Despite the headwinds of the financial crisis, foreign banks remain committed to their operations in China. But market share increases will become an issue due to reduced trade flows and stronger competition from the Big Four domestic banks. These are two of the main findings of the 2009 survey of foreign banks in China by PricewaterhouseCoopers (PwC).
The annual survey looks at the strategic issues facing foreign banks. The professional services firm interviewed the CEOs, senior executives and branch managers of 41 foreign banks. Conducted in April and May, the interviews took place in Beijing, Shanghai, Hong Kong and Shenzhen.
The survey asked management about the bank's attitude towards China compared with other markets. They were asked to answer with a score between one and 10. While there was a slight decrease on last year's survey, the banks expressed a strong commitment, with an average score of 8.4. US banks, which are some of the hardest hit by the crisis, offered a highly committed score of 9. The report points out one US bank which offered the statement that "almost nothing" would alter their commitment. European banks, however, dropped to 7.8 from 8.7.
This is not to say that the financial crisis has not affected the banks, since just under half of the respondents admitted that recent events have changed their business plans. The most common impact is that expansion plans are slowing down. Other changes include an increased focus on the liability side of the business due to liquidity issues in late 2008, the drying up of trade finance, and a shift to wholesale banking.
There are currently 26 foreign banks incorporated in China. The report suggests that this could increase to 40 in the next couple of years. The surveyed banks said that they feel pressured to incorporate by the regulator, but they also pointed out that the requirements to incorporate, such as the loan/deposit ratio, were too burdensome. One European bank said: "We don't want to go retail but the regulator wants us to do it. They will close the door."
The opportunities for growth seem less promising than before. Last year, the vast majority of respondents thought that the aggregate market share of foreign banks would increase and a minority thought it would stay the same. This year paints a very different picture; respondents were fairly evenly split between those who thought that it would increase, those who thought it would stay the same and those who thought it would decrease.
The banks that believe market share will increase in size based their optimism on their global client relationships, their product range and capabilities as well as the lifting of government restrictions. More pessimistic respondents cited competitive pricing by the Big Four domestic banks, a decrease in trade flows, and for the banks that have not yet received incorporation, an unlevel playing field.
Human resources issues became less of an issue as staff turnover decreased. In 2007, 20 of the surveyed banks reported a staff turnover of more than 20%. This year, only two banks saw such a high level of turnover.
Just one bank this year said that it was going to decrease the base salary for its employees. In 17 banks, salaries are expected to go up, with increases of between 3% and 10%. One bank admitted that for the past seven years, its employees received annual increases of 30%. It also said that this excessive trend will finish this year. Bonuses and incentives are expected to remain the same in most banks. Only four banks said that they would increase bonuses this year.
With regards to expanding the team. Most banks answered that if they were in hiring mode, they would be looking for relationship bankers on the corporate side of the business. Legal and compliance staff were the next most sought after, with treasury bankers coming in third.
Banks said it had become less difficult to hire in the current environment. One bank commented that it would not start hiring for two years.