Competition has become fierce for deposits among foreign
banks in China as they scramble to pick up enough deposits to
comply with an end-2011 deadline set by the China Banking
Regulatory Commission. The big players look likely to comply but
there are concerns about smaller banks.


Bar chart shoing profit after tax of foreign banks in China, 2007-2010Foreign banks in China have been scrambling for deposits in
2010 and early 2011 to comply with a regulatory demand that their
loan-to-deposit ratios should not exceed 75%.

The emphasis on deposit gathering
appears to have been successful among most of the big foreign
retail banks surveyed by Retail Banker International and
they are likely to meet the end-2011 deadline.

HSBC, Standard Chartered, DBS and
Citibank are all in compliance and Bank of East Asia (BEA), whose
loan-to-deposit ratio was 77.9% at the end of 2010, has publicly
stated it will meet the requirement.

Of the large foreign-operated banks
in China, only Hong Kong-based Hang Seng Bank, 62% owned by HSBC,
has not publicly stated that it will meet the deadline. However,
the bank has been increasing its deposits rapidly, growing them 76%
in 2010 compared to just a 28% increase in loans and advances.

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All of the banks which gave figures
on deposits are growing them at an impressive rate, although most
are doing so from a relatively low base. BEA, which has the second
largest branch network in mainland China after HSBC, increased
deposits 40.9% in 2010 and had renminbi-denominated deposits worth
HK$149.7bn ($19bn). DBS also saw significant growth – its deposits
doubled in 2010.

Bar chart showing branch networks of locally-incorporated foreign banks in China, 2011



These figures reflect an
industry-wide trend highlighted by the China Banking Regulatory
Commission (CBRC) in its 2010 annual report.

Foreign bank deposits increased 44%
in 2010 to CNY1.06trn ($165bn), according to the report while loans
increased more slowly at 26.6% to CNY913bn.

The scramble for deposits has been
triggered by the closing of a five-year exemption on the 75%
loan-to-deposit requirement given to foreign banks when they first
locally incorporated in China, starting in 2006.

There are concerns some of the
smaller foreign-owned banks in the country may not be able to meet
the CBRC’s 31 December deadline. Media reports suggest four or five
may fail to comply. These banks are being hurt in part by strict
rules on opening branches which reduces their ability to attract
new customers and deposits.

Branch openings are limited for new
banks in China, meaning those which already have large networks –
HSBC, BEA and Standard Chartered – have a big advantage.

Around 70 to 80% of savings
accounts tend to be opened in branches in China, according to Nick
Wilde, Asia-Pacific managing director of Bank Solutions at
technology vendor Fiserv.

“The branch, certainly in our
experience, is a really dominant means of opening savings
accounts,” says Wilde.

“You are up at around 70-80% of
those accounts being opened in branches. Also, most of the people
that have savings accounts will tend to have it with the same bank
they have their current account.”

This may disadvantage the smaller
banks’ deposit-gathering efforts. Wilde, who recently worked on a
core banking project with Shenzhen Rural Commercial Bank in China,
says one solution may be for banks to work on building stronger
online propositions.

“I’m not saying there won’t be an
online-only bank like ING pop up somewhere down the road,” he

“I don’t think there is any reason
for it not to happen. I don’t know whether it will happen next week
or next year. But yes, a branch network, especially if you’re after
that retail consumer, is going to be an important part of the

HSBC, which has the largest branch
network of the foreign banks in China, with 23 full branches and 85
sub-branches, is particularly well placed to take advantage of
consumers’ preference for branch banking compared to its foreign
peers. Its head of retail banking and wealth management in China,
Bonnie Qiu, says the bank has been relatively unaffected by the
loan-to-deposit restrictions.

Table showing peer ranking of banks across banking offerings in China (rated by Chinese bank CEOs)


‘Liquidity strong

“HSBC remains well capitalised with
ample liquidity on the back of strong customer deposits,” she

“Our liquidity is strong enough to
enable us to meet the customer’s banking needs.”

Qiu says that, while the bank’s
retail branch network gives it a big advantage, she also welcomed a
recent shift in the policy stance regarding sales of products
through other channels.

“We already have a clear advantage
that is difficult for other foreign banks to match,” she says. “We
remain committed to expand our network and channels as fast as
regulators allow.

“In addition, we are delighted with
the direction of the regulation towards permitting multi-channel
sales, thus allowing us to develop a competitive channel to
complement our branch distribution.”

