Foreign banks in China face new challenges, survey shows

Foreign banks are facing new challenges operating in China following the global economic crisis. Domestic lenders, which in the past have had little advantage over their foreign peers in terms of banking services and products, have turned into "formidable competitors", a new survey shows.

Increasing competition from domestic lenders, with their extensive branch networks and rising service expertise, was marked as the top challenge -- a box usually reserved for the regulatory environment or finding and retaining good personnel, PricewaterhouseCoopers found in its fifth annual survey on foreign banks in China.

The firm interviewed CEOs and senior management at 42 foreign banks in Beijing, Shanghai, Shenzhen and Hong Kong. The respondents think local banks are better placed to fend off competition from foreign banks thanks to the strong economic recovery and the government's stimulus policy, which ordered Chinese banks to pump money into the fast-growing economy. By comparison, foreign banks became extra cautious during the economic downturn and failed to gain any extra market traction in China.

"Foreign banks have always differentiated themselves from local banks for having a bigger product range and better services to clients, but local banks are learning to have the same products and services and are hiring talent from the foreign banks," said Mervyn Jacob, PwC's financial services leader for China and Hong Kong.

In an effort to ward off the global economic crisis, Beijing announced a massive Rmb4 trillion ($586 billion) stimulus package in November 2008, and domestic banks extended a record Rmb9.6 trillion of new credit in 2009, nearly double the amount in 2008, following government orders.

"Foreign banks didn't take part in that and they have lost many lending opportunities," Jacob told reporters at a press conference yesterday.

In the first half of 2009, foreign bank lending in China declined, in part because of competition from domestic banks and in part because foreign companies in China reduced their borrowing needs. As a result, the overall market share of foreign banks stagnated at around 2% and is expected to remain at the same level this year, according to PwC.

The regulatory environment, which topped the list of challenges in both 2008 and 2009, is ranked as the second toughest issue that foreign banks are faced with in China.

"The foreign banks now have to deal with increased tightening of regulations, including guidelines on new account openings, confirmation of account balances with their customers, new restrictions on property mortgages, and the rollout of wealth management products. Going forward, the banks expect regulations to tighten further," PwC said in a statement.

The foreign banks also argue that regulations are constantly changing and are unpredictable, and they are nervous about the possible introduction of lending caps, the survey found.

However, despite the challenging operating environment, respondents to the survey indicate that they remain committed to the Chinese market. Their plans are motivated by the rapidly growing number of high-net-worth individuals in China and a fast-accelerating economy which will generate strong demand for banking and related services.

Most participants in the survey expect an increase in annual revenue of 10% to 20% in 2010, although some banks are expecting growth rates of more than 100%.

The 42 banks project that they will employ 44,192 staff by 2013, which represents an increase of 48%, or 14,453 new employees. Nine banks anticipate that they will more than double their employee numbers by 2013.

The largest foreign banks in China in terms of employment size are HSBC, Standard Chartered Bank, Citibank, Bank of East Asia and Hang Seng Bank. They boast a total headcount of more than 19,000 people, according to PwC.

Although the number of acquisition targets is shrinking -- most foreign banks have already invested in Chinese banks and their holdings must not exceed 20% -- there are high expectations of further acquisitions. More than three-quarters of 41 banks said yes when asked if they would make further acquisitions, or embark on a merger, in China in the next three years. The remaining bank didn't comment.

Equity investments in commercial banks in the second- and third-tier cities will become the key targets for acquisition and participation in rural banking is also ticked as a preferred option.

The survey further revealed that non-performing loans and competition from non-banking entities are of least concern to foreign banks.