Smaller banks eye niches in mainlandSmall and medium-size banks see niche markets as their route into the mainland With capital-rich international lenders such as HSBC and Citigroup rushing to establish themselves in the mainland market, Hong Kong's small and medium-sized banks have been left searching for ways to get a cut of the pie. 'Yes, they will face a lot of difficulties. But the mainland market is so big, with financial assets of 35 trillion yuan. They just have to find their niche,' a banking veteran said. The Bank of East Asia (BEA) is a prime example of how medium-sized and smaller banks can make it in the mainland. Though hopelessly out-muscled by the global giants, BEA has one of the largest mainland branch networks among foreign banks and is now starting to reap the fruits of its investment. BEA, which boasts 20 mainland outlets - with three more set to open this year - hopes to have 60 to 70 branches and sub-branches within five years. Executive director and deputy chief executive Chan Kay-cheung (pictured) attributed the bank's ability to generate profits from its mainland business to its early positioning in the market and confidence in the country's economy. 'We have been in China since 1920, and we were one of four foreign banks allowed to run foreign-exchange business in Shanghai when the mainland market was first opened in 1979. 'We open branches along the sea, along the rivers and follow the development strategy of the mainland authorities,' he said. Mr Chan cited the bank's Xian branch as an example of this policy. The branch was opened in 2001 to support the central government's western development strategy despite the poor economy. 'But being an exclusive foreign bank there, we are better off,' he said. With its existing branches well spread throughout the mainland, BEA expects its mainland profit contribution, which accounted for 11 per cent of group profit in the first half of this year, to jump to 25 per cent in four years. Aiming to tap mainlander yuan business, especially in the area of wealth management when the market fully opens in 2007, the bank has always had acquisition on its agenda. 'As the mainland is so big, just relying on opening branches by ourselves is not enough. We have also been actively discussing equity investment with potential partners in recent years,' Mr Chan said. 'While big Chinese lenders prefer to partner with international banks, we are more likely to partner with city commercial banks with national licences or those aiming to have one.' The lender wants to have equity investment in two banks to ensure good coverage in both northern and southern China. While BEA has a proven track record in the market, it remains to be seen whether newcomers such as Wing Hang Bank and Wing Lung Bank can find similar success. Wing Lung chairman Michael Wu Po-ko said his bank had made its mainland move later than other institutions mainly because of the asset requirement of US$20 billion. 'But we were the first Hong Kong bank to open a branch in Shenzhen last year after the relaxation of the threshold under the Closer Economic Partnership Arrangement. And we plan to open a sub-branch in Nanshan later this year,' Mr Wu said. The bank also intends to apply for a yuan licence for its Shenzhen branch next year and upgrade its Shanghai and Guangzhou representative offices. Mr Wu said that although some international banks had been operating in the mainland for 10 to 20 years, they were only now starting to show growth. However, a veteran banker said small and medium-sized banks lacking lending experience in the mainland could expect fierce competition from international and established mainland players. Wing Lung executive director and general manager Chung Chi-shum said the bank had also learned a lesson on lending to mainland bodies in the late 1990s. 'Lending to Chinese companies is not new to us as we have had our Guangzhou representative office for more than 10 years. We have an understanding of mainland business,' Mr Chung said. He said the bank hoped to cash in on its strengths in the mortgage and trade finance fields. Steven Chan Sik-tin, an assistant director of Hong Kong research at BNP Paribas Peregine, believed small and medium-sized lenders could find their way in the mainland market by focusing on their business strengths. 'Wing Hang has only two branches in the mainland. However, the China profit contribution accounted for 5 per cent of the bank's total,' he said. Wing Hang, which aims to diversify - with a particular focus on the Pearl River delta - intends to strengthen its presence on the mainland by choosing Shenzhen as an operations hub and opening up eight to 10 sub-branches. Meanwhile, Citic Ka Wah Bank - with a powerful parent company, Citic Group, in the mainland and being one of the few Chinese banks with branches in the United States - is not only eyeing business in the mainland, but also mainland firms wanting to expand out to world markets. Fubon Bank (Hong Kong), on the other hand, wants to use the connections of its Taiwan parent, Fubon Financial Holding, to target Taiwanese businesses. However, a banking analyst believed that only some of the smaller lenders would succeed by pursuing niche markets. 'With the market still not fully open and the game not really started yet, it is too early to say who will be the winner,' the analyst said.