, and the due diligence allowance of 5,000 yuan per person per month, the Huaxing Bank's conference subsidy standard is even more attractive, specifically:

Each person will be paid RMB 10,000 for attending the shareholders' meeting on-site, RMB 15,000 for attending the board of directors/board of supervisors on-site, RMB 5,000 for attending the board of directors/board of supervisors on-site special committee meeting on-site, RMB 5,000 for attending the board of directors/board of supervisors by teleconference voting meeting on-site, RMB 2,000 for attending the committee by teleconference voting meeting on-site; each supervisor will be paid RMB 5,000 for attending the board of directors' on-site meeting on-site. Appropriate subsidies can be given according to the above standards for attending special meetings such as prudential supervision meetings, or participating in special inspections, supervision and research, etc.

Based on this, as we mentioned at the beginning, some media combined this "quotation sheet" and the convening and attendance of the shareholders' meeting, board of directors, and special committees of the board of directors disclosed in the annual report, and calculated that Ouyang Hui, the independent director who attended the most meetings (attended 13 board of directors meetings and 26 special board of directors meetings throughout the year), received a meeting allowance of 325,000 yuan in 2023 alone.

However, the revised annual report concealed the details of the previously controversial director and supervisor meeting subsidy standards, and instead changed the content to "due diligence allowances and meeting subsidies will be paid based on the meeting attendance and performance of directors and supervisors."

As for the standards for due diligence allowances for senior executive directors, Huaxing Bank has not made any changes. The due diligence allowance for directors and shareholder supervisors is still 5,000 yuan per person per month; the basic allowance for independent directors and external supervisors is 5,000 yuan per person per month; and the due diligence allowance is 5,000 yuan per person per month.

In this regard, some analysts pointed out that, in fact, conference subsidies are part of the allowances for directors and supervisors. Subsidies given by companies help encourage independent directors and external supervisors to participate more actively in relevant meetings and research and perform their duties better. From the perspective of conference subsidies, there is no clear standard for subsidies themselves. In theory, they can be approved by the shareholders' meeting. However, Huaxing Bank's relatively high level of allowances among small and medium-sized banks is rare in the industry. It should be noted that the general pre-tax allowances of small and medium-sized banks are only about 100,000 to 250,000 yuan.

Holding high subsidies and receiving high salaries

In addition to deleting the conference subsidy standards, the revised annual report also made certain revisions to the statement of total compensation received by executives.

In fact, behind the "sky-high appearance fee" controversy, the market also truly saw that the salary and benefits of Huaxing Bank's senior executives were very generous, and compared with the industry level, they were at the upper-middle level.

On April 30 this year, the bank's 2023 annual report salary data disclosed showed that the total salary received by Huaxing Bank's 10 senior executives in 2023 was 24.8145 million yuan, which is about 2.48 million yuan per person, and this is only the after-tax salary.

Looking back, in 2021, Huaxing Bank paid a total of 31.0401 million yuan in after-tax compensation to 10 senior executives, but in 2022, the compensation was reduced to 26.1519 million yuan. In other words, the bank's per capita compensation in 2021-2022 was approximately 3.1 million yuan and 2.62 million yuan respectively.

Although it is obvious from the trend that the income of Huaxing Bank executives has been reduced in recent years, it is still much higher than the industry average. According to public market data, the average salary of domestic listed bank executives in 2023 was 1.2837 million yuan. Considering the difference before and after tax, the salary of Huaxing Bank executives last year may be more than twice that of the former. This has caused a lot of heated discussion in the market, and Huaxing Bank has been faced with a lot of negative voices.

It is also worth noting that the high salaries of Huaxing Bank’s executives are actually based on declining performance. It should be noted that in 2022 and 2023, the bank’s operating income both showed a year-on-year decline.

