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April 26, 2017

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Still minor players, foreign banks shift focus

TEN years ago, when foreign banks were first allowed to set up incorporated offices in China, the tantalizing vision of millions of new customers had them scrambling for a piece of the action.

But now, a decade on, there’s a more sober view of profitability here.

For one thing, the zeal to own stakes in China banks seems to be waning in favor of a focus on debt products and cross-border financing to help domestic companies going abroad, experts say.

Foreign banks held 2.68 trillion yuan (US$389.4 billion) of assets in China at the end of 2015, tripling the figure in 2007 but down 4 percent from a peak in 2014, the China Banking Regulatory Commission said in an earlier report.

By 2016, there were 39 foreign banks incorporated in China. The first four through the door — HSBC, Standard Chattered, Bank of East Asia and Citi Bank — upgraded from local branches to corporate entities in March 2007.

But presence doesn’t necessarily equate to prominence or profit. The total market share of foreign banks in China remains below 3 percent, according to the banking regulator.

Some foreign lenders have started to scale back their presence by selling stakes in mainland banks. In the most recent case, Australia & New Zealand Banking Group said on January 3 that it would sell its 20 percent stake in Shanghai Rural Commercial Bank Co to two Shanghai-based state-owned companies for about US$1.3 billion. ANZ cited improvement of “capital efficiency” as the reason.

In 2016, Citigroup sold its stake in China Guangfa Bank for about 23.3 billion yuan, and a year earlier, Deutsche Bank unloaded a 20 percent stake in Huaxia Bank.

In a sense, the expectations of foreign banks and the reality of Chinese policies haven’t dovetailed, according to Jimmy Leung, banking and capital markets leader at PwC China.

Under current regulations, a foreign institution cannot own more than a 20 percent stake in a domestic bank.

“The allowable market participation wasn’t as much as they expected,” Leung said. “Foreign banks hoped they could influence the decision-making process by being a part of local banks. But the caps on equity holdings curbed that prospect.”

Foreign banks have been lobbying for wider access. Credit Suisse officials told Shanghai Daily last week that when the bank addressed those concerns to a top-level official in China, it was told that change takes time.

Some argue that foreign banks have been withdrawing from China mainly because of troubles outside the country. Global revenue and profit may be suffering from the strong US dollar and narrowing interest margins — problems similar to their Chinese counterparts.

The Global Times cited analysts saying that Deutsche Bank’s sale of its stake in Huaxia Bank was the result of fines it was facing from US regulators. In short, it needed money.

Still, most foreign players are content to tweak their China strategy, preserve their hard-won mainland banking licenses and look for other opportunities here. As the bond market opens up, Chinese companies continue to pursue overseas expansion and individuals seek to boost their wealth. Banks are eyeing the ramifications for business prospects.

“Scale effect impacts a bank’s profitability in a market like China,” said Jennifer Zeng, partner of consulting firm Bain & Company. “Since foreign banks don’t have the advantage of scale, they have to give play to their advantages in global networks and resources.”

Reuters earlier reported that Morgan Stanley is among the big lenders hoping to diversify revenue in China by focusing on securitization and corporate bond underwriting.

Other players, like UBS, said they will expand their staffs in China in the next four years, focusing on businesses that target wealthy clients seeking to diversify their investment portfolios globally. UBS opened its first branch in Shanghai last March, announcing plans to extend the size of its wealth management team.

Some banks may also seek to boost revenue in China by generating service fees from offshore corporate bond issuance, listings and mergers and acquisitions, according to Leung.

Singapore’s DBS Bank said it helped issue a US$500 million bond for Chongqing Logistics City last August. It also was involved in issuing a combined 1.8 billion yuan in offshore renminbi bonds for a state-owned agricultural commodities firm and a local investment company in Chongqing in 2016.

Last year, Chinese companies also inked about US$222 billion of mergers and acquisitions, including ChemChina’s US$44 billion buyout of Syngenta, which was the largest-ever foreign takeover by a Chinese group.

Although the pace of overseas expansion by Chinese companies has been slowed somewhat by new controls on outbound money flows, China’s “Belt and Road” initiative still offers chances for cross-border business.

“Future business opportunities for foreign players lie in many aspects,” Zeng said. “Trade finance and structure finance businesses, for example, could be done with projects complementing Belt and Road.”

The China Banking Regulatory Commission said in March that a foreign-invested bank in China might provide its parent bank group with various financial products and services for Chinese-funded companies, both onshore and offshore.

“If the huge overseas financing demand of domestic companies can’t be fulfilled by the global services of Chinese lenders, then the country’s strategy of driving economic growth by going outside the country may ease the bottleneck,” Leung said.

“In a natural scenario, foreign investment banks could make the most of themselves and carry out those businesses through their global networks. We expect to see some significant growth of cross-border business in the next five to 10 years,” Leung said.


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