Ground [Fertile,Ground]

　　After struggling to find solid footing, overseas banks operating in China may finally be hitting their stride, according to the seventh PwC Overseas Banks in China survey released on July 17.
　　China’s 181 overseas banks more than doubled their profits to 16.73 billion yuan($2.66 billion) in 2011 from 7.78 billion yuan($1.23 billion) in 2010. Growth was achieved as a result of strong demand for corporate credit from multinationals expanding within China and an increasing number of stateowned and private enterprise customers. Internationalization of the yuan with strong demand in derivative trading with financial institutions and corporate clients also helped drive results.
　　Despite China’s subdued economic outlook and speculation of a soft landing, overseas banks are nonetheless predicting annual revenue growth of 20 percent or more until 2015.
　　
　　Strong growth
　　Overseas banks experienced their most profitable year in China in 2011.
　　In addition to soaring profits, total assets increased 24 percent to 2.15 trillion yuan($341.3 billion) at the end of 2011. The market share of overseas banks increased to 1.93 percent from 1.83 percent.
　　This strong result was achieved despite difficulties in their home markets and a less than favorable outlook for Chinese and global economies, said the report.
　　According to Beijing-based Securities Times, last year overseas banks performed noticeably well in retail business and wealth management via innovation in product lines and an increasing number of outlets.
　　“Many banks, which established their China offices in 2007 and 2008, focused on staff recruitment and infrastructure. Now that those are in place, it’s time to seek a return on the investment,” said Charles Chow, PwC China assurance partner.
　　Standard Chartered PLC’s annual report in 2011 showed that consumer banking profit climbed 26 percent to $1.65 billion in 2011. It opened another 19 branches and sub-branches in 2011, expanding its total network to 81 branches in 21 cities. Taken together, Hong Kong, Taiwan and China’s mainland delivered profits of $2.1 billion, up 46 percent. Greater China thus represents 25 percent of the group’s total income and 31 percent of its total profits.
　　Hang Seng China recorded encouraging profit growth before tax to HK$482 million as it increased its foothold on the mainland. The business from the mainland contributed 22 percent to the bank’s total profit before tax, compared with 15 percent in 2010.
　　Through focusing on the growing financial needs of target mainland customers with rapidly rising incomes, Hang Seng China’s mainland personal banking customer base increased by 21 percent and the enhancement of wealth management services facilitated a 26-percent rise in the number of prestige banking customers in 2011, according to the report released by Hang Seng China.
　　“The exponential growth in the number of high net-worth individuals in China is leading some overseas banks to renew and develop their retail and wealth-management businesses,” said Raymond Yung, PwC China financial service leader.
　　Overseas banks further benefited from the growing number of global companies entering China and the increase in Chinese firms expanding overseas, said the Securities Times.
　　According to the Ministry of Commerce, total utilized foreign direct investment reached a new high at $116 billion in 2011, up 9.72 percent compared to the previous year. Chinese companies expanded their overseas presence, and non-financial outward direct in-vestment reached $60.1 billion last year, a rise of 1.8 percent on 2010.
　　Figures offered by PwC show that overseas banks in China saw their net profits grow by an average of 115.04 percent last year, outpacing the 29.03 percent growth recorded by the country’s top five state-owned commercial banks during the same period.
　　The blistering growth is primarily attributable to an increasing demand for corporate credit from multinationals expanding within China and state-owned firms looking to spread overseas, said Jimmy Leung, PwC’s China banking and capital market leader. “To facilitate cross-border settlement, these companies are favoring overseas banks, who have developed their global banking networks better than state-owned ones,” said Leung.
　　“Overseas banks are the only choice for those Chinese companies that expand overseas. Only these banks are capable of dealing with international cash management business—domestic banks are not,” said Yung of PwC China.
　　Citi has launched a “China desk” in eight locations around the world, including three in Africa and one in the Middle East, serving large Chinese clients. “We staff the desk with Mandarin speakers, so that culturally they are very familiar with their customers,” said Andrew Au, Chief Executive of Citi China.
　　Strong regulatory support for overseas banks was also cited in PwC’s report as another reason for their recent successes in the country.
　　Last year, for example, financial authorities eased restrictions on overseas banks injecting capital into their Chinese branches, Hu Liang, a financial services assurance partner from PwC China, told the Global Times.
　　Last year marked the 10th anniversary of China’s entry into the World Trade Organization. Gradual opening of the financial sector is a solemn commitment China made when it entered the WTO at the end of 2001, and the task is being carried out in earnest, said a report released by China Banking Regulatory Commission (CBRC).
　　The People’s Bank of China announced in December 2003 that overseas banks were permitted to conduct domestic currency business with Chinese companies in four pilot cities, and the working capital requirements for overseas banks were reduced.
　　In December 2004 the CBRC allowed overseas banks to conduct local currency business in 18 Chinese cities.
　　In 2006, overseas banks were permitted to conduct currency transactions with Chinese firms and individuals on China’s mainland.
　　According to PwC data, at the end of 2011, the overseas bank presence included 181 banks from 45 countries and regions. This included 37 locally incorporated banks from 14 countries and regions. CBRC data showed that overseas banks operated 245 branches, almost three times more than a decade ago.
　　Eye on the future
　　China has seen some dismal economic data lately, but far from being discouraged, the overseas banks surveyed say they remain more committed to China than ever, said the PwC report.
