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Financial ServicesBanking & Capital Markets
Foreign banks in ChinaMay 2007
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Foreword 1
About the author 2
Executive summary 3
Market environment 8
Competition and positioning 27Performance 47
Peer review 53
Appendices 60
Methodology 62
Bank groups 63
Participants 64
Background comments on participants 65
Foreign ownership in Chinese banks 75
European Chamber Bank Working Group KeyRecommendations 2006 76
CBRCs Report on the Opening-up of the Chinese Banking Sector,January 2007 77
Chinese banks ranked by Tier 1 capital and assets 92
Partners in success 93
Table of contents
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Foreign banks in ChinaDatePricewaterhouseCoopers 1
Foreword
Welcome to the second PricewaterhouseCoopers surveyon foreign banks in China, following the inaugural surveypublished in September 2005. This year, we are verypleased to have 40 financial institutions participate in thesurvey, up from 33 in 2005. The key objectives of the surveyare to:
raise awareness of strategic and emerging issues forforeign banks in China;
establish data on certain industry trends;
understand the thinking of Chief Executive Officers in thebanking industry;
provoke discussion and debate on the best optionsfor capitalising on trends to enhance and improveperformance of foreign banks;
provide insights and perspectives on how banking inChina may evolve over the next three years.
The growth of foreign banks in the Chinese market has
continued to accelerate with the recent announcementsof local incorporation marking another key stage in thedevelopment of the sector. The strong economy and agrowing middle class, together with the continued openingup of the banking sector under the terms of Chinas WTOaccession, has led many foreign banks to continue to investin Chinas financial sector. 2006 saw an influx of foreigninstitutions buying into Chinese retail banks in advance ofthe new WTO measures to allow foreign banks to competeon more equal terms with local institutions. According to
Mervyn JacobFinancial Services Leader for
China and Hong KongHong KongMay 2007
the CBRC (China Banking Regulatory Commission), at theend of 2006, 74 foreign banks from 22 different countriesand regions had established 200 branches and 79 sub-branches in 25 Chinese cities. A further 242 representativeoffices have been established. The growth in foreign bankparticipants also demonstrates the continued commitmentof the Chinese government to bank reform and the role that
foreign banks can play in improving the competitiveness ofthe overall Chinese banking sector.
Findings of particular interest in the survey includeobservations on the changes in Chinas financial market, thedevelopment of the regulatory environment, banking risksin China, future opportunities and the results of the peerreview.
We trust that bankers and other readers will find the materialuseful in this industry-wide survey.
I would like to thank the Chief Executive Officers and SeniorExecutives who participated in this survey for their time andefforts in making this publication possible. I would also like
to thank Dr Brian Metcalfe for his research and producingthis report. We look forward to feedback on this surveyand on topics to be included in future surveys on the Chinabanking industry.
To obtain further information, please contact thePricewaterhouseCoopers banking and capital marketsspecialist partners in your area of interest. They are listed atthe back of this survey.
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Foreign banks in ChinaDatePricewaterhouseCoopers 2
Dr Brian Metcalfe is an Associate Professor in the Business Schoolat Brock University, Ontario, Canada. He has a doctorate in financialservices marketing and has researched and produced over 30 reports,such as this one, on behalf of PricewaterhouseCoopers in 11 differentcountries including Australia, Canada, China, India, Japan and SouthAfrica.
Previous reports have examined strategic and emerging issues incorporate, investment and private banking, life and property and casualtyinsurance, insurance broking and wealth management.
In the past he has been employed by National Westminster Bank, Bankof Ireland and Connecticut Bank & Trust Co. He has consulted for a widerange of organisations, including Royal Bank of Canada, Bank of NovaScotia, Barclays Bank, Clarica Life Insurance Company, Equitable Life ofCanada and several major consulting firms.
He has also taught an executive management course entitled FinancialServices Marketing at the Graduate School of Business, University ofCape Town.
About the author
This report was researched and written by Brian Metcalfe, Ph.D.Information presented herein, while obtained from sources believedreliable, is not guaranteed as to accuracy or completeness.This report has been commissioned by and distributed throughPricewaterhouseCoopers Inc.
Additional copies of this report can be obtained from Anna Lai of PricewaterhouseCoopers on[852] 2289 8719 or at [email protected].
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Executive summary
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Foreign banks in ChinaDatePricewaterhouseCoopers 4
This survey focuses on thestrategic and emerging issuessurrounding foreign banksexpanding activities in China. Itbuilds on the inaugural survey in2005.
The survey attempts to synthesisediverse viewpoints, protectconfidentiality and offer insightsinto this fast changing financialservices environment.
It is based on interviews with CEOsand senior executives and branchmanagers of 40 foreign banks.
The interviews were approximatelyone hour in length and wereconducted in five centres, Beijing,Hong Kong, Shanghai, Shenzhenand Tianjin, between January andMarch 2007.
Background
The participants in alphabeticalorder were:
ABN AMRO
Australia & New Zealand BankingGroup
Bank of America
Bank of Montreal
Bank of Nova Scotia
BNP Paribas S.A.
Business Development Bank
Calyon
Citibank
Dah Sing Banking Corporation
DBS
Deutsche Bank
Dresdner Bank
First Sino Bank
Fortis Bank
Hang Seng Bank
Hongkong and Shanghai BankingCorp.
Industrial Bank of Korea
ING Bank
JPMorgan Chase Bank
KBC Bank
Korea Exchange Bank
Maybank
Mizuho Corporate BankNatexis Banque Populaires
Norddeutsche Landesbank
OCBC
Rabobank
Raiffeisen Zentralbank OsterreichAG
Royal Bank of Canada
Royal Bank of Scotland
Sanpaolo Imi Bank
Shinhan Bank
Socit Gnrale
Standard Chartered Bank
The Bank of East Asia
The Bank of New York
Wachovia Bank
UBS
Wing Lung Bank
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Foreign banks in ChinaDatePricewaterhouseCoopers 5
The following findings are basedon interviews with 40 bankswho are considered to provide asound representation of the viewsof the 74 foreign banks from 22countries/regions that are actively
engaged in the Chinese bankingmarket in 2007. The main findingsare summarised below:
Recent changes
The most frequently citedchange by the foreign bankswas the facility to move to localincorporation. These entities will beallowed to provide foreign currencyand RMB services to customers
and will be subjected to the sameregulations as domestic banks. InDecember 2006, the geographicand customer restrictions on RMBservices were also removed.
The opinions of the foreign bankersexpressed in this report suggestthat 20 to 30 banks will incorporatelocally (26 of the 37 respondentbanks recorded a viewpoint in thisrange). However, not all locallyincorporated banks will have an
interest in serving the retail market.
Main findings
Commitment to the ChineseMarket
The head offices of the foreignbanks are highly committed to theirChinese operations. Twenty nine
banks recorded a score of 8 out of10 or higher in terms of support.
Regulatory frustration
Many foreign banks remaincritical of the regulatoryenvironment particularly in areasof coordination, consistencyand clarity. They are frustratedby currency restrictions and bythe lack of credit history. Thebanks seek changes to foreignexchange regulations, foreigndebt quotas, liquidity ratios andcapital requirements. Although thebanks continue to define regulatorychange as the most importantdriver of change, capital markets,globalisation and technology arealso influential.
Staffing issues
Human resources along withregulations are the two mostpressing issues. The rapid growthin personnel needs over the next
three years will fuel an already tightlabour market. Annual turnoverrates are high, 35% of the banksrecorded a rate of 15% to 20%and over two thirds were above15%. Significant salary inflation iswidespread.
Brand recognition
Brand name recognition washighlighted as a growing concernas a number of banks plan to gearup for the retail market.
Domestic bank challenges
The foreign banks continueto believe that their domesticcounterparts face on-goingchallenges in the domestic loanmarket and in governance andmarket related practices. Noimprovements in their perceptionsof these areas have been made
since the 2005 survey.
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Continued opportunity
The banks clearly see growingopportunities in the Chinesemarket. Few could envisage aslowdown in economic growth
before 2010. Although 74 foreignbanks have branch operations anda further 186 have representativeoffices, only a third of respondentsthink the market is overcrowded.
Many point out that the foreignbanks represent less than 2%market share. Foreign banks areexpected to enter and leave themarket over the next year. Thecurrent number of 74 banks isexpected to exceed 85 banks by2010 by over half the group.
Product development
Credit cards, followed byinvestment products andmortgages are forecasted to growstrongly in the retail market. In thewholesale market the top threeareas of growth mentioned wereinterest rate and currency swapsand structured products.
