Cashing in on China's Boom

November 20, 2008
By: Hu Yue

Foreign banks continue to fare well here on the back of the country's torrid economic growth

Sitting on piles of bad mortgages and unpaid credit-card debts and auto loans, several foreign banks have seen their profits plummet along with the broader economic downturn in the West. But the good news is that they still see China as a bright spot for expanding their business.

In the first three quarters this year, foreign banks in China earned 10.12 billion yuan ($1.48 billion) in profit, double the amount they made during the same period last year, said the China Banking Regulatory Commission in a statement on September 25.

The banking regulator said these institutions currently have an average ratio of non-performing loans of 0.52 percent of their total loans and that their capital-adequacy ratio averages 16.9 percent, underlining their healthy fundamentals, good asset quality, adequate capital provisions and sound liquidity.

Guo Tianyong, Director of the Research Center of the China Banking Industry under the Central University of Finance and Economics, told Beijing Review that foreign lenders have enjoyed buoyant business here largely because of China's economic boom in recent years and its strong domestic financial market, which has been growing exponentially.

Zhang Xi, a senior banking analyst at China Galaxy Securities Co. Ltd., agreed. She said a growing number of wealthy Chinese have ensured high returns for the foreign banks' wealth management and private banking services, which account for a big chunk of the banks' total revenues.

China's embrace of foreign lenders dates back to 1978 when the Japan Import and Export Bank was authorized to set up a representative office in Beijing. Ever since then, more and more foreign banks have penetrated China's market by extending their branch networks and product offerings and buying stakes in their Chinese counterparts, particularly after being offered broader access to lucrative retail renminbi services at the end of 2006.

A survey conducted by Pricewaterhouse-Coopers LLP (PWC) indicated that most foreign banks are expected to further tap into the world's fastest-growing major economy. In a poll of 42 foreign banks, the global consultancy said nine anticipated at least a 100-percent revenue growth in China this year, and many foresaw 40-50 percent annual revenue growth rates over the next few years.

The bullish growth predictions by overseas banks are based on confidence that more clients will be attracted to their deeper and more sophisticated product offerings and global client relationships, PWC said.

But as the financial crisis unfolds, many now fret that the foreign banks, after getting hit hard at home, may drag their feet in pushing into China in the face of a possible economic slowdown.

Zhang downplayed the concerns, saying China's banking system, one of the few in the world that have largely emerged unscathed by the financial chaos, remains stable and healthy, and therefore would maintain its appeal to foreign lenders.

Guo said the foreign banks' buoyant profit growth in China was likely to lose some steam as the crisis drained some of their financing sources at home, although it would remain much higher in most parts of the world. He added that the foreign banks would continue to value their China foothold. A case in point is Bank of America Corp., which has not sold its holdings in China Construction Bank Corp. as many expected, he said.

The worries are turning out to be truly unwarranted, because foreign banks have not bulked from the Chinese market, but continue to look to the country as a calm port in the storm. Since October, several foreign banks, including the Bank of East Asia Ltd. and Standard Chartered Plc, have added new branches to their banking networks in China.

Besides this, a growing number of foreign banks such as Citigroup Inc. and HSBC Holdings Plc, are making a push into the country's vastly under-serviced rural areas. HSBC said it would open about 30 branches in the countryside in the next few years, while the country has approved Citigroup's plans to establish two microcredit firms in the rural areas of Hubei Province in central China.

Guo said rural finance represents the future development trend of the banking sector in the long run and may become fresh growth points for both foreign and Chinese lenders.

Analysts say Chinese banks, particularly the "big four" state-owned banks, are now able to stand on their own feet after a few years of restructuring, but still need to improve their risk management, corporate governance and efficiency in a fully competitive market environment.

As foreign lenders spread across the country, they also face increasing competition in private banking and wealth management from China's large banks, which are eager to reduce their dependence on their traditional lending business and boost their fee income.

In the end, it will be a win-win situation that allows foreign players into the country's internal business cycle, Guo said.

"The arrival of foreign banks has benefited the local banking industry and customers with new services, managerial expertise and methodologies," Guo said. "They can also play a catalytic role in improving the corporate behavior of Chinese banks."