SHANGHAI (Reuters) – Major foreign banks are less interested in buying into Chinese banks since Beijing allowed them to set up wholly owned subsidiaries in China last year, a survey by global consultancy PricewaterhouseCoopers shows.
Foreign banks that had already bought into Chinese lenders, such as HSBC Holdings Plc (HSBA.L: Quote, Profile, Research, Stock Buzz) (0005.HK: Quote, Profile, Research, Stock Buzz) and Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz), are also in no rush to raise their holdings.
While more than 50 percent of the 42 foreign banks surveyed by PwC are expected to make further acquisitions in China by 2011, many will focus on non-banking sectors.
“In the next few years, an increasing number of foreign banks are expected to walk out of the banking sector when they consider making investments in China,” said Raymond Yung, PwC's Financial Services Leader for the mainland China market.
“They are becoming more interested in making investments in non-banking sectors such as Chinese trust, leasing and futures companies,” said Yung.
Foreign banks' favourite way to boost their presence in China is through organic growth, followed by the creation of a new financial entity — or locally incorporated bank — according to the survey. In 2007, partnerships with a joint stock commercial bank ranked as the No. 2 option, behind organic growth.
China's banking regulator began approving local incorporations of foreign banks, including HSBC, Citigroup and Standard Chartered (2888.HK: Quote, Profile, Research, Stock Buzz) (STAN.L: Quote, Profile, Research, Stock Buzz), early last year.
In principle, local incorporation can offer these foreign banks access to China's retail banking market — with more than $2 trillion in household deposits.
“To accelerate their expansion in China, local incorporation has become a good path for them to overcome some Chinese regulatory hurdles, which you can't do with your local partnership,” said Jimmy Leung, PwC's Financial Services Leader for the central China market.
But locally incorporated banks still need to fight some regulatory hurdles, which may affect profit prospects and force them to change their business models in China.
These include China's strict foreign exchange controls to fight hot money betting on the yuan's rise and regulatory limits on loan and deposit expansion to cool China's economic growth, while the increasing new regulations and recruiting and retaining staff are the top three issues pressuring foreign banks.
Some banks also complained that it took too long to complete local incorporations, while others were disappointed by the length of time it took expand local networks.
“The applying and approving procedures in China seem too long to some foreign banks,” said Yung.
“For instance, some banks want to open at least three or four new branches per year, but in fact, they are only approved to open one or two, making them feel very disappointed.”
Despite such challenges, nine of the 42 foreign banks that participated in the survey expect to double revenue growth in 2008 and many foresee 40-50 percent annual revenue growth rates over the next few years due to huge market potential in China.
By George Chen
(Editing by Anne Marie Roantree)