With gradual and successive financial reforms taking place in China, foreign banks are optimistic about their future in China, reveals Ernst & Young's report “Future Direction for Foreign Banks in China.”
In the second half of 2013, a series of financial reforms were announced, including the internationalisation of the Renminbi, interest rate liberalisation and the establishment of the Shanghai Free Trade Zone.
“All of these are good news for the foreign banks in China. Any move toward a more open, transparent and less regulated financial marketplace will be broadly welcomed,” says Jack Chan, Managing Partner, Financial Services of EY Greater China. “However, the benefits for the foreign bankers also significantly depend on the scope, interpretation, timing and implementation of the proposed changes.”
With the further opening up and internationalisation of the RMB market, foreign banks hope to benefit from expanded trade financing developments, a rise in both inward and outward investment flows, and a dramatic growth in foreign exchange opportunities. New product offerings will accompany the internationalization.
Many participants in the report contended that they are already capitalising on the idea of RMB offshore centers. These hubs will serve future opportunities of RMB deposits, clearing and FX trading.
Following the previous expectations on Shanghai becoming an international financial center by 2020, the recent announcement of the Shanghai Free Trade Zone (FTZ) adds momentum and excitement to the fulfillment of Shanghai 2020.
Report participants agreed that the FTZ allows banks to introduce new services and expand more rapidly in China. As suggested by initial media reports, there will also be further attractions for foreign banks, such as the relaxation of controls, faster approval processes and new cross-border-financial services opportunities.
Chan, however, added that further clarification is needed to fully understand the benefits of establishing an operation inside the FTZ.
The report also reveals that foreign banks believe that interest rate liberalisation holds the key to the rebalancing of the Chinese economy. Despite the possible short term effect on profitability, foreign banks are confident in their superior risk management skills to turn the market initiative to their advantage.
Despite the optimism, foreign banks still see challenges in China. China’s complex regulatory environment continues to be one of their major issues. The many rules and regulations as well as the continuing capital and liquidity constraints pose obstacles to foreign banks. They express their hopes to see a revision of critical regulations such as the foreign debt quota and the loan to deposit ratio.
The report further highlights the issue of skills shortage and talent management in face of the challenging environment in China. Relationship bankers in corporate sector, legal and compliance personnel, and risk management personnel are the top three bank positions in greatest demand among a list of 17.
Among the CEOs and senior executives from the 38 foreign banks interviewed, 33 experienced interest rate margin compression. Profits might be affected given that many of them depend on corporate lending. In response, the foreign banks plan to grow fee income, rebalance their loan portfolios and re-price their loans if possible.
In the future, foreign banks hope to offer a wider range of services in the domestic market. As revealed in the report, foreign banks have continued to chip away at the Chinese financial market. They have recently sought to broaden involvement through investment in trust companies, securities companies and asset management companies.
Some banks also have deliberate strategies to expand across the financial sector with hope to leverage the potential synergy.
As Chinese corporates continue to expand internationally through acquisition and greenfield investment, foreign banks will also seek to develop their advisory role both offshore and onshore. Over 30% of the participants believe that corporate advisory services will increase significantly.
Looking into the future, foreign banks expect a modest improvement in performance over the next three years. 25 banks expect to see a slight improvement while seven banks more optimistically forecast a significant improvement.