Future growth
The 40 banks interviewed employ16,752 people and this will grow by113% to 35,685 by 2010. Twentyfive banks will more than double
in size. Expatriate employees arebeing used to alleviate a growingskills shortage. There are alreadyalmost 3,000 expatriates workingin the industry.
Assets are expected to double by2010 to over $100 billion while netprofits are expected to triple insize.
On the retail side at least six banksplan to serve in excess of 100,000customers by 2010 and totalcustomers will exceed the 1 millionmark.
Home country and globalcorporates are stronglyrepresented in the banks loanportfolios but Chinese basedcorporates are becoming veryimportant to some, particularlyEuropean banks.
Performance
Four banks anticipate 100%revenue growth in 2007 andanother 10 banks expect between50% and 100%. By 2010 one bank
continues to forecast 100% growthand only four banks predict growthwill fall below 20% at that time.
Of the 24 banks that provideincome data more than halfacknowledge that profits areminimal. Despite this a numberof segments such as corporatebanking, investment banking andtreasury show improvements inprofitability since 2005. Tradefinance was an important source ofrevenue to 19 banks.
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A summary of the top rankedforeign banks/financial institutionsin each category based on peerranking is shown in the tablebelow. Full details includingindications of how the rankings
have changed since 2005 areshown later in the report.
Peer ranking summary
First Second Third
Foreign exchange trading Citibank HSBC Standard Chartered
Treasury Citibank HSBC Standard Chartered
Derivatives Citibank HSBC Deutsche Bank
Corporate lending HSBC Citibank Standard Chartered
Project financing Citibank HSBC BNP Paribas
Investment banking Goldman Sachs Morgan Stanley Citibank
Asset management HSBC UBS CitibankCorporate finance Citibank Goldman Sachs HSBC
Mergers and acquisitions Morgan Stanley Goldman Sachs Citibank
Trade finance HSBC Standard Chartered Fortis
Retail banking HSBC Citibank Standard Chartered
Credit cards Citibank HSBC Standard Chartered
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Market environment
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Number of employees
The 40 banks interviewed employ16,752 people and this total isforecasted to expand by 113% to35,685 people by 2010. In 2005, 35
banks predicted a growth of 154%to 16,910 by 2008. This formerprediction is in line with the 2007number which includes one largeforeign bank not surveyed in 2005.
The strong growth predicted isassisted by six banks that plan toadd over 1,000 new employeesover the next three years. Threebanks in this group will add 3,000or more new employees.
The percentage increases alsoshow impressive employmentgrowth. For instance, 21 bankswill more than double theirexisting personnel and four banksanticipate growth above 200% by2010.
Number of expatriate employees
At present the 40 foreign banksemploy 2,872 expatriates. This
is a significant jump from 2005when the 35 banks surveyedemployed 475 expatriates. As aresult one can conclude that manyof the banks are supporting theirexpansion by importing trainedpersonnel from within their banks.Over the next three years they planto add another 639 expatriatesto produce a total of 3,511. Theoverall employment growth willhowever, reduce the expatriate
Background profile
0
5
10
15
20
25
30
35
2005
2007
Credit
card
provider
Other
Nich
eba
nking
Privateba
nking
Corporate&institu
tionalb
anking
Retailan
dco
mmercial
Corporate&investmentb
anking
Trad
efin
ancing
Based on responses from 40 banksin 2007 and 35 banks in 2005
Numberof banks
Zero
0-50
50-100 100+
200+
300+
Percentage increases in employment by 2010
Based on responses from 40 banks
Classification of banks by participants
Projected increases in employment by 2010
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Foreign banks in ChinaDatePricewaterhouseCoopers 10
percentage from 17% in 2007 to9.8% in 2010.
There is a significant variationamongst the banks in terms ofthe level of expatriate staff. Forexample, 10 banks have more than
10% expatriate staff and sevenof these are Asian banks. Twentyone banks have less than 5%. Twosmaller banks have no expatriatestaff.
Assets and onshore loans
Thirty one of the 40 participantsprovided information on theirassets in 2007 and projectionsfor 2010. The total assets in 2007
were $51 billion increasing by111% to $108 billion in 2010. Thistotal excluded data for one largeforeign bank. Those larger foreignbanks that provided individual dataestimated that they may reach $15-20 billion in assets by 2010.
Net income
Twenty four participants estimateda combined net income of $328million in 2007 rising to $940million by 2010. This figureexcludes three large foreign banks.In addition to the 24 respondentsan additional four banks confirmedthat they were profitable. Twentybanks recorded net income of $10million or less in 2007. Within thisnumber 13 banks are generatingsmall profits.
Retail customers
Seventeen banks indicated theyhad retail customers and wereable to project growth forward to2010. Seven banks had a retail
base of less than 1,000 customers.Around six banks indicated thatthey planned to have a retail baseexceeding 100,000 customers by2010 and three of this group mightbe considered front runners onretail expansion.
In total the 17 banks had 173,200customers in 2007 growing by over500% to 1.1 million by 2010.
The participants provided creditcard projections but the smallnumber of players and theissuance of cards by some ofthe banks joint venture partnersmade this data too sensitive forpublication.
Retail operations
Fifteen participants confirmed thatthey had an interest in serving theretail sector. In addition several
banks indicated that their parenthad not yet decided on whetherto formally enter the retail sector.Other banks indicated that theyhad investments in domestic banksand this would be the entry vehicleto the retail market not the foreignbank entity.
Eighteen banks said they had nointerest in the retail sector.
Local incorporation
The following banks haveindicated publicly that they wish toincorporate locally.
Approved:
Citibank
HSBC
Standard Chartered Bank
The Bank of East Asia
Applications in process:
ABN AMRO
Bank of Tokyo-Mitsubishi - UFJ
DBS
Hang Seng Bank
JPMorgan Chase
Mizuho Bank
OCBC
Wing Hang Bank
Ten of these 12 banks plan tolocate their head office in Shanghai
while JPMorgan Chase will locatein Beijing and Wing Hang Bank inShenzhen.
CBRC has confirmed applicationsare being considered for:
Nanyang Commercial Bank
Citic Ka Wah Bank
United Overseas Bank
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Foreign banks in ChinaDatePricewaterhouseCoopers 11
Competition in the marketplace Retail banking
Twelve banks responded to thisquestion and almost 60% indicatedthat they consider retail banking tobe intensively competitive.
Over 70% of the respondentsindicated that they had madesignificant or fundamental changesto their retail strategy. The first fourbanks to incorporate domesticallyall plan to offer Yuan-denominatedmortgages, wealth managementproducts and deposit and loanservices.
Press reports stated that, with theexception of Citibank, they wouldalso launch their own brand ofcredit card.
Money market
Only 27% of the 34 banks thatresponded to this questionsuggested that competition wasintensive. A higher percentage
33% indicated that it was light.
Almost 60% of banks have madeeither no change or minor changeto developments in the moneymarket. There has been littlechange in this market since 2005.
Retail banking
Note: Based on responses from 12 banks. Shadingrepresents greater than 20%
Intensive
Minorchange
Significantoperationaland organi-sationalchange
Fundamentalchange instrategy andpositioning
No change
Response
Competition
17% 33% 8%
8% 33%Moderate
Light
None
Money market
Note: Based on responses from 34 banksShading represents greater than 20%
Intensive
Minorchange
Significantoperationaland organi-sationalchange
Fundamentalchange instrategy andpositioning
No change
Response
Competition
3% 6% 12% 6%
6% 18% 18%
15% 9% 9%
Moderate
Light
None
Numbers of banks reporting a response in the
eight markets reviewed will vary as participantswere requested not to comment on a specificmarket unless they were familiar with thecompetitive nature of that market.
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Foreign exchange andderivatives
The opinion on the degree ofcompetition in foreign exchangeand derivatives remains similar to
2005 although a higher percentageof respondents suggested theyhad made minor or no change tostrategy 50% in 2007 comparedto 43% in 2005.
Trade finance
In 2005, trade finance representedthe most competitive market forforeign banks in China.
Ninety per cent believed it tobe intensively competitive whileover half had made significant or
fundamental changes.
In 2007, the level of competitionhas been scaled back to 64% and61% of the banks have made nochange or minor change.
Foreign exchange and
derivatives
Note: Based on responses from 32 banksShading represents greater than 20%
Intensive
Minorchange
Significantoperationaland organi-sationalchange
Fundamentalchange instrategy andpositioning
No change
Response
Competition
13% 3% 25% 6%
9% 19% 13% 3%
6% 3%
Moderate
Light
None
Trade finance
Note: Based on responses from 36 banksShading represents greater than 20%
Intensive
Minorchange
Significantoperationaland organi-sationalchange
Fundamentalchange instrategy andpositioning
No change
Response
Competition
14% 22% 25% 3%
8% 17% 11%Moderate
Light
None
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Treasury
The treasury market continues tobe relatively underdeveloped.
