Wells Fargo takes retail out of game plan for China

Instead of competing with its mainland peers for deposits, the US player plans to leverage its global network and corporate banking businesses

PUBLISHED : Monday, 04 August, 2014, 3:40am
UPDATED : Monday, 04 August, 2014, 3:40am

In the decade since the mainland opened its gate with much fanfare to foreign financial institutions, it has dished out some tough lessons on what it means to be the foreigner in the country.

"It's very difficult to compete with banks on the mainland that have 26,000 branches and 400 million customers," Richard Yorke, head of San Francisco-based Wells Fargo's international group, told the South China Morning Post.

"On the mainland, I think more than in many other markets, you have to be really focused and really clear on where your competitive advantages are because it's a market where scale is incredibly important because of who you're dealing with."

Assets at foreign banks on the mainland made up just 1.82 per cent of the market in 2012, a record low since the country opened its banking sector to the world in 2004. The share has been falling since 2007, when foreign bankers were still cheery on the country and the more than 400 foreign financial institutions now comprise 2.38 per cent.

You have to be really focused on where your competitive advantages are
Richard Yorke, Wells Fargo

Yorke has witnessed the entire run.

Before joining Wells Fargo in 2010, he led HSBC Holdings' drive into the mainland as the country cracked the door to foreign banks. He was the first director of the China Banking Association's foreign bank working committee that started in 2007.

HSBC pushed aggressively into the mainland under Yorke's leadership. It incorporated as a wholly owned foreign bank in 2007. Today it had 24 branches and sub-branches across the country, the bank's website said.

After a decade of staring into the mainland, Yorke has some blunt insight on how to compete among its biggest financial institutions. Simply put: don't - at least not in retail banking.

Wells Fargo had no intention of incorporating locally, Yorke said. It has a branch in Shanghai with about 80 staff and a representative office in Beijing that is in the process of applying for a branch licence.

The bank will not touch mainland deposits. Instead, it plans to leverage what Yorke calls its competitive advantage: its global financial institutions and corporate banking businesses.

In other words, it will work with its mainland peers rather than directly competing against them, a strategy welcomed by regulators such as the People's Bank of China.

"They are very clear on what our strategy is," Yorke said of the regulators.

Making nice with the regulators is important. Concerns over "the plethora of rules and regulation" top the list of worries for foreign banks, according to a 2014 report from Ernst & Young.

Rumours had circulated that Beijing might raise the required minimum registered capital for locally incorporated branches to one billion yuan (HK$1.3 billion) from 300 million yuan, the report said, in what would be a substantial hurdle to expanding a deposit-taking network.

That could make the decision not to incorporate locally a bright one. Wells Fargo, instead, will look to its newly acquired international prowess to foster business on the mainland.

When Wells Fargo acquired Wachovia in the United States at the onset of the financial crisis in 2008, it brought under its wing an extensive global financial institution that gave it access to Asia. The bank now boasted tight relations with the mainland's top and second-tier banks, Yorke said.

On the corporate banking side, Wells Fargo hopes to take its US clients into the mainland.

The strategy contrasts greatly with what Yorke called the "aspirational brand nature" of foreign banks before the financial crisis. The banks moving into the country at the time pitched themselves as more sophisticated and better at customer service and risk management than their mainland peers, he said, without naming any specific banks.

However, the financial crisis wiped out that notion. "A lot of that is done now," Yorke said. In the next decade, banks would have to be more honest with themselves about what advantages they had in the mainland market, he said. Retail banking is not likely one of them.