Foreign bankers find limited success in China

Mainland operations continued to disappoint foreign banks with about 20 per cent reporting poor profitability over the past three years and a further 40 per cent saying they were only meeting earnings expectations.

According to a survey by PricewaterhouseCoopers (PwC), banks found the regulatory environment the most difficult aspect of operating in China but, at the same time, the most important driver of change.

"It's fair to say that really the success has been limited to date," observed Mervyn Jacob, PwC's financial services leader for China and Hong Kong.

Attracted by the country's growing personal wealth, high savings rate and a lagging financial market, foreign lenders have set up 214 operational branches or subsidiaries and 244 representative offices in China with total assets of US$76 billion by the end of April, PwC quoted China Banking Regulatory Commission figures as showing.

The largest international accounting firm surveyed chief executives, senior executives and branch managers of 35 foreign banks in Beijing, Shanghai, Tianjin, Shenzhen and Hong Kong in April and May.

The respondents included both international heavyweights such as HSBC, Citibank, JP Morgan, Bank of America and Deutsche Bank and smaller regional players including OCBC, Wing Lung Bank, Dah Sing Bank and DBS.

With retail yuan banking still off-limits, trade finance, money market and foreign exchange trading are so far the most profitable market segments for foreign banks.

However, more than 85 per cent of the foreign lenders forecast greater profits over the next three years through a combination of the lifting of the ban on yuan retail banking services in China at the end of next year and the development of the capital markets.

"One of the key drivers of bank optimism is the fact that many new markets are opening up on both the retail and wholesale side, the opportunity for more customer penetration and potentially more profits," Mr Jacob said.

More than 70 per cent of the banks polled predict revenue growth of at least 30 per cent this year, while six saw revenue at least doubling in the next 12 months.

Four banks expect to continue to grow at least 100 per cent annually through 2008.

Foreign banks view mortgages and investment products as the most promising areas in mainland retail banking alongside credit cards. On the wholesale or corporate banking side, debt capital markets, credit derivatives, structured and risk management products are expected to boom.

Taking advantage of regulatory relaxation, foreign banks are expected to flood into areas such as bonds, private banking and wealth management as well as credit cards in the years to come.

Despite the surge in recent foreign acquisition of mainland banking stakes, foreign lenders still view organic growth in the country as the most popular option.

The lenders are expected to expand their combined mainland headcounts by 154 per cent to 16,910 by 2008.

Bankers complained an increasing number of regulations were slowing down actual market opening and that they had been interpreted and applied unevenly across the country.

They also cited poor corporate governance and finding and retaining good personnel as major hindrances to their operations.