Although a third of the 33
respondents believed the marketwas intensively competitive onlytwo banks have made fundamentalchanges.
Corporate lending
Almost 70% of the banks havemade minor or no change tocorporate lending strategy.
Fewer banks in 2007 recordedan intensively competitiveenvironment. The percentagedeclined from 75% to 60%.
Treasury
Note: Based on responses from 33 banksShading represents greater than 20%
Intensive
Minorchange
Significantoperationaland organi-sationalchange
Fundamentalchange instrategy andpositioning
No change
Response
Competitio
n
18% 6% 6% 3%
9% 18% 30% 3%
3% 3%
Moderate
Light
None
Corporate lending
Note: Based on responses from 33 banksShading represents greater than 20%
Intensive
Minorchange
Significantoperationaland organi-sationalchange
Fundamentalchange instrategy andpositioning
No change
Response
Competition
15% 27% 12% 6%
6% 21% 9%
3%
Moderate
Light
None
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Investment banking
The investment banking markethas become marginally morecompetitive than in 2005.
However seven of the 21respondents said they had notaltered the strategy while fivebanks indicated they had made aminor change.
Credit cards
Only four banks responded to thisquestion and three of them said themarket was intensively competitive.In 2005, five banks unanimouslyrecorded an intensive market.
The market will become morecompetitive with the local
incorporation of foreign banks.The media has reported that threebanks already plan to launchlocal cards while Citibank plansto issue debit cards and continueto issue credit cards throughits local partners, ShanghaiPudong Development Bank andGuangdong Development Bank.
Investment banking
Note: Based on responses from 21 banksShading represents greater than 20%
Intensive
Minorchange
Significantoperationaland organi-sationalchange
Fundamentalchange instrategy andpositioning
No change
Response
Competitio
n
10% 24% 33% 5%
19% 5%
5%
Moderate
Light
None
Credit cards
Note: Based on responses from four banksShading represents greater than 20%
Intensive
Minorchange
Significantoperationaland organi-sationalchange
Fundamentalchange instrategy andpositioning
No change
Response
Competition
25% 25% 25%
25%Moderate
Light
None
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0 1 2 3 4 5 6 7
Guangdong Development Bank
Huaxia Bank
Bank of Beijing
Shenzhen Development Bank
Industrial Bank
China Everbright Bank
Bank of Shanghai
CITIC Bank
Shanghai Pudong Development Bank
China Minsheng Bank
Bank of Communications
China Merchants Bank
Agricultural Bank of China
China Construction Bank
ICBC
Bank of China
Average score on a scale of 1 to 10
Q Can you score on a scale 1 to10 your perception of the levelof competitiveness of thefollowing domestic banks inthe Chinese market?
Not all banks were able to providescores on some of the less wellknown banks and the scores reflectthe averages of scores provided bybankers that had some knowledgeor experience of these banks.
The Top 3 banks were identifiedas Bank of China, ICBC and ChinaMerchants Bank.
Six banks recorded a score below 5.
The foreign banks were asked toscore the level of competitivenessof 16 banks operating in thedomestic market.
These views are recognised as
being very subjective but theynevertheless reflect a degree ofdifferention in the minds of theforeign bankers interviewed.
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Q How would you characterisethe commitment of yourparent bank to the Chinesemarket in comparison to othermarkets around the world ona scale of 1 to 10 (where 1
represents no commitmentand 10 is extremelyaggressive)?
Thirty nine banks shared theirviews on the commitment of theirparent bank to the Chinese market.Only four banks recorded a scoreof 5 or below.
At the other end of the scale 29banks recorded a score of 8 orhigher, with seven banks awardingtheir parents the maximum score of10 out of 10.
The high levels of support identifiedin the 2005 report remained inplace in 2007, suggesting that theforeign banks commitment andinterest in the Chinese market hasnot faltered.
0
2
4
6
8
10
12
12345678910
Based on responses from 39 banks
Number of
banks7
4
2
1
2
1
10
12
The majority of banks found itdifficult to explain what mightinitiate a decline in interest. Somesuggested an Asian economiccrisis similar to that of the 1990sbut most could not envisage an
economic slowdown before 2010.
Several European banks suggestedthat a lowering of interest by theirparent in Eastern Europe mightbe reciprocated by an increasedinterest in China. Another bankcommented that its parentsinterest might increase if a foreignbank was allowed to gain control ofa domestic Chinese bank.
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Regulatory issues
The bankers continued to expressconcern about the level and natureof regulation. They indicated thatregulation was multi-layered and
often lacked a clarity of co-ordination.
They reported a lack of co-ordination between SAFE(State Administration of ForeignExchange) and CBRC andsuggested different CBRCoffices provided contrastinginterpretations.
Senior management in the bigbanks
One bank commented that the bigbanks management teams havebeen in place since the 1990s andthe system would benefit frommore turnover at this level.
Currency controls
The banks noted that the currencyis not fully convertible andrecorded their frustration with
currency restrictions.
Credit history
The lack of a comprehensivecredit history was considered ashortcoming of the banking systemespecially by banks planning toenter the retail market.
Other concerns included:
Q Can you identify three majorconcerns of the Chinesebanking system at present?
Every bank has a foreign debtquota and once reached theborrower has to pay a 5%business tax
There may be an
underestimation of the NPL(non-performing loan) portfoliosin the big banks
There is no national treatmentregarding the capitalrequirement for each foreignbank branch
There is a lack of marketdiscipline and good governanceregarding personal relationshipsin the domestic loan market
Limits on offshore funding
Too protectionist in a financialmarket where foreign bankshave less than 2% market share
The policy of directing theforeign banks to expand north,south and west needs furtherclarification
Low productivity in the domesticbanks
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Q What are the most importantchanges taking place inChinas financial market?
Local incorporation of foreignbanks
The most important change takingplace in the financial marketwas widely recognised as local
incorporation.
The impact of this move will havefar reaching implications for foreignbanks.
Areas mentioned includedincreased capital requirements,wider supervision, greatertransparency and new productopportunities.
One of the biggest obstacles forforeign banks will be attractingenough low-cost deposits to fundtheir yuan banking operations.
Lifting of geographic restrictions
The banks predicted furtherexpansion with the removal ofthe previous restriction to 25open cities following the expiryof the WTO accession five yearadjustment period in December
2006.
Foreign banks dont pose a significantthreat to Chinese ones. What Chinas
banking industry needs next, in the post-IPO period, is transformation, innovationand deregulation.
Zhang Jianguo, President of ChinaConstruction Bank
Bloomberg News, December 11, 2006
The CBRC had increased thenumber from 18 to 25 in December2005 with the addition of Shantou,Ningbo, Harbin, Changchun,Lanzhou, Yinchuan and Nanning.
Opening of capital markets
A general opening of the capitalmarket was forecasted with bondmarket development and furtherdevelopment of derivatives.
One banker compared thecurrent situation in China to hisexperiences in Japan in the 1980sand 1990s.
Foreign exchange market
One bank mentioned that theforeign banks were now beingrequired to arrange onshorefunding for foreign exchangetransactions.
Other predicted changes include:
a lifting of the SAFE quota andthe ability to do RMB options
further stock market reforms
the ongoing restructuring of thestate-owned banks
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The most important driver ofchange among the 40 bankscontinues to be the pace ofregulatory change.
This factor exceeded the next
driver, capital markets, by almosttwo to one and overshadowedother drivers such as technology,new entrants and globalisation.
Q What are the major driversof change in the Chinesebanking industry?
0
50
100
150
200
2005
2007
Disin
term
ediat
ion
Othe
rnew
entra
nts
Othe
r
Secu
ritisa
tion
Commoditis
ation
Joint
ventureba
nks
Merge
rs/con
solid
ation
Econ
omies
ofs
cale
Tech
nolog
y
Glob
alisatio
n
Capit
almarke
ts
Regulat
oryc
hang
es
Score
Based on responses from 40 banks2005 responses adjusted
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The regulatory environmentremains the most difficult aspectof Chinese banking in 2007. Ona scale of 1 to 5 where 5 is mostdifficult the regulatory environmentalmost received the maximum
possible score.
Finding and keeping goodpersonnel have been elevatedto second place followed bycompetition from other foreignbanks.
Q What does your bank find themost/least difficult aspects ofthe Chinese banking industry?
-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0
2005
2007
Competition from non Bank FIs
Level of NPLs
Identifying profitable clients
Economy and market volatility
Risk management
Corporate governance
Competition from domestic banks
Building a customer base
Accounting framework and tax
Product/Revenue diversification
Innovative product/service offerings
Brand name recognition
Competition from foreign banks
Finding and retaining good personnel
Regulatory environment
increasing difficulty
More difficult
Less difficult
Brand name recognition hasbecome more important perhapsreflecting the foreign banks widerlaunch into the retail bankingspace.
