In the current financial landscape, the issuance of bank wealth management subsidiary licenses has encountered a noticeable slowdownAs of now, no new licenses have been granted to small and medium-sized banks, raising critical questions about the underlying causes of this trend and the strategies that these banks can adopt to enhance their existing wealth management practicesVarious industry experts have shared their insights on this pressing issue, painting a complex picture of the current banking environment.

The deceleration in the grant of licenses is evidentBy mid-2024, only 32 wealth management firms had been established, comprising six large state-owned banks and twelve joint-stock banks that received such licensesThe trend of regulatory authorities approving licenses for bank wealth management subsidiaries has been noticeably restrained, particularly since the initial wave of approvals that began in 2018. For instance, while new firms were routinely approved from 2019 through 2022, only Zhejiang Bank Wealth Management received approval for establishment in 2023, with no further licenses issued in 2024 so far.

Small and medium-sized banks, particularly city and rural commercial banks, are taking proactive steps to seek out wealth management licenses

For example, at a recent earnings press conference, a representative from Changsha Bank discussed their ongoing dialogue with regulatory bodies aimed at establishing their wealth management subsidiaryThis initiative has been in the works since 2018, yet the bank, along with others like Chengdu Bank and Qilu Bank, has not reported any significant progress on their respective plans.

Dong Ximiao, Chief Researcher at Zhangle Alliance, notes that the era of mass issuance of wealth management licenses seems to have passedThe current focus seems to be on fostering maturity within existing firms rather than expanding the number of entitiesThe regulatory framework is now inclined toward granting licenses based on a “one at a time” approach as firms demonstrate operational strength and the capability to manage larger-scale productsThis shift underscores a significant transition in the regulatory perspective and market expectations.

According to Ye Yindan, a researcher at the Bank of China Research Institute, the rapid expansion of the banking wealth management sector in recent years has led to an oversaturation of market resources, manifesting in challenges such as product homogenization and declining profitability for many subsidiaries

In an effort to curb detrimental competition and inefficiencies, regulatory agencies are now focused on enhancing oversight of existing wealth management entities, encouraging them to channel their efforts into innovating products, refining risk management, and improving customer service rather than expanding haphazardly.

For smaller banks operating without a wealth management license, direct issuance of financial products is not an option, yet this does not entirely preclude their involvement in the wealth management marketIn light of the ongoing scarcity of licenses, these banks are shifting towards a model of third-party distribution to recover ancillary income and accelerate their transformationRecent data indicates a growing number of distribution partnerships, with 511 institutions now representing wealth management products, reflecting a rise of 20 entities compared to the beginning of the year.

Taking a closer look at smaller banks, many have begun to collaborate extensively with large bank wealth management subsidiaries, insurance companies, and fund management firms to optimize their product offerings

For example, the Zhejiang Hecheng Rural Commercial Bank has rapidly expanded its distribution of open-ended and closed-ended wealth management products while ensuring that they clearly communicate the associated risks to investorsBy delineating the roles of the respective wealth management firms in product sales, these banks are not only enhancing customer transparency but also fortifying their market position in this competitive landscape.

The distribution model presents an opportunity for smaller banks to improve their wealth management capabilitiesYe Yindan suggests that by partnering with licensed wealth management firms, smaller institutions can leverage their extensive customer networks while transferring the risk and complexities of wealth management to those entities with more established expertiseThis symbiotic relationship not only reinforces client loyalty but also yields additional revenue streams enabling these banks to offer a wider suite of services to their clients.

However, some enterprising smaller banks, although not currently licensed, do not wish to rely solely on third-party distribution models for their wealth management initiatives

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Industry insiders have indicated a shift among banks that aspire to optimize their organizational frameworks and infrastructure to align with the requisite conditions for obtaining a license in the futureThe larger players in the stock market are positioned favorably to secure these coveted licenses due to their substantial asset bases.

Dong Ximiao emphasizes that for smaller banks with wealth management product scales below 100 billion CNY, establishing their own wealth management firms might not be the optimal path forwardInstead, leveraging the existing window before the wider market for third-party distribution becomes available could be beneficialHe proposes that smaller banks take full advantage of the forthcoming Central Data Exchange platform to enhance their distribution system, cultivate skilled financial advisors, and significantly elevate their product distribution efforts

By doing so, they can create a customized "wealth management supermarket," catering to diverse customer needs while fostering loyalty among existing investors and attracting new ones.

Despite the limitations faced by unlicensed banks, they have unique advantages in certain local markets that can be optimized for growthFor instance, these banks often have strong channel positions within their communities, granting them access to a variety of local enterprises, individual traders, and high-net-worth clientsTailoring wealth management services to meet the specific needs of these customers can provide a path to circumvent typical limitations associated with their licensing status.

As banks reduce deposit rates—which diminishes their appeal—wealth management offerings emerge as vital instruments for generating new revenue streamsThe recent regulatory updates also reinforce a shift away from guaranteed returns, heightening the risks associated with asset fluctuations for wealth management products

Dong Ximiao asserts that the transition to net value products necessitates a delicate balance among safety, returns, and liquidity, representing a formidable challenge for banks and their wealth management arms as they navigate evolving market demands.

Furthermore, this transition is fundamentally about enhancing risk management tactics and pricing capabilities for investorsIt is paramount for banks to develop robust frameworks that can accurately reflect genuine market risks while ensuring net value changes correspond directly with the realities of asset risksEnsuring transparent disclosure of product performance and risks to investors enables informed decision-making and trust in the wealth management offerings.

To further safeguard investor rights and promote a stable growth trajectory for China's banking wealth management market, regulatory and industry associations are enforcing standards for product performance disclosures

These requirements aim to enhance the clarity and accuracy of past performance presentations to empower investors in their judgments about the nature and quality of available products.

According to data from Tianyancha’s Research Institute, there is a growing need for banks to provide regular reports on net value, detailed asset allocations, and risk evaluations of their wealth management productsSuch practices will bolster investor engagement and confidence, reinforcing the integrity of the wealth management sector as it adapts to meet the challenges and opportunities that lie ahead.

Ultimately, to promote sustainable development within the banking wealth management sector, Dong Ximiao advocates for ramping up the recruitment and development of expertise in the financial industryEnhanced market analytics and asset allocation strategies will empower banks to cater more effectively to diverse investor needs while embracing regulatory shifts aimed at dismantling rigid repayment norms