　　Most CEOs at overseas banks believe that the yuan’s internationalization and interest rate liberalization will be the next development push, particularly for the debt capital market, structured products, interest rate swaps and cross-currency interest rate swap services.
　　The richer experiences of overseas banks in the foreign exchange swap business will further benefit cross-border trade financing growth, according to the report.
　　Since 2008, China has signed bilateral currency swap arrangements with South Korea, Mongolia, Viet Nam, Myanmar, Malaysia, Belarus, Indonesia, Argentina, Iceland and Singapore.
　　As China promotes the yuan’s international use, overseas banks in the country, which have more access to the offshore yuan market, have won over domestic institutional investors as they moved to build global portfolios after the government fast-tracked approvals for new overseas investment plans, Nie Riming, a research fellow at the Shanghai Institute of Finance and Law, told the Global Times.
　　Standard Chartered opened its first onshore yuan trading account in Africa for South African metals trader Portland Steel in May 2011.
　　It also developed innovative trade settlement solutions to support clients’ greater use of the yuan. All payments and collections for IKEA’s yuan-settled merchandised transactions are now centralized in Hong Kong. It also put in place a financing solution for Daewoo International’s yuan-settled exports to China, which enabled further expansion of trading volumes while carefully managing counterpart exposure and foreign exchange risk, according to the report released by Standard Chartered.
　　About 10 percent of China’s trade was settled in yuan in the first quarter of 2012, and by 2015, HSBC expects this to rise to 50 percent.
　　According to Margaret Leung, ViceChairman and Chief Executive of Hang Seng Bank Ltd., at the end of 2011, it had over 70,000 commercial yuan accounts in Hong Kong, and yuan cross-border trade related business routed through the bank had increased.
　　China’s transformation from an exportoriented to a domestic-demand driven economy will bring more diversified opportunities to overseas banks, said Mervyn Jacob, PwC’s financial service leader for China and Hong Kong. Most of the banks interviewed will turn to newly emerging markets such as modern agriculture, information technology and eco-friendly energy, he added.
　　
　　Challenges and risks
　　According to Wu Hong, Vice President of the China Banking Law Society, the road for overseas banks in China has not been entirely free of bumps. These banks have long struggled with attracting deposits from Chinese savers, which has kept the brakes on their lending activities as a result of the local regulator’s 75 percent loan-todebt ratio mandate. “This is a major concern for overseas banks, and one that has severely cut into their revenues,” said Wu.
　　Wu explained that overseas banks’ much smaller banking networks in China compared with their state-owned peers have become the major barrier in luring deposits from the Chinese people.
　　The Agriculture Bank of China, one of the major state-owned banks, has more than 24,000 outlets around the country, while HSBC China, claimed to have the largest service network of any overseas bank in China, boasted over 100 outlets in the mainland.
　　In terms of competition in outlet and scale, overseas banks have no chance to win out over local ones. Differentiation will be the viable way for overseas banks to compete with local ones, said the Securities Times.
　　On July 30, 2009, HSBC opened its first rural branch in Suizhou of central China’s Hubei Province, becoming the first overseas bank to enter China’s rural market.
　　Today, HSBC has set up 12 rural branches in eight provinces and formed a rural financial service network.
　　“The costs for setting up a rural bank are lower than setting up a branch bank in the city. HSBC will further step up its network expansion and services for rural banking,” said Li Huiqian, Director of HSBC China’s rural banking business.
　　Like most industries, talent remains a major challenge for overseas banks—so much so that more than half of the survey respondents believe talent shortage would have a “significant” or “very significant” impact on their top-line growth.
　　While the European banking sector was cutting jobs last year, China’s banking industry, especially overseas banks, were hungry for talent as a result of fast expansion, said Ye A’ci, the Human Resources Director of Standard Chartered China. Standard Chartered Bank has doubled the number of its China staff from about 2,000 in 2006 to the present 4,000.
　　Although overseas banks pulled through understaffing via poaching from local banks by providing higher salaries in earlier years, the problem has reemerged with their further expansion in China and the continued growth of the whole financial sector.
　　According to the PwC report, the difficulty score for finding and keeping good personnel rose again this year following a trend in 2009.
　　“The pay rise in local banks has made it difficult to lure talent away from their fast-growing local competitors,” said the Securities Times.
　　Facing a talent shortage, many overseas banks are on an aggressive recruitment drive, aiming to increase the industry’s head count by 56 percent to 55,000 by 2015 from the current 35,000.
　　As in past years, the strict regulatory environment continues to be a major concern to the 41 overseas banks surveyed. On the respondents’wish list of key regulatory restrictions, they would like to see relaxed loan-to-deposit ratio cap, bond underwriting, access to the derivatives market and the wealth management market, a higher quota of offshore funding, and equal treatment on QDII. On a surprising note, the participants surveyed consider CBRC a more supportive regulator than even their own home regulators.
　　China requires local units of overseas banks to keep their ratio of loans to deposits to 75 percent, the same as local lenders. The cap isn’t much of a constraint on local banks thanks to their huge deposit bases, but is a hindrance for overseas banks to expand their lending business.
　　“Overseas banks have been affected by the 75-percent loan-to-deposit ratio. Their deposits are difficult to generate in the absence of an extensive branch network,” said the PwC report.