OVERSEAS banks have been stepping up efforts to expand their presence in China. PwC's Jimmy Leung shares his thoughts with Shanghai Daily reporter Hu Xiaocen on their business prospects.

Foreign banks operating in China had a bumper year in 2011. Combined profit doubled to 16.7 billion yuan (US$2.6 billion), a significant step up from the aftermath of the global financial crisis in 2008-09.

There's been great progress in localization by foreign banks since China joined the World Trade Organization in 2001. Locally incorporated foreign lenders' head offices increased by 21 to 40 by 2011.

Their service networks now span over 50 cities, up from 20 about 10 years ago. Foreign banks continued to make large investments in China.

Forty lenders have invested a total of 27.1 billion yuan in the past decade, the China Banking Regulatory Commission said in its last annual report.

Foreign banks have said they plan to hire about 56 percent more employees in China by 2015 to support annual average revenue growth of 20 percent.

With such aggressive recruitment plans, the combined headcounts of foreign banks in China will rise to 55,000 from 35,000 in the next three years, according to a recent report released by PricewaterhouseCoopers.

Jimmy Leung, banking and capital markets leader at PwC China, said lenders on the mainland have learned to cope with changing times.

Leung has nearly 30 years of professional services experience, the last 16 spent in China.

He currently leads PwC's banking and capital markets operations in China, overseeing 800 employees.

He is a regular speaker on banking issues at business forums and academic meetings.

He is also a frequent contributor of ideas to regulators and the banking community.

Sitting in PwC's head office in Xintiandi in Shanghai, Leung shared with Shanghai Daily some thoughts on the evolution of modern banking in China.

Q: How would you describe the banking industry in China now and what is the relationship between foreign and domestic banks?

A: There's some prominent difference in the competition landscape of the banking sector this year from previous years. Foreign banks no longer view the domestic banks as formidable foes. Even if they had the same preferential treatment as their local competitors and pursued the same customers as Chinese banks, they are late comers and would find there's not much business left for them.

The foreign banks began to adopt a different strategy in 2009, after the Chinese government embarked on its 4-trillion-yuan economic stimulus program. The program was a credit spree and the chance of a lifetime for local lenders to expand. Foreign lenders were left in a rather passive position, facing tremendous competition pressure from Chinese banks that had far bigger deposit bases and customer networks.

Over the years, as the stimulus program subsided, competition between Chinese and foreign lenders has been toned down a lot. The foreigners have found a strong footing in the domestic market with a shift in their business strategies. The competition from domestic banks eased when foreign players began to differentiate their products and customer base from Chinese competitors.

Q: Where have foreign banks staked their competitive edge?

A: The primary advantages they have over the local rivals are quality service and global networks.

These advantages are so competitive that the foreign banks do not need to set deposit rates to the ceiling as small Chinese lenders did after the People's Bank of China extended the floating range of those rates in July.

The small local banks must offer deposit rates at the maximum level; otherwise, they are not in a competitive position against large lenders.

The foreign banks do not go for the maximum rates to be more competitive. Even if they raise their rates to the cap, they are not necessarily as competitive as the local banks and in the end incur heavier cost burdens.

Big Chinese lenders offer lower deposit rates than smaller lenders and endure higher profit margins. They enjoy a bigger bite of the market, which gives them bigger and quicker turnover. The foreign lenders with no advantage in terms of cost and market share must pursue a different strategy.

"If customers appreciate our service, they will be willing to give up a little on interest." That's the niche thinking of foreign lenders. The service component is the most important, and the product is just subordinate. Personalized attention is the critical part of a memorable customer experience.

In addition, the high-profile names of foreign banks are symbols of reliability and trustworthiness to customers. Other than the subtle things I have mentioned, the foreign lenders' global networks are really an assistance to those companies with ambitions to expand overseas.

That is a strength that domestic banks don't have at the moment. And the government is now encouraging enterprises to invest overseas, which helps the foreign banks do business in China.

Q: How has the contraction of business in the home countries of foreign lenders influenced their operations in China? And do you see Chinese banks looking increasingly at offshore opportunities?

A: The head offices of foreign banks have urged business expansion in other regions due to the prolonged global financial crisis. China remains a strong growth point to them in offsetting losses elsewhere.