Product and revenue diversificationalong with corporate governancehas declined in relative importancesince 2005.
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The graphs below show that theforeign banks continue to recordvery high scores regarding thescale of the challenges facing thedomestic banks.
In the loan market little haschanged since 2005. Indeed themagnitude of the challenge hasonly receded in the collateralarea, and that decrease was onlymarginal.
Q Can you score on a scaleof 1 to 5 the followingchallenges for the Chinesebanking system, accordingto your perception, where5 represents the greatest
challenge?
Governance
Domestic loan market
Market practice
0 1 2 3 4 5
Reliance on collateral
Accuracy of loan grading system
Collecting NPLs
Credit monitoring
0 1 2 3 4 5
Ability to cross sell limited by regulator
Poor product differentiation
Primitive customer information system
Fee/commission regulation
Interest rate regulation
Focus on high risk, low margin lending
0 1 2 3 4 5
Functional overlaps in front/middle/back office
Lack of disclosure
Independence of directors
Poor management information system
In governance and market practicethe scores closely mirror the 2005scores.
In terms of market practice there isone exception to the 2005 findings
cross selling limitations imposedby the regulator has declined from4.03 in 2005 to 3.05 in 2007. In allother areas the perceived level ofchallenge faced by the domesticbanks remains extensive andformidable.
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Q What are the most pressingissues you face? Can you ratethem 1 to 5?
Participants were required to scoreeach issue on a scale of 1 to 5,where 5 was most pressing.
The 0 centre axis thereforerepresents 3 in the 1 to 5 scale and
those to the right side are mostpressing and range from 3 to 5.
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0
2005
2007
Increasing competition from non banks
Insurance
International accounting standards
Quality of loan books (NPLs)
Basel II
Internet security risks
Rogue trader
High dependence on new technology
Consolidation of financial industry
Globalisation
Liquidity of banks
Understanding complex productsMarket volatility
Global economic downturn
Business continuity (disaster recovery)
Service quality
Fraud prevention and detection
Domestic economic downturn
Corporate governance
Introducing new information technology
Risk management
Increasing competition from domestic banks
Retaining existing clients
Product/revenue diversification
Building a customer base
Legal risksIncreasing competition from foreign banks
Cost control
Appropriate staff incentive schemes
Improving revenue growth
Operational risk management
Recruiting/training front office staff
Increasing number of new regulations
More pressing issue
Based on responses from 40 banks
Less pressing issue
2005
2007
New regulations continue to bethe most pressing issue facedwith recruiting and training andoperational risk managementbecoming more important pressingissues in 2007.
Revenue growth, governance andthreat of an economic downturnall recorded a lower level ofimportance.
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Q Which of the following typesof risk represent the greatestpotential threat to you as aforeign bank in China? Pleaserate each risk between 1and 4, where 1 is among the
greatest threats and 4 is not athreat.
Confirming the responses in otherquestions in this report the foreignbanks ranked regulatory risk as thegreatest threat in 2007. Regulatoryrisk was placed ahead of credit riskand reputational risk. At the bottom
of the scale representing minimalrisk was IT risk and businesscontinuity risk.
Operational risk and market riskwere considered to be majorthreats but a collection of risksincluding fraud, treasury, liquidity,currency, business strategy andgovernance were all judged to beminor threats. Political risk wasconsidered to be a minor threat by70% of the participants.
Greatest threat
Major threat
Minor threat
Not a threat
Extremely effective
Effective
Ineffective
Extremely ineffective
Greatest threat
Major threat
Minor threat
Not a threat
Extremely effective
Effective
Ineffective
Extremely ineffective
Greatest threat
Major threat
Minor threat
Not a threat
Extremely effective
Effective
Ineffective
Extremely ineffective
Magnitude of the risk Effectiveness of risk management
Reputational risk
The second part of this questionasked respondents to commenton how effectively they managedthese different risks.
Only credit risk achieved a 100%
score by combining effective andextremely effective management.
The banks believe they have aneffective handle on managing thelist of different risks.
Setting aside political risk, whichis outside the banks sphere ofinfluence, the risk that had thelowest combined score of effectiveand extremely effective, at 84%,was regulatory risk.
Market risk
Credit risk
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Greatest threat
Major threat
Minor threat
Not a threat
Extremely effective
Effective
Ineffective
Extremely ineffective
Greatest threat
Major threat
Minor threat
Not a threat
Extremely effective
Effective
Ineffective
Extremely ineffective
Greatest threat
Major threat
Minor threat
Not a threat
Extremely effective
Effective
Ineffective
Extremely ineffective
Greatest threat
Major threat
Minor threat
Not a threat
Extremely effective
Effective
Ineffective
Extremely ineffective
Greatest threat
Major threat
Minor threat
Not a threat
Extremely effective
Effective
Ineffective
Extremely ineffective
Greatest threat
Major threat
Minor threat
Not a threat
Extremely effective
Effective
Ineffective
Extremely ineffective
Magnitude of the risk Effectiveness of risk management
Regulatory risk
Business/strategic risk
Operational risk
Fraud risk
Liquidity risk
Currency risk
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Legal risk
Greatest threat
Major threat
Minor threat
Not a threat
Extremely effective
Effective
Ineffective
Extremely ineffective
Greatest threat
Major threat
Minor threat
Not a threat
Extremely effective
Effective
Ineffective
Extremely ineffective
Greatest threat
Major threat
Minor threat
Not a threat
Extremely effective
Effective
Ineffective
Extremely ineffective
Greatest threat
Major threat
Minor threat
Not a threat
Extremely effective
Effective
Ineffective
Extremely ineffective
Greatest threat
Major threat
Minor threat
Not a threat
Extremely effective
Effective
Ineffective
Extremely ineffective
IT/technology risk
Greatest threat
Major threat
Minor threat
Not a threat
The participants believedthat they were unableto manage the polititicalenvironment and as aresult a chart showing theirlevel of risk management
effectiveness was notprepared for this factor.
Magnitude of the risk Effectiveness of risk management
Business continuity risk
Treasury/liquidity planning
Governance risk
Political risk
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Less than 5%
5 to 10%
10 to 15%
15 to 20%
20 to 30%
30 to 40%
40% or above
35% recorded 15% to 20% turnover
Over two-thirds were above 15%
Q What is your staff turnoverrate?
One of the greatest challengesfor the foreign banks in China istalent management. The banksare finding it difficult to recruit andretain staff. Over two-thirds of thebanks are experiencing turnover
above 15%, and 35% recordedturnover levels of 15% to 20%.
A small group of the leadinginternational banks appear to bethe most effective in holding staffand have managed to suppressturnover rates to below 5%.
At the other extreme some bankshave experienced acute staffingproblems. One Asian bank saidthat two years ago it had 80%turnover; last year it dropped to50% and in 2007 it predictedturnover would be 20%.
Another Asian bank indicated ithad lost a key member of theirwealth management team as aresult of a competitive offer of triplethe employees salary.
A European bank voiced concernthat employees had returned fromhead office training programmesand immediately resigned.
Several participants pointed outthat although the banking industrywas growing rapidly there was achronic shortage of experienced,senior management.
It was predicted that the move tolocal incorporation and continuedexpansion will increase the staffingneeds.
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Competition and positioning
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Q Do you believe the bankingmarket continues to beovercrowded?
The banks unanimously agreedthat foreign banks would continueto enter and leave the Chinesemarket.
No Yes
Based on responses from 40 banks
100%
Yes
Based on responses from 37 banks
In 2005 over half the participantsbelieved the banking market wasovercrowded. In 2007 only athird of the 40 banks viewed it asovercrowded.
This reversal reflects the openingup of the market along multiple
dimensions such as productrange, geographic coverage andregulatory framework.
The foreign banks acknowledgethat they currently account for less
than 2% of the banking market.
Q Will other foreign banks enteror leave?
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0
2
4
6
8
10
Moret
han20
015
0
More
than
100
100908580757065
Based on responses from 38 banks
Number of
banks
1 1
9
4
2 22
3
10
4
0
2
4
6
8
10
12
Lessthan
10
15-19
20-24
25-2930
More
than
50
Based on responses from 37 banks
Number of
banks
2
8
7
2
7
11
Although 15 banks predict amarginal increase to less than80 banks by 2010 the majorityanticipate a larger number.Seventeen banks anticipate 100 ormore foreign banks.
Q How many foreign banks willbe operating in the Chinesemarket in 2010? Of these howmany will incorporate locallyby 2010?
