Citigroup, Foreign Banks Triple China Profit Growth (Update2)
July 4 (Bloomberg) — Profit growth at Citigroup Inc., ABN Amro Holding NV and other foreign banks in China tripled this year after they were allowed to offer local-currency services, a central bank report said.
Overseas banks earned a combined 3.05 billion yuan ($401 million) in the first five months, up 43 percent from a year earlier, the People’s Bank of China said in a research report published by China Securities Journal. Profit growth accelerated from an average 14 percent over the past five years.
China fully opened its banking industry in December, sparking a rush among foreign banks to add outlets and workers to compete for the nation’s $2.2 trillion of household deposits. They’re still dwarfed by the likes of Industrial & Commercial Bank of China Ltd., which earned 18.7 billion yuan in the first quarter.
“A rising tide lifts all the boats,” said Zhang Xi, a banking analyst at Beijing-based Galaxy Securities Co. “Foreign banks will never achieve the economies of scale to pose a serious challenge to domestic rivals given their current speed of expansion in China.”
As of May 31, 75 foreign banks operated 186 outlets in 25 Chinese cities, according to the report. They had 514.3 billion yuan of outstanding loans and 305 billion yuan of deposits. Their non-performing asset ratio stood at 0.6 percent at the end of May.
Beijing-based ICBC, China’s largest bank and the world’s No. 2 by market value, operates about 18,000 branches in China and has more customers — 153 million — than Russia has people.
Better Than Ever
Overseas banks may have overtaken domestic rivals in profit growth in an economy forecast by the central bank to expand 10.8 percent this year. Earnings growth at China’s publicly traded banks averaged 29 percent in 2006, according to UBS AG.
The economic growth forecast, published by the central bank on June 29, represents the fastest pace since 1995, when the economy was less than a third of its current size. Overseas banks’ combined profit from local-currency services more than doubled to 1.3 billion yuan through May, today’s report said.
“Business has never been so good,” Jeroen Drost, ABN Amro’s Asia chief executive, said in an interview yesterday. “The key challenge here is to keep up with the growth.”
Foreign banks expect to double their total workforce in China to almost 36,000 by 2010, according to a survey by PricewaterhouseCoopers LLP published in May. HSBC Holdings Plc, Citigroup, Standard Chartered Plc, Bank of East Asia Ltd. and eight others have become locally incorporated to offer yuan- denominated bank cards and mass-market services this year.
Capital Controls
China’s restrictions on capital outflows — individuals can’t freely invest in overseas stocks, for example — means banks such as Citigroup and HSBC can’t fully capitalize on their international reach, said Zhang.
“High-end customers want access to global asset allocation to diversify risks, but that can’t be achieved under the current capital control in China,” she said. “That’s blunted foreign banks’ edge.”
HSBC, Europe’s biggest bank by market value, plans to add 30 outlets in China this year and hire 1,000 people a year in 2007 and 2008. It has 35 branches on the mainland, the most of any foreign bank. The bulk of HSBC’s 2006 income in China came from corporate and commercial banking with Chinese and foreign clients.
London-based Standard Chartered aims to double its number of China outlets to 40 by the end of this year and Citigroup plans to add 14 outlets to take the total to 30.
Countermeasures
Foreign lenders controlled 2.1 percent of China’s $6 trillion of banking assets and less than 1 percent of total deposits, the central bank report said. Their combined profit accounted for 1.2 percent of the total earned by banks in China.
Citigroup, HSBC, Bank of Tokyo Mitsubishi UFJ Ltd., Mizuho Financial Group and Hong Kong’s Bank of East Asia Ltd. are the five biggest foreign banks operating in China.
China is letting state-owned banks expand into broking, fund management and insurance, winding back former premier Zhu Rongji’s 1993 restrictions, to help them counter overseas competition. The government wants fee-based services to account for 50 percent of revenue at domestic banks over the next five to 10 years, up from the current 17 percent.