China will become the second-largest world market for retail banking by 2015, just behind the United States, according to a report released by the global consulting firm McKinsey & Co Inc on Thursday.

By 2020, the retail banking industry is expected to have $280 billion a year in revenue, up from $127 billion now.

While that business in China is expanding at a rapid pace, it produces relatively low returns today, said Xu Jun, a Shanghai-based associate partner at McKinsey.

Retail banking in China has expanded at a breakneck speed in the last decade. Data compiled by McKinsey showed that the value of the industry's retail deposits increased 4.5 times and its loans by 17 times from 2000 to 2010.

"With the exception of the 'Big Four' banks, which benefit from being really large, Chinese retail banks have low profits and, for the most part, cost-to-income ratios that are greater than 75 percent," Xu said. "That's compared with less than 50 percent for most of their international peers."

He said an end is coming to the rapid increases in corporate-banking loan balances, widening interest margins and good credit conditions that were common in the past decade. He also said banks should put a greater emphasis on their retail franchises' profits instead of trying to expand.

"Banks should be aware that last decade's feast will not continue."

McKinsey predicted that the structural returns on customer assets held at Chinese banks will fall significantly, going from their current 2.2 percent to 1.6 percent by 2020. That will be a result of a deregulation of interest rates and increasing risk costs. Retail banking returns are also expected to slip, going from 3.3 percent at present to 3.2 percent by 2020.

The arrival of newcomers is meanwhile expected to intensify the competition that already exists in the industry.

He said a bank should try to be its customers' primary bank, rather than one that is frequently used. Xu noted that the Chinese place nearly 70 percent of their assets on average in their primary banks.

As for products, mutual funds and consumer finance products, including credit cards, personal loans and auto loans, are expected to be the product categories that undergo the fastest growth from 2010 to 2020, the report said.

Lending to small businesses is also expected to become more common as banks, spurred by the government, increase the supply of credit that is available to meet the needs of small enterprises and also try to ensure they receive higher loan yields, it said.

Jan Bellens, partner at McKinsey, said banks should prepare for the approaching changes and that both domestic banks and lenders with foreign backgrounds should think twice about being over-dependent on deposits.

Foreign banks, meanwhile, have far to go before they will be large enough to compete with domestic lenders in the market.

Building a network in China usually takes 20 years, Bellens said.

"Apart from their physical network disadvantages, which are greater than their Chinese counterparts, foreign banks also lag far behind in talent, capital, information technology systems and online and telephone banking, as well as marketing," Xu added.

wangxiaotian@chinadaily.com.cn