Foreign banks operating in China have had to adjust to new challenges following the global economic crisis. Increased competition from domestic banks and a demanding regulatory environment have affected the speed and scope of their expansion in China, according to the fifth PricewaterhouseCoopers' Foreign Banks in China survey.
For the first time in the five years that PwC has conducted the survey, the 42 foreign banks that took part this year identified increasing competition from domestic lenders as the biggest challenge. China's massive stimulus package in 2009 led to a lending boom by local banks, sidelining many of the foreign banks that have traditionally focused on the corporate lending market. Some foreign players also expressed concern that the loan surge could lead to a potential rise in non-performing loans in 2011 and 2012.
"The foreign banks now see their domestic counterparts as formidable competitors. With their extensive branch networks and rising service expertise, Chinese lenders are much better placed to fend off competition from foreign banks. In areas such as wealth management, cards and internet banking the domestic banks are continually lifting their game, forcing foreign banks to compete based on a superior level of service," says Mervyn Jacob, PwC Financial Services Leader for China and Hong Kong.
As in the past surveys, the regulatory environment remains a source of concern, says PwC. The foreign banks now have to deal with increased tightening of regulations, including guidelines on new account openings, confirmation of account balances with their customers, new restrictions on property mortgages, and the rollout of wealth management products. Going forward, the foreign banks expect regulations to tighten further.
Despite these challenges, foreign banks continue to stake their future in China. "Foreign banks have been working hard in the last year to expand their reach across China. More are now opting for local incorporation, and for those who have, they are opening new branches. Inorganic growth is also an area of focus, with the banks looking to make investments in areas such as asset management, private equity firms and trust and securities companies," adds Jacob.
The study also revealed that annual revenue growth prospects have improved for many foreign banks in China. Most expect an increase of between 10% to 20% in 2010. The optimism reinforces the fact that China remains a key market for the future growth of foreign banks, while the market becomes increasingly competitive.