Friday, June 8, 2012

China's economy hasn't foreign banks!

Walt Disney (DIS) didn’t have trouble raising money for its $4.4  billion theme park in Shanghai. After it won approval in 2009, a dozen Chinese banks sprang into action, offering $2 billion in loans and promising more. Foreign lenders, limited by the Chinese government in how much they can lend, watched from the sidelines. The size of the deal put it beyond their reach.
Five years after China said it fully met World Trade Organization obligations to open its economy to global financial firms, Citigroup (C) and HSBC Holdings (HBC) are among banks still largely shut out of the world’s third-biggest banking market. Foreign financial companies hold less than 2 percent of assets in China, the lowest share among major emerging markets, according to the International Monetary Fund.

At the same time, state-owned banks such as Industrial and Commercial Bank of China, the largest in the world by market value, have been transformed from almost insolvent institutions into profitable firms with the help of more than $650 billion in government bailouts. “Foreign banks have been over-optimistic about their business outlook in China,” says Ivan Li, deputy head of research at Kim Eng Securities Hong Kong. “They can’t make good money in China as the market is dominated by Chinese lenders.”

Foreign banks, like their Chinese counterparts, are restricted to lending no more than 75 percent of their deposit base. To gather deposits they must open branches, and government approvals have been slow in coming: Foreign banks have 387 branches in China compared with about 66,600 operated by the five largest state-owned lenders. They held just 1.6 percent of the nation’s 83 trillion yuan ($13 trillion) of deposits and had made 1.7 percent of its 58 trillion yuan in loans as of the end of last year, according to the China Banking Regulatory Commission. By contrast, foreign banks typically control almost 50 percent of deposits, loans, and profits in emerging markets, according to the IMF. They hold 22 percent of banking assets in Brazil and 5 percent in India. In the U.S., overseas banks’ share is 18 percent.

The dearth of deposits has limited foreign banks’ ability to lend, causing them to miss out on a surge that saw outstanding loans denominated in yuan almost double over the past three years. China’s banking system, with 114 trillion yuan in assets, is larger than the 30 other emerging markets combined, as tracked by Fitch Ratings, and smaller than only the U.S. and Japan. “Foreign banks have pretty much sat out a once-in-a-lifetime expansion opportunity in China,” says Liu Yuhui, director of financial research at the government-backed Chinese Academy of Social Sciences in Beijing.

Failure to grab market share has limited profitability. Global banks combined have earned about $10 billion in China over the past decade after spending $27 billion to build their franchises and $33 billion to buy stakes in local lenders, data compiled by China’s banking regulator show.

Among the four largest U.S. banks, Citigroup is the only one building a retail banking network. JPMorgan Chase (JPM), Wells Fargo (WFC), and Bank of America (BAC) have all decided to steer clear of consumer banking in China and focus instead on treasury and corporate services. “Retail banking is a scale business, and without scale you can hardly achieve anything,” says Shao Zili, JPMorgan’s chairman and chief executive officer for China. “We figured it’s neither efficient nor realistic to build a meaningful retail banking network of our own at this stage.”

Citigroup, which established a presence in China in 1902, has only 49 branches in the country. It has set a goal of 100 by 2013. By contrast, the bank operates 65 outlets in Taiwan, which has a population of 23 million. The bank has high hopes for new products, such as credit cards, that China is only now starting to allow. Citigroup announced in February that it will become the second foreign bank to issue its own cards in China. “We believe the cards segment in China has huge growth potential in coming years,” says Stephen Thomas, a spokesman at Citigroup’s China unit.

HSBC, whose roots in Hong Kong and Shanghai date to 1865, hasn’t fared much better than Citigroup. It now has 117 branches in China. CEO Stuart Gulliver said in February that he hopes to increase the bank’s China branch network to 800. Based on past speed of approval, it would take HSBC 70 years to reach that goal. Rather than pursue branch expansion, HSBC has decided to target specific businesses for growth, according to Helen Wong, CEO of the bank’s China operations. For corporate banking, it’s concentrating on companies with international needs such as trade financing and foreign expansion, she said. For depositors, HSBC is targeting affluent Chinese with at least 500,000 yuan. “Domestic banks already retain their natural advantage in their extensive nationwide network, so do you compete on those terms? Probably not,” says Wong. “You look at niche areas and enter where you can offer a good proposition with competitive advantage.”


Source:
businessweek.com