The CBRC’s loan-to-deposit deadline
is one of a number of regulatory requirements foreign-owned retail
banks operating in China have needed to comply with this year.
China’s regulators have also placed stringent reserve requirements
on all banks in order to try and slow inflation.

The country’s consumer prices index
is currently running at 6.5% and the People’s Bank of China (PBOC),
China’s central bank, has decided to implement the reserve
requirements as an additional tool to interest rates, which it has
already raised three times this year.

Table showing foreign bank operations in China (2004-2010)



It has raised the reserve
requirement for banks six times in 2011.

The level varies for banks
depending on their size – the ratio for China’s biggest lenders is
21.5%. At HSBC, the largest of the foreign banks in China, the
reserve requirement figure increased from 13.5% in December 2009 to
17.5% in March this year.

In recent regulatory filings, both
HSBC, Hang Seng Bank and BEA all highlighted increased regulation
and tightening monetary policy as among the primary challenges
facing their businesses in China.

This feeling is reflected across
the industry, according to a report on the Chinese banking industry
produced by professional services firm PwC earlier this year. It
highlighted a host of concerns regarding retail banking regulation
which were voiced by foreign financial companies operating in the

They include:

  • the tightening of liquidity
    with increases in interest rates and reserve
  • a feeling the banking sector
    in China is healthy and that regulators may be being overly
    cautious. Some banks says their policies may even precipitate
    problems which are not currently there;
  • the administrative burden
    and regulatory environment placed on smaller foreign
  • one European bank says that
    prudential ratios imposed by the CBRC limits their ability to meet
    the needs of their core customers.

The regulatory environment in China
has meant many of the leading retail banks have pursued very
similar business strategies in the country. All of the big six
foreign banks operating in the country are targeting affluent and
emerging affluent customers through a combination of traditional
retail banking products and wealth management-focused services.

There has been a big focus recently
on acquiring customers in the emerging affluent bracket – those
with incomes of between $20,000 and $100,000. Both HSBC and
Standard Chartered have launched products in China designed to do
this as part of their wider Asia-Pacific campaigns – HSBC with
Advance and Standard Chartered with Preferred Banking.

“Our own research has shown that
many of the needs of the emerging affluent segment are not being
met,” says Kelvin Lawrence, chief operating officer of Preferred
and Personal Banking at Standard Chartered.

“First and foremost, emerging
affluent customers are not recognised by banks as a special
category and are usually serviced as a part of a larger common
group. They have a strong aspiration to be treated differently.

“Secondly they are demanding and
want to be rewarded faster and better than others. Thirdly, this is
a generation on the go, with a lot of work and family commitments.
Members of this group are looking for convenient and hassle-free
banking services across all channels.

“Finally, many of them are
inherently self-directed, but still like assistance on demand when
it comes to making key financial life event decisions.”

One in four emerging affluent
individuals in Asia are likely to become affluent in the next three
years, according to the Standard Chartered research. This segment
and this type of service is likely to be important to foreign banks
in China as a means of acquiring new clients and then providing
them with higher margin wealth management services as they become

Another prerequisite for serving
Chinese customers is a strong banking network across the Greater
China region, including Hong Kong and Taiwan – mainly for corporate
clients but also for retail and wealth management customers.

HSBC has been strengthening
collaboration between its offices in mainland China, Taiwan and
Hong Kong to promote cross-site referrals. This enables it to serve
clients in China with onshore products and, where the need arises,
to support business and wealth requirements like overseas
expansion, financing or risk management, generally from Hong

Banks are also starting to identify
niche segments within China as their experience of operating in the
country grows.

One particular sub-segment being
pursued by HSBC revolves around the increasing interest among
parents in China to send their children to school abroad.

The bank has designed a set of
products and services which can help parents throughout this
process, from saving to send their children to an international
school to providing credit cards and money transfer services when
they are there.

“Through HSBC Premier, we can help
families save over the medium term for this goal,” says Qiu.

“At the same time, for our
customers with children studying overseas or planning to go abroad
for overseas study, we can help them prepare their children to cope
financially away from home – including services such as getting
overseas accounts and credit cards ready before their children’s
departure – though this is subject to local regulations.

“We also offer Premier’s Global
Transfer service, with which parents can transfer funds to the
designated accounts, and send emergency cash when needed.”


Key players


HSBC has the widest branch networks
of the foreign banks operating in China with 108 outlets
altogether. Twenty-three of these are fully fledged branches and 85
are sub-branches.

