October 2010
New challenges loom for foreign banks operating in China. The fifth Foreign Banks in China survey by PricewaterhouseCoopers points to a demanding regulatory environment coupled with increasing competition from domestic banks. However, foreign players continue to be enthusiastic about growth prospects in China despite complex roadblocks.
Major Challenges Despite China’s economic stimulus and lending surge, foreign banks failed to gain any extra market traction. Their overall market share currently stands at 2%, and half of the respondents predict it will remain the same in 2010.
The PwC survey is based on inputs from 42 foreign banks in China and, for the first time in the five years that PwC has conducted the survey, competition from domestic lenders was identified as the biggest challenge. Domestic banks, with their extensive branch networks and rising service expertise have turned into "formidable competitors".
Foreign banks differentiated themselves from local banks for having a bigger product range and better services to clients, but local banks are now offering the same products and services and are hiring talent from the foreign banks.
Some foreign banks also expressed concern the lending surge in 2009 by local banks could lead to possible lending caps and a rise in non-performing loans (NPLs) in 2011 and 2012.
Regulatory environment continues to be a major cause of concern for foreign players. The regulatory structure, which topped the list of challenges in 2008 and 2009, is ranked second amongst the complications faced by foreign banks in China today.
Banks expect tighter regulations in the future in many areas, including guidelines on new account openings, confirmation of account balances, loan-to-deposit ratio and rollout of wealth management products.
Most banks feel the current regulatory structure has created an unlevel playing field and will continue to tighten further. They believe that regulatory change dictates the pace of market development in China.
Human resource costs are also expected to go up in 2010 especially for foreign banks that are expanding their branch networks. Thirty-eight of the banks surveyed expect an increase in salaries in 2010. Staffing difficulties are expected to arise due to demand and competition for key posts such as relationship managers and compliance professionals.
Positive OutlookThe challenging operating environment has not dampened the banks’ enthusiasm towards the Chinese banking industry. The commitment scores for both locally incorporated banks and North American banks increased marginally in 2010 while Asian and European banks indicated a modest reduction.
However, the foreign banks averaged 8.3 out of 10 with respect to their commitment in China.
Growth prospects have also improved for many foreign banks in 2010. Sixteen banks expect an annual growth rate of 10-20% while 12 banks predicted a growth of 20-40%. A few banks believe that annual growth rate could be as high as 100%.
Many foreign banks are expected to incorporate locally. According to the PwC survey, over 30 foreign banks are now incorporated locally and most respondents expect this number to go up to 40 by 2011. The experience of foreign banks that have chosen to incorporate locally has been positive.
Banks expect the rapidly increasing number of high net worth individuals and a fast-growing economy to boost demand for wealth management and other banking related services.
Even though organic growth remains the primary method of expansion in China for foreign banks, more than three-quarters of 41 banks indicated they would consider acquisitions or mergers over the next three years.
Equity investments in commercial banks in the second-tier and third-tier cities are expected to become the key targets for acquisition. Banks are looking to make investments in areas such as asset management, private equity firms and securities companies.
The potential growth areas and the commitment of banks indicate that China continues to be a key market for foreign banks in the future. However, the high degree of competition in the Chinese banking industry leaves no room for complacency.
With local banks learning the ropes quickly, foreign banks may have to look for innovative new ways to make their mark.
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