Foreign Banks Expect China Revenues to Surge

The 127 foreign banks operating in China have a miniscule market share but see big growth opportunities ahead.

The 127 foreign banks operating in China expect their revenues there to grow far faster than at home despite miniscule market shares, according to a report by PricewaterhouseCoopers (PwC) International. The rosy outlook doesn’t seem to have been tempered by the central government’s tightening of lending limits.

Twenty-two of the 42 foreign banks interviewed in China expect revenue to jump between 20 and 50 percent in 2011 due to the continued opening of China’s economy and its move toward a convertible yuan. All the banks expect revenues to continue growing over the next three years.

The high confidence level belies the difficulties faced by the 127 foreign banks in gaining a foothold in China. Collectively they held only 1.83 percent of the domestic banking market in 2010, up slightly from 1.7 percent in 2009.

“The market share figure fails to reflect how foreign banks are continuing to redefine the market segments in China,” said Raymond Yung, financial services leader for PwC China. “They believe that China still offers exciting growth opportunities. And they’re not wrong.”

The debt capital markets is seen as the area offering the best future opportunities, said the report. China’s bond market is now Asia’s second largest and the sixth biggest in the world.

The recent tightening of credit by the central government has created even more room for expanding the bond market. More banks are exploring the market through acquisitions in permitted areas like trust companies, securities firms, and asset management.

Yet these banks are operating in an increasingly stringent environment in which the central bank is seeking to soak up liquidity and curb inflation by raising the reserve requirement six times since the beginning of the year and 12 times since the beginning of 2010. It has also raised interest rates four times since October.

Some banks worry that it will be difficult to attract enough deposits to meet the required loan-deposit ratio of 75 percent. Profits are also expected to be hurt by the new capital regulatory parameters, especially the 2.5 percent provision ratio.