Twenty six banks anticipate 20 to30 banks to incorporate locally by2010. Two banks expect more than50 banks to incorporate.
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Q What product areas do yousee as becoming increasinglyimportant in the Chinese retailbanking industry in the nextthree years?
Three product categories areexpected to experience rapidgrowth by 2010. They are creditcards, investment products andmortgages.
0
5
10
15
20
25
30
Foreign currency
RMB
Othe
rretail
produ
cts
Taxe
ffective
produ
cts
Le
verage
dinv
estm
entp
rodu
cts
Mortg
ages
Inve
stmentp
rodu
cts
Credit
cards
Based on responses from 40 banks
Number of
banks
In April 2007 media reportsstated that the first four banksto incorporate locally will offeryuan-denominated mortgages,wealth management products anddeposits and loans. The reports
also stated that The Bank of EastAsia plans to waive its accountmanagement fees as a promotionalincentive while HSBC will charge300 yuan a month for value-addedpremium services to customerswith balances below 500,000 yuan.There will be no fees for customerswith balances exceeding thisamount.
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Q What product areas do yousee as becoming increasinglyimportant in the Chinesewholesale banking industry inthe next three years?
The four RMB denominatedproduct areas expected to growby 2010 are interest and crosscurrency swaps, structuredproducts and debt capital marketswith over 25 banks expecting
these areas to become increasinglyimportant.
0
5
10
15
20
25
30
Foreign currency
RMB
Performingloan
trading
NPLtrading
Equity
capitalm
anagementsolutions
Hybrid
financingtechniques
Onlinetransactions
systems
Securitisation
Equity
capitalm
arkets
Debt
capitalm
arkets
Structured
products
Crosscurrencyswaps
Interestrate
swaps
Based on responses from 40 banks
Number ofbanks
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The foreign banks expect a rangeof new entrants into the financialsector. Suggestions on newentrants (some already are present)included:
Auto finance companies suchas Ford Credit, Toyota Finance,GMAC, etc.
Large international insurancecompanies expanding theirfinancial services presence
Private equity firms participatingin some of the domestic banksor financial institutions (forexample, the Carlyle Group withits partner Prudential Financialacquired a 25% stake in ChinaPacific Life in 2005)
Leasing companies such as VWLeasing or Siemens Leasing
Global retailers such asCarrefour which plans to have112 outlets by year end 2007and Wal-Mart (perhaps in acredit card joint venture) whichplans to have 123 outlets
Q Can you name three newentrants from outside thefinancial services industrythat you believe will representa significant threat in thefinancial services market over
the next three years?
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Twenty one different markets wereidentified, covering both retail andinvestment and merchant banking.If the participating banks weredeemed to be active in a particularmarket, they scored their perceived
levels of success on a scale of 1 to5 where 1 was very unsuccessfuland 5 was very successful.
Since 3 is perceived as neutral, tosuggest a degree of measurablesuccess, it is important that theaverage scores for the participants
Q How successful has yourbank been in penetrating thefollowing markets in the lastyear?
in that market exceed 3. Figures inparentheses indicate the numberof participants providing a scorein that particular market. In theradar diagrams appearing on thefollowing pages, a 21-sided frame
based on the value of three hasbeen drawn.
If the line pierces the frame (i.e. theline moves to the outside of thecircle frame), success has beenachieved in that respective market.
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All banks Levels of success
1
2
3
4
Other (2)
Transactional &custodial services (11)
Trade finance (33)
Money marketactivity (26)
Securitiestrading (9)
Foreignexchange (31)
Funds
management (6)
Internet banking (4)
Retirement products (3)
Transaction services (6)
Retail deposits (7)
Consumer loans (2)
Residentialmortgages (3)
Credit cardmarketing (1)
Retail markets (5)
High net worthindividuals (13)
SME lending (18)
SME treasury (17)
Derivatives (24)
Global corporates (18)
Top 100 corporateslending (21)
Top 100 corporatestreasury (20)
Global corporates, derivatives and transactional &custodial services are new categories in 2007
2007
2005
The foreign banks as a grouprepeated average levels of successin their chosen market segments.In most product categories, thescore hovers around 3 out of 5 orneutral in an index of success.
The chart indicates only onecategory, other, where the scoreexceeded 4 out of 5. In one case itreferred to correspondent bankingand in the other home countrycorporates of an Asian bank.
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1
2
3
4
Other (1)
Transactional &custodial services (4)
Trade finance (11)
Money marketactivity (8)
Securitiestrading (3)
Foreignexchange (11)
Fundsmanagement (2)
Internet banking (1)
Retirement products (0)
Transaction services (3) Retaildeposits (4)
Consumerloans (1)
Residentialmortgages (2)
Credit card
marketing (0)
Retail markets (3)
High net worthindividuals (5)
SME lending (9)
SME treasury (6)
Derivatives (7)
Global corporates (3)
Top 100 corporateslending (5)
Top 100 corporatestreasury (5)
Global corporates, derivatives and transactional &custodial services are new categories in 2007
2007
2005
Asian banks Levels of success
The Asian banks in both 2005 and2007 considered themselves tobe successful in trade finance andSME lending.
They scored below 3 among Top100 and global corporates.
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European banks Levels of success
The European banks record onlyaverage levels of success. Fifteenbanks believe they were successfulin trade finance.
1
2
3
4Other (0)
Transactional &custodial services (4)
Trade finance (15)
Money market
activity (13)
Securitiestrading (3)
Foreignexchange (15)
Fundsmanagement (3)
Internet banking (2)
Retirement
products (2)
Transactionservices (2)
Retaildeposits (2)
Consumerloans (1)
Residential
mortgages (1)
Credit cardmarketing (0)
Retail markets (2)
High net worthindividuals (7)
SME lending (7)
SME treasury (8)
Derivatives (14)
Global corporates (12)
Top 100 corporateslending (13)
Top 100 corporatestreasury (11)
Global corporates, derivatives and transactional &custodial services are new categories in 2007
2007
2005
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The North American banksrecorded strong scores in foreignexchange, top 100 corporateslending, global corporates andtrade finance.
North American banks Levels of success
1
2
3
4
Other (1)
Transactional &custodial services (3)
Trade finance (7)
Money marketactivity (5)
Securitiestrading (3)
Foreignexchange (5)
Fundsmanagement (1)
Internet banking (1)Retirementproducts (1)
Transaction services (1)Retail
deposits (1)
Consumer loans (0)
Residentialmortgages (0)
Credit cardmarketing (1)
Retail markets (0)
High net worthindividuals (1)
SME lending (2)
SME treasury (3)
Derivatives (3)
Global corporates (3)
Top 100 corporates
lending (3)
Top 100 corporatestreasury (4)
Global corporates, derivatives and transactional &custodial services are new categories in 2007
2007
2005
As a group they were unsuccessfulin the retail segment, SME lendingand HNW individuals.
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To identify the markets that thebanks believe will be of greatestimportance over the next threeyears, the 40 participants rankedthe following 21 markets on a scaleof 1 to 5.
Q How important are thefollowing markets for yourbank over the next threeyears?
Future importance All banks
1
2
3
4
Other (1)
Transactional &custodial services (14)
Trade finance (36)
Money marketactivity (30)
Securitiestrading (18)
Foreignexchange (34)
Fundsmanagement (15)
Internet banking (15)
Retirement products (10)
Transactionservices (12)
Retaildeposits (18)
Consumerloans (15)
Residentialmortgages (15)
Credit cardmarketing (11)
High net worthindividuals (20)
SME
lending (24)
SME treasury (24)
Derivatives (29)
Global corporates (20)
Top 100 corporateslending (28)
Top 100 corporatestreasury (27)
Global corporates, derivatives and transactional &custodial services are new categories in 2007
2007
2005
Going forward the foreign banksscored above 3 for most segments.
A score of 1 indicates little or noimportance while a score of 5 canbe considered very important.
Since 3 is perceived as neutral,average scores for the group
should exceed 3, and thereforemarkets viewed as importantproject beyond that line.
They attached major levels ofimportance to the top 100 andglobal corporates, trade finance,foreign exchange, retail deposits,high net worth individuals and theSME sector.
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Future importance Asian banks
A group of Asian banks attachedmajor importance to the largecorporates and a sizeable number
1
2
3
4
Other (0)
Transactional &custodial services (7)
Trade finance (13)
Money marketactivity (12)
Securitiestrading (7)
Foreignexchange (12)
Funds
management (7)
Internetbanking (9)
Retirementproducts (5) Transaction
services (7)
Retaildeposits (11)
Consumerloans (9)
Residentialmortgages (9)
Credit cardmarketing (6)
High net worthindividuals (10)
SMElending (12)
SME treasury (9)
Derivatives (9)Global corporates (6)
Top 100 corporateslending (9)
Top 100 corporatestreasury (8)
Global corporates, derivatives and transactional &custodial services are new categories in 2007
2007
2005
also propose to be very active inthe retail sector. Areas such astrade finance and foreign exchangealso received strong scores.