Of course, objectively speaking, offering high-return compensation to executives is an important means for a company to attract and retain talent, and it will also motivate them to continuously make suggestions for improving the company's performance, bringing positive feedback. However, considering the reality that Huaxing Bank's revenue-generating ability has continued to weaken in recent years, this positive feedback effect is obviously "greatly discounted."

Perhaps aware of the many negative comments coming from the macro market, Huaxing Bank may not want to cause unnecessary trouble due to excessive interpretation and attention of executive compensation by the outside world. In the revised 2023 annual report, the bank has become "smarter" and no longer discloses the total compensation of 10 senior executives (including the full-time chief supervisor), but changes the statement to expand the scope to the bank's directors, supervisors, and senior executives, saying that the total compensation received by the above-mentioned personnel in 2023 is 27.8105 million yuan.

As of the end of 2023, Huaxing Bank has a total of 24 directors, supervisors and senior managers. As a result, we can only estimate that the average salary of these 24 people is about 1.16 million yuan, but we cannot accurately calculate the average salary of 10 of the senior executives. This also means that the average salary data of this part of the bank that the market is particularly concerned about has been indirectly "hidden".

Performance is facing a downward trend, and asset quality is not encouraging

Beneath the controversial sky-high appearance fees and generous remuneration packages of senior executives, Huaxing Bank's declining performance in recent years has gradually been exposed. How to escape the downward predicament and boost performance has become a top priority for the bank.

Public information shows that Huaxing Bank is a mixed-ownership commercial bank established in an innovative model with formal approval from the state ministries in August 2011, with a registered capital of RMB 8 billion. By the end of 2023, the bank has expanded steadily and successfully established branches in 11 important cities including Guangzhou, Shenzhen, Foshan, Dongguan, Shantou, Jiangmen, Zhuhai, Huizhou, Zhongshan, Zhaoqing, and Zhanjiang, building a relatively extensive service network. At present, the bank's total assets exceed RMB 440 billion, reaching RMB 443.69 billion by the end of the first quarter of 2024.

Taking a five-year cycle, from 2019 to 2023, Huaxing Bank achieved operating income of 5.874 billion yuan, 7.376 billion yuan, 9.118 billion yuan, 8.899 billion yuan and 8.409 billion yuan, respectively, with year-on-year growth rates of 30.62%, 25.57%, 23.61%, -2.4% and -5.51%, respectively; the net profit achieved in the same period was 2.036 billion yuan, 2.228 billion yuan, 3.129 billion yuan, 3.312 billion yuan and 3.02 billion yuan, respectively, with growth rates of 35.03%, 9.46%, 40.43%, 5.84% and -8.82%, respectively.

It can be seen that the bank's revenue growth rate has been declining year by year since 2019, and began to fall into the negative range in 2022. Similarly, its profitability is not stable. The profit growth rate is like a roller coaster, sometimes high and sometimes low. Especially in 2023, Huaxing Bank fell into the dilemma of "double decline" in revenue and net profit.

At the same time, the bank has been under downward pressure in recent years in terms of net interest margin and net interest margin, which are extremely important indicators for measuring a bank's profitability. Data shows that Huaxing Bank's net interest margin has dropped from a high of 2.42% at the end of 2019 to 1.71% at the end of 2023. During this period, its net interest margin has fallen significantly year by year, reaching 2.58%, 2.36%, 2.05%, 1.86% and 1.55% respectively.

The Daily Financial Report believes that the decline in Huaxing Bank's performance is due to both the disturbance of the macro-environment and its own reasons, which are specifically manifested in the following aspects:

First, the decline in asset quality is particularly obvious. There is no doubt that when the balance of non-performing loans and the non-performing loan ratio of banks increase, it means that banks need to increase provisions to cover possible bad debt losses, which directly and seriously compresses the profit margins of banks.

Data shows that from 2019 to 2023, the balance of Huaxing Bank's non-performing loans was 946 million yuan, 1.212 billion yuan, 1.672 billion yuan, 2.346 billion yuan and 3.566 billion yuan respectively; the non-performing loan ratio during this period was 0.83%, 0.75%, 0.89%, 1.12% and 1.57% respectively.

