Foreign Banks In China Forecast Buoyant Revenue Growth In 2008

by Mary Swire, for LawAndTax-News.com, Hong Kong

27 June 2008

The majority of the foreign banks in China anticipate strong revenue growth over the next few years, with clusters of banks foreseeing 40% and 50% annual revenue growth rates, according to a report published on Monday by PriceWaterHouseCoopers (PWC).

Nine of 42 foreign banks expect to double revenue growth in 2008, according to the annual PwC survey, entitled “Foreign Banks in China”.

This promising outlook for the banking industry in China is reflected in the commitment of the foreign banks’ parent companies to the Chinese market.

In both the 2005 and 2007 reports, a high level of commitment was evident. If anything, this support seems even stronger in 2008, PwC observed. A score of 8.64 was recorded on a scale of 1 to 10 regarding the commitment of the parent banks to the Chinese market.

Although most of the world’s top banks have a presence in China, foreign banks expect more to enter the market and few to depart. Survey results revealed that the number of foreign banks may reach 100 by 2011.

Despite the prosperous market outlook and strong confidence, foreign banks continue to identify the regulatory environment and staff retention as the biggest challenges.

The latter issue has increased in importance since 2005. As the foreign banks are expanding their branch networks and product offerings, the threat of movement from one bank to another increases.

The banks are severely challenged in their ability to recruit and retain personnel.

The three most difficult hiring positions are senior executives, compliance officers and wealth management officers. In the latter functions, salary increases in 2008 are expected to be around 30%. In other areas, 15% to 20% is normal, although much higher increases may also occur.

As China becomes increasingly integrated into the world economy, market volatility and the impact of a global economic downturn draw greater attention.

Nonetheless, 38 out of 40 foreign banks surveyed anticipate profit levels in the next three years to be greater than those at present.

“Although the foreign banks in China face a number of challenges, the prospects and opportunities are positive," commented Mervyn Jacob, PwC Financial Services Leader for China and Hong Kong, adding that:

“Over 80% of the respondents were confident that their market share would grow. The two most important reasons for this given by respondents were the banks’ product offerings and capabilities, and their global client relationships.”

In terms of future strategic expansion, foreign banks continue to favour organic growth as the most desirable method of expansion.

“It’s interesting to note that partnering with a joint stock commercial bank became a less desirable option this year compared to the findings of 2005 and 2007; perhaps one of the reasons is that such opportunities have become less available,” observed Raymond Yung, PwC Financial Services Leader for China.

However, the majority of respondents also believe that they will make acquisitions by 2011. Areas of interest mentioned included securities, insurance, wealth management, leasing and asset management.

In April 2007, after receiving Chinese local banking licences, four foreign banks, HSBC Holdings, Citigroup, Standard Chartered and Bank of East Asia, opened retail banking outlets in Beijing, Shanghai and Shenzhen among other cities.

With local licences from the China Banking Regulatory Commission, the banks were able to offer yuan-denominated services without the high limits which had previously restricted them to the top slice of the market.

Previously, the banks operated only through branches, and had been able to offer restricted yuan-denominated services since the previous December, when China opened its banking market as required under its WTO accession agreement.

There were already more than 70 foreign banks in China prior to then, but most of them were limited to handling foreign currency business, and they held just 2% of the country's banking assets.

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