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The European banks assignedhigh importance to the Top 100and global corporates, derivatives,foreign exchange and tradefinance.
1
2
3
4
Other (0)
Transactional &custodial services (4)
Trade finance (15)
Money marketactivity (12)
Securitiestrading (7)
Foreign
exchange (15)
Funds
management (4)
Internet banking (4)
Retirementproducts (4)
Transactionservices (4)
Retaildeposits (5)
Consumer loans (5)
Residentialmortgages (5)
Credit cardmarketing (4)
High net worthindividuals (7)
SMElending (10)
SMEtreasury (12)
Derivatives (15)
Global corporates (10)
Top 100 corporateslending (14)
Top 100 corporates
treasury (13)
Global corporates, derivatives and transactional &custodial services are new categories in 2007
2007
2005
Future importance European banks
A smaller group attached strongimportance to the retail sector.
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Future importance North American banks
The North American bank groupalthough smaller in number thanthe Asian and European bankgroups assigned significant scoresto almost all the different marketsegments.
1
2
3
4
Other (1)Transactional &
Custodial services (3)
Trade finance (8)
Money marketactivity (6)
Securitiestrading (4)
Foreignexchange (7)
Fundsmanagement (4)
Internet banking (2)
Retirement products (1)
Transaction services (1)
Retaildeposits (2)
Consumer loans (1)
Residentialmortgages (1)
Credit card
marketing (1)
High net worthindividuals (3)
SMElending (2)
SMEtreasury (3)
Derivatives (5)
Globalcorporates (4)
Top 100 corporateslending (5)
Top 100 corporatestreasury (6)
Global corporates, derivatives and transactional &custodial services are new categories in 2007
2007
2005
Values closely matchedthose given in 2005 with theexception of consumer loansand mortgages where only oneparticipant provided lower levels ofimportance.
The SME sector demonstrated anincreased level of interest.
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Asian banks European banks North Americanbanks
All banks
2007 2010 2007 2010 2007 2010 2007 2010
Retail banking
Credit cards 3 4 2 5 1 1 6 10
Mortgages 5 7 3 4 1 1 9 12
Term deposits 5 8 6 5 1 1 12 14
Internet banking 1 5 3 5 1 1 5 11
Transaction & custody services 2 3 4 5 1 1 7 9
Private banking 5 7 5 5 1 2 11 14
SME lending 7 8 3 5 1 1 11 14
SME venture capital 2 3 1 3 1 1 4 7
Wholesale banking
Bonds 1 4 8 11 1 3 10 18
Treasury/FX/money market 9 10 14 15 5 6 28 31
Corporate banking 10 11 15 16 4 4 29 31
Project financing 7 8 10 12 2 2 19 22
Investment banking 7 8 10 13 3 4 20 25
Corporate finance 7 9 8 11 3 3 18 23
Trade finance 10 10 15 16 6 7 31 33
Correspondent banking 5 6 10 11 6 6 21 23
Wealth management 2 2 0 1 0 1 2 4
Funds management 1 4 6 7 0 1 7 12
Life insurance/risk products 1 3 2 4 0 1 3 8
To disguise the identity ofindividual banks, the 36 banksthat responded to this questionhave been grouped into Asianbanks, European Banks and NorthAmerican banks.
The results suggest that around 12banks plan to be active in the retailarena. The Asian banks will makeup almost half of this group.
Q Which of the following areasare you presently involved inor plan to be in by 2010?
Present and future product areas by number of respondents
At least 14 banks plan to be activein private banking and small andmedium enterprise lending by2010. Not all banks seeking toincorporate locally plan to enter theretail banking market.
On the wholesale banking side,most participants are already activein core areas such as corporatebanking, treasury/FX/moneymarket and trade finance.
The bond market will becomeincreasingly important.
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Q Will your business modelchange over the next threeyears?
In 2005, almost three quarters ofrespondents said their businessmodel would change by 2008. Thatresponse fell to just over half in2007 looking forward to 2010.
No Yes
Based on responses from 39 banks in 2007
and 34 banks in 2005
20072005
0 5 10 15 20 25
Other
State of the economy
Parent bank strategy changes
Increasing competition
Increasing customer demands
Product changes
Regulatory change
Number of banks
This suggests that the banksstrategies are becoming moredefined in the new post WTOenvironment. Sixteen banks saidtheir model would not change by2010.
The primary influence on strategycontinues to be regulatory changefollowed by product changes andincreasing customer demands.
The pace and direction ofregulatory change continues todictate the strategic responses ofthe foreign banks.
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No
Yes
Based on responses from 33 banks
Of the 33 banks that responded tothis question, 31 banks indicatedthat they would implement theirparents systems.
One of the requirements of local
incorporation requires that banksselecting this vehicle will berequired to maintain full control oftheir operational systems in China.
Q Will the local operationprimarily implement parentsystems?
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Q Below are a list of strategicoptions that your bankmay choose to increase itspresence in the Chinesemarket. Can you scoreon a scale of 1 to 10 the
attractiveness of each option?
As in 2005 the most popularstrategic option for expansion inChina remains organic growthfollowed by partnership with acommercial bank.
Creating a new financial entityincreased its attractiveness scorein 2007.
0
2
4
6
8
10
2005
2007
Partn
erwith
anoth
erforeig
nba
nk
Partn
erwith
anHK
,Taiw
an,Sing
aporea
nba
nk
Create
anon
bankf
inancial
institu
tion
Partn
erwith
aBig
4bank
Create
anew
fina
ncial
entity
Partn
erwith
ajoint
stockc
ommercia
lbank
Orga
nicgrowth
Based on responses from 37 banks in 2007and 35 banks in 2005
Number ofbanks
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Q On a scale of 1 to 5, where5 represents greatestimportance, if you were tochoose a joint venture howimportant would the followingconcerns be to your bank in
China?
If a foreign bank was to select ajoint venture relationship then thegreatest concern would be itsability to exercise managementcontrol. The pattern of other issuesthat are important in a joint venture
relationship remain unchanged.
0 1 2 3 4 5
2005
2007Ability to integrate
non bank financial services
Ability to build in
exit mechanisms
Ability to leverage
JV involvement
Ability to increase stake indomestic financial institutions
Protection of
foreign investors rights
Ability to exercise
management control
Based on responses from 35 banks in 2007
and 35 banks in 2005
Maximum score is 5
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Performance
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The chart indicates the rate ofrevenue growth anticipated by 37respondents.
Four banks anticipate 100%growth in 2007 and another 10
banks envisage growth between50% and 100%. Only six of the37 respondents predicted revenuegrowth of less than 20% in 2007.
Q What is your estimate of theannual growth in revenues ofyour business for 2007 andover the next three years?
0
20
40
60
80
100
Bank3
7
Bank3
6
Bank3
5
Bank3
4
Bank3
3
Bank3
2
Bank3
1
Bank3
0
Bank2
9
Bank2
8
Bank2
7
Bank2
6
Bank2
5
Bank2
4
Bank2
3
Bank2
2
Bank2
1
Bank2
0
Bank1
9
Bank1
8
Bank1
7
Bank1
6
Bank1
5
Bank1
4
Bank1
3
Bank1
2
Bank1
1
Bank1
0
Bank9
Bank8
Bank7
Bank6
Bank5
Bank4
Bank3
Bank2
Bank1
Percentage
growth
Based on responses from 37 banks
2007
2010
By 2010, one bank continuesto expect 100% growth while afurther eight banks plan growth tobe 50% or greater. Only four banksforecast annual growth below 20%in 2010.
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The performance of the foreignbanks has improved since 2005.
Q In the next three years, do youthink profits for your bank willbe greater than at present,as at present or less than atpresent?
Optimism on profit performanceis also apparent in this relatedquestion which suggests that all 39
Q Over the last three yearsin the market, have yourbanks profit expectationsbeen greater than expected,as expected or less thanexpected?
Less than expected
As expected
Greater than expected
Based on responses from 34 banks in 2005and 38 banks in 2007
2007
2005
Greater than at present
Based on responses from 35 banks in 2005and 39 banks in 2007
As present
2005
2007
The level indicating profits greaterthan expected has expanded to50% while the less than expectedcategory has declined from sevenbanks to four banks.
respondents expect their profits tobe greater in 2010 than at present.
