Foreign banks predict strong revenue growth in China

Despite China’s subdued economic outlook and the slowdown in deal activity, foreign banks told PricewaterhouseCoopers (PwC) in a new survey that they are optimistic about earnings in the country and predict their annual revenue growth to reach 20% or more by 2015.

The global consulting firm interviewed senior executives and managers from 41 foreign banks in Beijing, Shanghai, Shenzhen and Hong Kong from April to May, asking them to identify the strategic and emerging issues of doing business in the country.

About 17 banks forecast revenue growth of more than 30% by 2015. Respondents said the main source of potential income lies in developing financial institution businesses such as treasury products and bond trading. The banks’ CEOs ranked regulatory approval to underwrite bonds as the most important driver for future growth.

China has given initial approval to two foreign banks, HSBC and Citi, to underwrite bonds on the interbank bond market, which until now has been dominated by big domestic lenders. However, access to this market remains limited for the other foreign banks.

Another revenue driver, the banks noted, would come from keeping pace with the expansion of multinational corporations based in China, as many of the global companies are shifting their operations away from manufacturing exports towards producing, distributing and marketing products for the local market.

“China is shifting away from a production-export market to a domestic-consumption driven economy,” said Mervyn Jacob, PwC financial services leader for China and Hong Kong. “This means new opportunities for foreign banks to diversify into emerging market sectors such as IT and clean energy as they mature. They will also be able to leverage their global expertise as more Chinese firms seek to expand offshore. Capitalising on this will require a different and more focused approach to their China strategy.”

Strong profitability during 2011 has helped boost the banks’ prospects in the coming years. China’s 181 foreign banks more than doubled profits to Rmb16.73 billion ($2.6 billion) in 2011 from Rmb7.78 billion in 2010. This was achieved as a result of strong demand for corporate credit from multinationals expanding within China and an increasing number of state and private-owned enterprise customers. Nevertheless, foreign banks have a less than 2% market share in China.

To capture the growing business opportunities, foreign banks will increase headcount in the country aggressively, according to PwC. The 41 banks surveyed predict they will hire nearly 20,000 new employees by 2015. The staff in biggest demand include relationship bankers for corporate clients, risk managers and treasury and legal consultants.

As with most industries in China, the talent shortage remains a big challenge. More than half of the respondents said the shortage would have a “significant” or “very significant” effect on their top-line growth, the firm said.

Meanwhile, China's tight regulations and policies remain the top concern of foreign banks, whereas technology facilities are their least concern.

Overall, the survey found China continues to be a critical and important market.