China represents HSBC’s most
profitable market outside of Hong Kong, where it has a dominant
market position through its wholly-owned subsidiary Hong Kong
Shanghai Banking Corporation and 62%-owned Hang Seng Bank.

Mainland China represented $2.7bn
in profit before tax for HSBC in 2010, compared to $6.7bn in Hong
Kong, $679m in India, $524m in Singapore and $401m in Malaysia.

HSBC has around 5,000 staff in
China, according to a 2010 Bloomberg report.


Bank of East

Bank of East Asia (China) has the
second-largest branch network in mainland China with 21 branches
and 70 sub-branches.

It expanded its retail loan book by
10.9% in 2010 and grew deposits by 40.4%. Its impaired loan ratio
was 0.07%.

BEA China grew its branch network
in 2010, adding two full service branches in Suzhou and Zhengzhou
and 16 sub-branches. These sub-branches included the opening of two
“cross-location” sub-branches, a new option offered to Hong
Kong-based banks in 2009.

The cross-location branches help
banks serve customers who frequently travel between Hong Kong and
the mainland. BEA also has 400 ATMs in the country. Around 42% of
BEA’s 11,412 staff are employed in China.



Income in Standard Chartered’s
China business rose 19% to $204m, with “strong advances growth” and
improving deposit margins, according to the bank’s 2010 annual

However, operating expenses
increased more quickly, rising 20% to $274m, meaning the bank made
an operating loss of $78m in the country.

This was a result of continued
investment in the business, according to the bank. Standard
Chartered has aggressively increased its staff in the country
during the year and also opened nine new branches.

The bank saw particularly strong
growth in its cards, personal loans and unsecured lending business
but did not provide figures. Standard Chartered has around 4,000
employees in the country.


Hang Seng

Along with BEA, Hang Seng Bank
emphasises the cross-border benefits it can offer to consumers who
frequently travel between Hong Kong and mainland China. It opened
two cross-location sub-branches in 2010, one in Foshan and one in

Its business on the mainland grew
strongly, with its customer base expanding 15%. Wealth management
is a key focus for Hang Seng in mainland China and the bank
registered a 17% rise in the number of Prestige Banking accounts,
an affluent product package for affluent customers.

Pre-tax profit from the bank’s
Chinese operations increased 24%, lending increased 28% and
deposits increased 76%.

Hang Seng Bank has 11 branches, 27
sub-branches and 67 ATMs across China. Customers can also use HSBC
ATMs across the mainland – Hang Seng Bank is a wholly-owned
subsidiary of HSBC. Around 1,632 of Hang Seng’s 9,642 staff work in
mainland China – 16.8% of the group’s employees.



Citi has the fifth-largest branch
network of the foreign banks in China with 10 branches and 26

China is a central part of Citi’s
Asia strategy and the bank has produced research which shows it
expects the number of middle class households in China and India to
increase by 300m by 2020.

In an attempt to tap that trend,
Citi launched Citigold Private Client in April 2010 for individuals
with assets of between $1m and $10m in China, Singapore and Hong

According to Bloomberg, Citi’s
China profit after tax was CNY1.3bn ($191m) in 2008. Since then it
has not provided earnings for its China business.

After-tax profit from its Asia
Regional Consumer Banking business was $2.2bn in 2010, up 52% from
$1.4bn in 2009.

Its operations across Asia included
711 retail branches, 16.1m retail banking accounts, $105.6bn in
customer deposits and $61.2bn in retail banking loans.

The bank is aiming to expand its
staff in the country up to 12,000 by 2013, up from around 4,500 in



DBS bought RBS’s Chinese retail
banking assets in December 2010, giving it control of RBS China’s
retail and commercial banking customer base in Shanghai, Beijing
and Shenzhen.

Around $898m worth of deposits are
in the process of being transferred from RBS to DBS, subject to
consumers’ and corporates’ consent.

DBS Group earned around 25% of its
revenue from the Greater China region and 36.4% (S$626m) of its
after tax profit of around S$1,720m.

Its actual earnings derived from
the China mainland remain relatively small – only S$47 of thism was
earned from its combined Taiwan and mainland China segment. The
majority was from its Hong Kong business.

The bank plans to invest heavily in its China business, with a
target to double the business’s staff numbers from 1,000 to 2,000
and increase its branch locations from 16 to 50 by 2013.