Many foreign banks have shifted their focus to the East. So in the next few years, they will invest more in China because the nation's economy is still growing at a fairly fast rate near 8 percent. They won't cut their input in this fast-growing market, that's for sure.

At the moment, Chinese companies are not so enthusiastic about acquiring foreign assets. They have become more prudent after some hard lessons learnt. If the situation in the US and Europe stabilizes in the future, China's financial institutions may readjust their plans for foreign acquisition.

Q: Why have foreign banks sold their stakes in Chinese banks?

A: It's mainly because of the deteriorating economic situations in their home countries.

Since 2009, some foreign banks started to dispose their assets, not only in China but also in other countries. There are not many options left if you have operational issues and capital-adequacy issues amid an economic recession. You have to sell assets for cash because no one is able to lend you money.

They sold their stakes in the Chinese banks because no one would want their assets in Greece or in any other counties in the center of turmoil.

The sale of their holdings in China provided cash to solve their issues back home. It doesn't necessarily mean that they were pessimistic about China's market.

Q: Why don't foreign banks take their fight against the Chinese banks to domestic retail business?

A: This happens everywhere in the world. It should not be attributed to local protectionism.

You seldom see Citibank branches in the UK. In Italy, there are no foreign banks, only local ones. But the foreign banks are more active in the South America. In Singapore, you see DBS and UOB all over the place. In Australia, it's ANZ and Westpac. It's just like that.

Getting back to China's market, maybe HSBC and Standard Chartered Bank could make inroads here. Both of them were founded in China, and are rooted in Asia. But they have to be patient. It's not some goal that can be achieved in 5 years or 10 years.

It's impossible for a foreign lender to grow as big as the Bank of Communications, the fifth-biggest lender in China. But to be like China Merchants Bank? Maybe that's possible, though quite distant.

HSBC never stopped expanding its retail business in China. One day it may have a network here as big as that of a domestic lender. It takes years to be that big.

HSBC has been doing business in China for more than 100 years. I remember a spokesman at the bank said in 2004 that HSBC always had a 50-year plan for development in any region.

Big foreign banks with ample support tend to look further and invest longer. Smaller banks do not have that kind of tenacity. For some of them, retail operations cost too much and may lead to business losses.

Even for HSBC, with a relevantly bigger retail network and more efficient cost allocation, its corporate banking operation is far more profitable than the consumer banking side of the business. So why would they choose to expand the unprofitable business?

Q: Foreign banks have strengths in service and talent. What are the chances that they can parlay these strengths to expand retail businesses?

A: Foreign lenders' operations in retail banking in China are limited to the time they've devoted to the market, the size of capital and the size of their local networks.

In the past, the foreigners faced tremendous pressure from their local rivals. The growth of consumer banking counts on the size of the network. Compared with the weighty branch networks of Chinese lenders, the foreign banks' footprints seem a bit off the map. It's hard for them to compete against the giant Chinese banks with only a number of outlets.

So they've shifted their focus from consumer finance, like credit cards and mortgages, to wealth management and private banking.

And their preference in customers is inclined toward high net worth individuals. The foreign banks have advantages in servicing clients that have a lot of foreign investments.

There's no striking advantage for the foreigners in retail business right now. In a global context, all foreign banks face limitations in local retail operations.

So far, the investment channels for individuals in China are not as varied as in developed markets, though the number of investment products is continuing to expand here.

In the process of internationalizing the Chinese yuan, opening up the financial market and liberalizing interest rates, there's plenty of room for private banking to grow. The foreign banks saw the opportunity and increased investment in China's market. There will be a huge growth in this sector in the next few years.

Q: It's no secret that foreign banks poach staff from each other endlessly. Is it possible for skilled personnel also to flow between the foreign and domestic banks?

A: I have heard of some executives at foreign banks hopping to Chinese banks. But not everyone can manage to adapt to working environments that are as different as chalk and cheese. Because the cultures are so different, communication can be difficult.

Some Chinese banks in Hong Kong have tried to recruit local professionals for high-level positions, and it often turns out to be a mismatch in the end. The higher the position is, the trickier it is for an outsider to integrate.

So it's hard for a person to job-hop between foreign and local lenders.

If the person switches from a foreign bank to a domestic one, he or she will be surprised to find that system once rigidly followed by everyone may be questioned and even broken in the new environment. Going in the other direction, a person may feel burdened with too many constraints after working in a more flexible environment.