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To ascertain which bank segmentshave recorded contrasting levels ofprofitability, the banks were askedto identify levels of return frommarket sectors in which they wereactive.
The overall pattern of profitabilityportrays improved profitability in allsegments in 2007 relative to 2005.
For example, in the retail bankingarea no banks fell above marginallyprofitable in 2005. By 2007, fourbanks were in this category.
Bank profitability ina number of differentsegments over the last year
Retail banking
Loss 30%
Corporate banking
Investment banking
Private banking
Treasury
Internet banking
Wealth management
Life insurance
Individual banks
Credit cards
In 2005, 20 banks were marginallyprofitable in corporate bankingand 10 banks were profitable orvery profitable. In 2007, 28 bankswere profitable, very profitable orextremely profitable in corporate
banking.
The pattern repeats in privatebanking where seven banks areprofitable or above and in Treasury,where the number in profitable orabove expanded from 14 banks in2005 to 19 banks in 2007.
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The foreign banks providedinsight into their loan portfolios byrevealing the percentage of loansto Chinese-based corporates,global corporates, home countrycorporates, Chinese banks and
foreign banks (a home countrycorporate would be a loan to aKorean corporate, granted by aKorean bank).
Q Can you provide some moredetails on your loan portfolio?
Based on responses from 36 banks
To Chinese-basedcorporates
To globalcorporates
To home countrycorporates
To Chinesebanks
To foreignbanks
Other Total
Asian bank 10 60 20 10 100
Asian bank 80 10 10 100
Asian bank 20 8 48 24 100
Asian bank 20 80 100
Asian bank 10 55 35 100
Asian bank 60 20 15 5 100
Asian bank 100 100
Asian bank 5 5 90 100
Asian bank 10 80 10 100
Asian bank 10 30 50 5 5 100
Asian bank 10 15 65 10 100
Asian bank 5 40 45 10 100
Asian bank 22 70 8 100
European bank 10 40 20 15 15 100
European bank 20 80 100
European bank 4 90 4 2 100
European bank 10 90 100
European bank 40 40 10 10 100
European bank 10 60 20 8 2 100
European bank 20 60 20 100
European bank 25 55 15 5 100
European bank 100 100
European bank 60 30 10 100
European bank 50 20 30 100
European bank 90 5 5 100
European bank 90 5 5 100
European bank 34 5 12 35 14 100
European bank 100 100
European bank 50 25 20 5 100
European bank 15 45 20 20 100
North American bank 100 100
North American bank 30 35 10 20 5 100
North American bank 50 25 25 100
North American bank 60 20 10 8 2 100North American bank 60 25 15 100
North American bank 100 100
Thirty six banks provided data and29 banks had loans to Chinesecorporates, 27 to global corporatesand home country corporates, 29to Chinese banks and 11 to otherforeign banks. Eight banks (Asian
and European) had more than50% of their portfolios with globalcorporates.
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Q What percentage of yourbusiness in terms of bankingrevenue is undertaken in thefollowing business lines?
Thirty five banks provided anestimate of their revenue across19 different lines of business.To respect confidentiality theregional location of the banks wasomitted from this table. In a few
cases, banks were only willing tobreakdown revenue by retail versuswholesale/investment banking.
Retailbanking
Mortgages Termdeposits
SMElending
Wholesale/investment
banking
Bonds Treasury/FX/money
market
Corporatebanking
Projectfinancing
Investmentbanking
Corporatefinance
Tradefinance
Corresp.banking
Wealthmanagement
Total
Bank 1 30 70 100
Bank 2 10 30 20 10 30 100
Bank 3 90 10 100
Bank 4 10 90 100
Bank 5 10 10 20 5 30 10 15 100
Bank 6 10 50 10 30 100
Bank 7 30 20 50 100
Bank 8 50 25 25 100
Bank 9 80 20 100
Bank 10 5 10 5 70 10 100
Bank 11 70 10 10 10 100
Bank 12 10 80 10 100
Bank 13 20 20 60 100
Bank 14 30 70 100
Bank 15 25 30 45 100
Bank 16 10 80 10 100
Bank 17 20 30 10 40 100
Bank 18 25 50 25 100
Bank 19 10 50 40 100
Bank 20 30 40 30 100
Bank 21 5 90 5 100
Bank 22 20 80 100
Bank 23 30 20 40 10 100
Bank 24 10 30 10 30 20 100
Bank 25 5 80 15 100
Bank 26 5 30 50 5 10 100
Bank 27 35 25 25 15 100
Bank 28 5 15 80 100
Bank 29 60 40 100
Bank 30 5 30 60 5 100
Bank 31 5 95 100
Bank 32 30 50 10 10 100
Bank 33 90 10 100
Bank 34 100 100
Bank 35 90 4 6 100
A further five areas were included in this question: credit cards, internet banking, transaction and custody services, SME venture capital and private banking. However the respondents reported no revenue in any ofthese areas. As a result the columns have been eliminated.
As a result the table displays, forinstance, a 30:70 line split but nofurther detail. The most populatedcolumns relate to the Treasury andcorporate banking. Trade financewas a source of revenue to 19
banks and generates over 80% ofrevenue for two banks.
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Peer review
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First Second Third Score ChangeCitibank 12 7 3 53
HSBC 6 10 4 42
Standard Chartered 1 2 9 16
Deutsche Bank 2 2 1 11
JPMorgan Chase 2 1 2 10
ABN AMRO 2 1 8
Bank of Montreal 1 3
The Bank of East Asia 1 1
BOTM UBJ 1 1
Lehman Brothers 1 1
Based on 26 banks
Q Can you name the top threebanks in terms of success(performance, presence,momentum, etc.) across avariety of different markets?
Treasury
A simple scoring method awardedthree points to first place, twopoints to second and one point tothird place. This allowed the banksto be ranked based on a totalscore.
Banks were asked not to record anopinion unless they were active inthat segment and were comfortablein providing an accurate rankingin terms of success (performance,
Foreign exchange First Second Third Score Change
Citibank 13 11 1 62
HSBC 7 11 7 50
Standard Chartered 2 1 13 21
Deutsche Bank 4 1 1 15
ABN AMRO 1 1 4
JPMorgan Chase 2 4
Mizuho Bank 1 3
UBS 1 1 3
Socit Gnrale 1 2
BOTM UBJ 1 1
Bank of Montreal 1 1
Based on 28 banks
presence and momentum) asopposed to mere size.
They were not permitted to ranktheir own institution. Often bankswould choose just to indicate first
or second places.
The Change column indicateswhether the ranking has moved up,down or remains unchanged fromthat recorded in the 2005 survey.
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Corporate lending
Derivatives First Second Third Score
Citibank 11 2 3 40
HSBC 1 9 3 24
Deutsche Bank 3 2 5 18
JPMorgan Chase 4 12
Socit Gnrale 1 2 1 8ABN AMRO 1 2 7
Goldman Sachs 1 2 7
Standard Chartered 1 5 7
UBS 1 3
BNP Paribas 1 3
Credit Suisse 1 1 3
Sumitomo Bank 1 2
Merrill Lynch 1 2
The Bank of East Asia 1 2
BOTM UFJ 1 1
Morgan Stanley 1 1
RBOS 1 1
Based on 24 banksNew category in 2007 therefore no change
First Second Third Score Change
HSBC 15 10 3 68
Citibank 10 5 5 45
Standard Chartered 3 10 9 38
The Bank of East Asia 1 4 6
Mizuho Bank 1 1 5
BOTM UFJ 1 2 4
DBS 1 1 3
Deutsche Bank 1 1
Socit Gnrale 1 1
BNP Paribas 1 1
Based on 29 banks
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Mergers and acquisitions
Corporate finance First Second Third Score Change
Citibank 9 1 1 30
Goldman Sachs 3 3 15
HSBC 1 5 1 14
Deutsche Bank 1 1 2 7
ABN AMRO 1 3 6 Morgan Stanley 1 1 1 6
Standard Chartered 1 1 1 6
UBS 1 1 5
JPMorgan Chase 2 1 5
BOTM UFJ 1 1 3
BNP Paribas 1 2
Socit Gnrale 1 1
Bank of America 1 1
Based on 18 banks
First Second Third Score Change
Morgan Stanley 4 5 1 23
Goldman Sachs 6 2 22
Citibank 5 3 21
HSBC 1 2 7
JPMorgan Chase 1 5 7
UBS 2 6
ABN AMRO 1 1 3
Deutsche Bank 1 1 3
The Bank of East Asia 1 2
Merrill Lynch 2 2 Standard Chartered 1 1
Lehman Brothers 1 1
Based on 18 banks
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Trade finance First Second Third Score Change
HSBC 13 5 49
Standard Chartered 6 5 5 33
Fortis 5 1 17
Citibank 6 5 17
BOTM UBJ 2 6 JPMorgan Chase 1 1 5
DBS 1 2 4
ABN AMRO 1 1 3
ANZ Bank 1 1 3
ING 1 2
Nord DeutscheLandesbank
1 2
The Bank of East Asia 1 2
Mizuho Bank 1 2
RZB 1 1
Sumitomo Mitsui 1 1
Hang Seng Bank 1 1
Deutsche Bank 1 1
Wachovia 1 1
Based on 27 banks
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Credit cards
Retail banking First Second Third Score Change
HSBC 15 7 3 62
Citibank 10 8 4 50
Standard Chartered 5 14 24
The Bank of East Asia 3 4 10
ABN AMRO 1 2 1 8 Hang Seng Bank 1 2
Based on 26 banks
First Second Third Score
Citibank 9 5 37
HSBC 6 7 2 34
Standard Chartered 2 6 10
The Bank of East Asia 1 1 4
Based on 16 banksNew category in 2007 therefore no change
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Appendices
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Methodology 62
Bank groups 63
Participants 64
Background comments on participants 65
Foreign ownership in Chinese banks 75European Chamber Bank Working Group KeyRecommendations 2006 76
CBRCs Report on the Opening-up of the Chinese Banking Sector,January 2007 77
Chinese banks ranked by Tier 1 capital and assets 92
Appendices
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Methodology
Previous experience has shown that personal interviews with seniorbankers using a standard questionnaire offers the best researchapproach. The questionnaire contained 40 questions and was completedduring interviews of approximately one hour. The author conducted allinterviews between January and March 2007 in Beijing, Hong Kong,Shanghai, Shenzhen and Tianjin.
