The outlook for offshore banks in mainland China is expected to be brighter in 2023 amid the country’s reopening and exit from strict zero-Covid policies, but this will also require the lenders to rethink their strategies in a fast changing and demanding market, analysts said. Offshore banks – including those based in Hong Kong – with business in China, will find opportunities especially in trade finance, wealth management and consumer finance. But they will also face challenges while carving their niches and finding good lending opportunities after a property bubble burst , analysts said. “This year will be better than 2022 – it will be a market which recovers and restores,” said Nicole Zhou, senior partner at McKinsey & Company. “The benefits for Hong Kong banks are relatively clear, as the reopening provides an important opportunity for them to serve as a connector between China and [the rest of the world]. “But for almost all multinational companies including foreign banks, the story is more complicated. They need to reassess their China strategies because the market is not what it was three years ago,” she added. The comments come as a number of foreign institutions including banks continue their expansion into the mainland, betting on China’s reopening as one of the few bright spots this year. Standard Chartered was given approval to set up a wholly-owned securities brokerage on January 19, while JPMorgan took full control of its China mutual fund unit the same day. Business and investment activity is expected to pick up, which means international banks will record higher demand for loans and cross-border financing, analysts said. Wealth management in particular in the Greater Bay Area (GBA) could be a key contributor. “Our biggest growth drivers and biggest innovation drivers are going to be those in the northbound connector with GBA in particular, given its concentration of high technology talent, thriving market size, and as a global commercial and trade hub,” said Jianing Song, KPMG’s head of banking and capital markets sector, Hong Kong. Lending for companies’ international transactions, as well as for consumers as China prioritises consumption this year, could be additional revenue sources for lenders, the analysts said. Adjustments to banks’ onshore strategies will be key. Some lenders have already launched processes to rethink their China business, to differentiate themselves from the country’s dominant domestic players. Credit Suisse cautiously optimistic as China investors back reopening “For foreign banks in China, in particular, it really is about finding that niche,” said Grace Wu, head of Greater China bank ratings at Fitch Ratings. Banks should focus on value-added areas through differentiated products and customer services without adding on cost, she added. “Foreign banks will have to launch a new round of China strategies,” said Zhou at McKinsey. “It should not be an extension of previous strategies or small tweaks, but [rather] a re-evaluation of the Chinese market’s importance to them and their own value propositions to the market.” As for Hong Kong banks, China’s reopening will increase their revenue and profit this year, but margin growth could face hurdles. “We expect rises in interest rates in Hong Kong as a result of US interest rates rises, and typically we would expect to see margins rising for banks,” said Paul Mcsheaffrey, senior banking partner, Hong Kong, KPMG China. But the likely growth in funding costs due to increased competition for deposits will drag on margin growth, he said. “Apart from the bigger banks, margins are not going up as much as you’d expect.” Banks based in the city will need to find high-quality borrowers after the spillover of risk from China’s property market, which raised their non-performing loan ratios to around 2 per cent last year. This is, however, viewed as a comfortable level by experts. “The reopening of China … is positive in terms of profitability, but looking at asset quality and growth, we still have some uncertainty given the external pressures from global challenges,” said Savio Fan, associate director, financial institutions, at Fitch. China set for ‘steady, continuous’ foreign capital inflows as investors return “Hong Kong banks are still quite cautious in lending. Even if they see opportunities [from mainland clients], whether they have capacity, or they have the appetite to do every business from China, it is a question mark for them,” he said.