It can be clearly seen that in just five years, the bank's non-performing loan balance has nearly quadrupled, and the non-performing rate has more than doubled. The asset quality has declined significantly, which is particularly worthy of attention.

As asset quality continued to be under pressure, Huaxing Bank had to increase provisions for effective coverage, which also resulted in its own provision coverage ratio being on a downward trend since 2021. By the end of 2023, it was 303.38%, 222.9% and 181.34% respectively, a decline of 25.22 percentage points, 80.48 percentage points and 41.56 percentage points respectively.

Second, the business structure is unreasonable. As we all know, when the business structure of a bank is too dependent on interest rate spread income and ignores the development of intermediary business, or the development of intermediary business is unbalanced, the risks generated will make the bank particularly vulnerable when facing market changes and regulatory requirements. Especially in the process of interest rate marketization, it will directly affect the profitability of the bank.

Taking 2023 as an example, Huaxing Bank achieved net interest income of 5.842 billion yuan last year, a year-on-year decrease of 7.9%, and its contribution to revenue accounted for as high as 69.48%; net income from fees and commissions accounted for only 6.28%, which was 528 million yuan, a year-on-year decrease of 25.98%; investment income accounted for 24.25%, second only to net interest income, but it also shrunk significantly, to 2.039 billion yuan, a year-on-year decrease of 12.98%.

Looking at the specific breakdown of each investment income item, the bank's trading financial assets accounted for as much as 78.7% in 2023, among which fund investments, corporate bonds, securities, asset management plans, and trusts with relatively high risks accounted for a large proportion, while relatively stable government bonds, policy-based financial bonds, etc. accounted for a very small proportion.

Debt investment only accounts for 1.29%, among which trust plans, corporate bonds, securities, and asset management plans also account for a high proportion, while relatively stable government bonds and financial bonds account for a smaller proportion.

It can be seen from this that Huaxing Bank's risky investments are far higher than its conservative investments, and its investment style is relatively aggressive. Under the influence of fluctuations in interest rates in the capital market, the bank's profitability may also be affected to a certain extent. In the future, the bank should reduce the proportion of high-risk businesses and increase the proportion of conservative investments.

Third, the loan concentration is high. It is reported that from 2021 to 2023, the loan ratio of Huaxing Bank's top ten customers to net capital will reach more than 40%. In terms of industry, leasing and business services, real estate, wholesale and retail industries are the industries with a relatively high proportion of the bank's loans. As of the end of 2023, the bank's leasing and business services loans accounted for a high proportion of 27.65%. Although the real estate industry has decreased compared with the same period last year, it still accounts for 14.85%, and the wholesale and retail industry accounts for 13.45%.

Some analysts pointed out that in the future, Huaxing Bank needs to strengthen loan concentration management, reduce the non-performing loan ratio, and create a certain stable space for profitability. At the same time, the bank should also enhance its regional economic service capabilities, continuously improve service quality, and increase customer satisfaction and loyalty to attract more customers and expand its business.

Overall, after 13 years of development, riding on the booming financial industry in my country, Huaxing Bank has embarked on a fast track. However, as my country's financial market is currently in a deep adjustment cycle, the bank's accumulated problems along the way have gradually been exposed. How to turn around its performance and achieve steady growth, while improving asset quality as soon as possible, is indeed a test for Huaxing Bank.

However, it is worth mentioning that the bank has withstood the pressure and test in the first quarter of this year, and its performance has recovered, with revenue and net profit of 2.34 billion yuan and 856 million yuan, respectively, up 12.53% and 5.91% year-on-year. At the same time, asset quality has also improved. At the end of the first quarter of this year, the non-performing loan ratio was 1.49%, down 0.08 percentage points from the end of last year.

Next, with the upcoming semi-annual report, how will Huaxing Bank perform? Daily Financial Report will continue to pay attention.

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