Responses have not been attributed to individual banks but rathercollectively within three groups: Asian banks (14), European banks (18)and North American banks (8).
At times, individual banks declined to answer particular questions orwere unable to provide sufficiently accurate data. This is noted whereapplicable.
The time commitment and support by all banks in this survey wasoutstanding.
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Bank groups
Bank groups
The information provided has beenconsidered proprietary and remainsconfidential. Results are thereforepresented in a disguised group
format, in the form of regionalgroups of banks. The members ofthe bank groups are as follows:
Asian banks:
ANZ Banking Group
Business Development Bank
Dah Sing Banking Corporation
DBS
First Sino Bank
Hang Seng Bank
Industrial Bank of Korea
Korea Exchange Bank
Maybank
Mizuho Corporate Bank
OCBC
As ANZ Banking Group was the only Australian bank to beincluded in the survey it has been grouped with the Asianbanks for convenience.
Shinhan Bank
The Bank of East Asia
Wing Lung Bank
European banks:
ABN AMRO
BNP Paribas S.A.
Calyon
Deutsche Bank
Dresdner Bank
Fortis Bank
HSBC
ING Bank
KBC Bank
Natexis Banque Populaires
Norddeutsche Landesbank
Rabobank
Raiffeisen ZentralbankOsterreich AG
Royal Bank of Scotland
Sanpaolo Imi Bank
Socit Gnrale
Standard Chartered Bank
UBS
North American banks:
Bank of America
Bank of Montreal
Bank of Nova Scotia
Citibank
JPMorgan Chase Bank
Royal Bank of Canada
The Bank of New York
Wachovia Bank
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Asian bank group
Asian banks
World rankingThe Banker, July 2006
Home countryranking
Background commentsTier 1 Assets Tier 1
First Sino Bank
270 employees
www.fsbankonline.com
N/A N/A N/A First Sino Bank, founded in 1997 in Shanghai, isthe first joint-venture bank in China established byTaiwanese investors and a Chinese bank. While
85% of its shares are held by the Hong Kong-registered Lotus Worldwide Ltd., Shanghai PudongDevelopment Bank and Wing Hang Bank also hold10% and 5% ownership respectively. First SinoBank offers consumer banking, corporate bankingand wealth management services.
Hang Seng Bank
1,500 employees
www.hangseng.com
N/A N/A N/A In April 2007, Hang Seng Bank opened its seventhoutlet in Shanghai, expanding its network inmainland China to 17 outlets. Founded in 1933,Hang Seng Bank is a principal member of theHSBC Group. It operates around 150 branchesand automated banking centres and 13 business
banking centres in Hong Kong.Industrial Bank of
Korea
80 employees
www.ibk.co.kr
133 123 7 Industrial Bank of Korea (IBK) is one of Koreaslargest financial institutions, with approximatelyUS$6,579 million in revenues, US$4,696 millionin capital and US$84 billion in assets at year-end2005. Established in 1961 under the IndustrialBank of Korea Act by the Korean government, IBKserves Koreas small and medium-sized enterprises(SMEs) as the nations sole SME-focused bank.IBK has over 8,000 employees in 400 domesticbranches and six international branches located inNew York, Tokyo, Hong Kong, Tianjin, Qingdao andShenyang.
Korea Exchange Bank
100 employees
www.keb.co.kr
131 150 6 The bank has 296 domestic branches, eightoverseas subsidiaries and 16 overseas branchesin the United States, Europe, Asia, China, Japanand other countries. KEB posted a net profit of1.006 trillion won in 2006, following a record highprofit level of 1.93 trillion won in 2005. The bankcontinued to make over 1 trillion won in net profitfor the two consecutive years.
The background comments were taken from the respective banks websites in April 2007
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European bank group
European banks
World rankingThe Banker, July 2006
Home countryranking
Background commentsTier 1 Assets Tier 1
ABN AMRO
1,500 employeeswww.abnamro.com
15 13 1 ABN AMRO is a prominent international bank, itshistory going back to 1824. ABN AMRO ranks11th in Europe and 20th in the world based on Tier
1 capital, with over 3,000 branches in more than60 countries, a staff of more than 97,000 full-timeequivalents and total assets of EUR 742.9 billion(as at 31 March 2005).
BNP Paribas
150 employees
www.bnpparibas.com
24 6 2 BNP Paribas operates in over 85 countries, andhas 138,000 employees, including 51,600 inEurope, among whom are 20,400 in Italy, 56,100 inFrance and in the overseas departments, 15,100 inNorth America and 5,200 in Asia.
Calyon
120 employees
www.calyon.com
6 7 1 Formed in May 2004, Calyon is the Crdit AgricoleGroups corporate and investment bankingentity. Calyon has some 15,000 staff (in May
2004) enabling it to support its large corporateclients, financial institutions, and its regionalcustomer base of French SME/SMIs. Calyonsbusiness activities are focused on capital markets,investment banking and financing services, aswell as international private banking. With overa century of activity in China, Calyon has fivefully operational branches. Calyon China alsoprovides equity brokerage, distribution and directinvestment capabilities via CLSA.
Deutsche Bank
450 employees
www.deutsche-bank.de
23 12 1 Deutsche Bank offers financial services in 73countries, holds EUR 1,126 billion in assets, andhas 68,849 employees from 130 nations. DeutscheBank first established a presence in China in 1872in Shanghai. Deutsche Bank now maintains branchoffices in Beijing, Shanghai and Guangzhou. InOctober 2005, the bank and private bank Sal.Oppenheim bought a 14% interest in Huaxia Bank,a nationwide bank listed on the Shanghai StockExchange. Deutsche Bank and Huaxia Bank willcooperate in a wide range of fields including creditcard issuance.
The background comments were taken from the respective banks websites in April 2007
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European bank group
European banks
World rankingThe Banker, July 2006
Home countryranking
Background commentsTier 1 Assets Tier 1
Dresdner Bank
55 employees
www.dresdner-bank.com
44 29 4 With around 950 branch offices and about 27,625full-time staff, the Dresdner Bank Group is active insome 50 different countries. Dresdner has offices
in Shanghai, Hong Kong, Beijing and Guangzhou.Dresdner offers a broad range of corporate andinvestment banking services to institutions basedboth in China and overseas. Dresdner Bank isa member of the Allianz Group, which is activein China in all key business segments, includingproperty and casualty insurance, life insurance andasset management.
Fortis Bank
80 employees
www.fortis.com
33 22 1 With a market capitalisation of EUR 39 billion,Fortis ranks among the 20 largest financialinstitutions in Europe. It has a sound solvencyposition, presence in 50 countries and has a
workforce of 58,000.HSBC
3,000 employees
www.hsbc.com
2 4 1 Headquartered in London, HSBCs internationalnetwork comprises around 10,000 offices in 82countries. HSBC has invested more thanUS$5 billion in mainland financial services entitiesincluding an 8% stake in Bank of Shanghai, a19.9% stake in Ping An Insurance and a 19.9%stake in Bank of Communications.
ING Ba