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Foreign banks eye retail banking sector
(Shenzhen Daily)
Updated: 2005-11-25 13:58
Foeign banks are zeroing in on China’s fast-growing and profitable retail
banking sector, an area they are better equipped to take advantage of than their
domestic competitors, said a senior executive at consultancy firm McKinsey &
Co.
“The opportunity in the retail sector is driving foreign banks into China,”
David Von Emloh, a partner at McKinsey in Shanghai, said.
“If you look at Chinese banking today, all the future growth and
profitability will come from retail, small-business lending and fee-based
businesses,” he said.
“In each of these areas, Chinese banks are relatively weak and for foreign
banks it’s a good opportunity.”
Von Emloh said Chinese banks, which have focused on corporate lending for
decades, don’t have the same skills for retail banking that foreign institutions
possess.
“The traditional areas of banking in China, such as deposits and lending,
will not grow much over the next eight years,” he said.
Chinese bank profits are aided by an unusually wide margin between lending
and deposit rates. Von Emloh said he expects margins will begin to decline in
the next five years as interest rates in China are deregulated, which will
negatively affect the profitability of traditional banking services.
As the Chinese Government continues to deregulate interest rates, pricing
competition among banks will kick in. Banks will then be forced to look for
other revenue streams.
By contrast, fee-based banking business is expected to grow 30 percent a year
over the next eight years. “This is why foreign banks are excited about the
prospect of deregulation in the Chinese banking sector,” said Von Emloh.
As matters stand, foreign investors can hold a combined 25 percent stake in a
Chinese bank, while a single foreign investor can hold a maximum 20 percent
stake.
Despite being relegated to minority shareholders with no legal control over
their investments, foreign investors have spent US$10.3 billion so far this year
on minority stakes in Chinese banks, according to Dealogic, a capital markets
data provider. In 2004, foreign banks invested a total of US$3.2 billion in
Chinese banks.
Von Emloh said the recent slew of foreign investments in Chinese banks has
been a way for foreigners to tap into the fast-growing retail-banking market,
and for Chinese banks to get the technology and capital they need to compete on
a global level.
So far this year, major bank deals include Bank of America Corp. and
Singaporean state-owned investment company Temasek Holdings Pte. Ltd. investing
US$3 billion and US$2.4 billion, respectively, in China Construction Bank Corp.
China’s controlled policy to attract foreign capital to China’s banking
system is part of its agreement with the World Trade Organization. Prior to
joining the WTO in December 2001, China had to agree to increased levels of
foreign participation in its financial-services sector. This includes allowing
foreign banks to provide foreign-currency services and local-currency products
to Chinese enterprises.
Von Emloh said the next major change will be in 2007 when foreign
institutions can participate in local-currency business with all domestic
customers.
“You have banks that have already set up business in China that are getting
ready to take advantage of this new local-currency business. This is a clear
opportunity for foreign banks, more so than foreign banks setting up joint
ventures,” said Von Emloh.
Even so, there still isn’t a fixed timetable on when foreign institutions can
take a majority stake in Chinese banks or in joint ventures. Von Emloh said
that, in the meantime, foreign investors may be able to get around the minority
stake-holding rule by forming non-equity partnerships with credit-card or
mortgage-lending businesses.
“You are seeing service agreements between domestic businesses and foreign
banks in things like credit cards that are actually 50/50 now. While they are
not joint ventures, they are formal agreements,” he said.
“Foreigners getting majority control in this kinds of business will happen
much faster than in banks.”
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