Seizing a golden opportunity

BANK OF EAST ASIA

SIMILAR TO businesses that moved west to take advantage of the California gold rush in the 1840s, foreign banks are tripping over each other to take advantage of the mainland's largely untapped banking and financial markets.

In accordance with stipulations set out for China's membership for the WTO, the mainland will further remove restrictions and welcome more foreign banks into the country by the end of the year. And just like the gold prospectors in the United States who saw dollar signs and a promise of riches, banks that make the journey north into the mainland believe there are vast fortunes to be made.

According to economists at Morgan Stanley in Hong Kong, Chinese mainland households have US$80 billion in foreign currency deposited in local bank accounts. Household savings in local currency total about 7 trillion yuan, equal to US$845 billion.

As one of the non-mainland banks with an extensive banking network in the mainland, the Bank of East Asia (BEA) is planning to expand its presence by opening new branches in key locations and upgrading its representative offices to provide a wider range of services.

Chan Kay-cheung, the bank's executive director and deputy chief executive, said as the mainland opened up its banking system, BEA was in a strong position to provide its clients with one-stop services, including a full range of banking services, investment consultancy services as well as property agency and management services.

The bank has licences to provide RMB services, except to local customers, through eight of its branches. The bank has a network of 11 branches, eight sub-branches and six representative offices in key cities across the mainland. The latest sub-branch is in Panyu in the southern part of Guangzhou.

Mr Chan said the bank expected to set up 35 more outlets in the next five years.

Under the conditions of its operating licence, the bank has carried out significant staff training to enable employees to provide foreign currency services to corporate and individual customers, as well as RMB services to expatriates and residents of Hong Kong, Macau and Taiwan, and local companies. Throughout its mainland network, the bank provides deposit, loan and advances services, bill acceptance, documentary credit, bank guarantees, remittances and international settlement.

From a survey of foreign banks conducted by PricewaterhouseCoopers in China, more than 70 per cent of the 35 banks polled predicted annual revenue growth rates of at least 30 per cent per annum over the next three years. Six banks expected growth rates of more than 100 per cent. Four respondents expected continued growth of at least 100 per cent per annum through to 2008.

Last year, foreign banks spent US$10.4 billion taking non-controlling minority stakes in Chinese banks, according to Dealogic, a capital markets data provider.

'As part of the bank's strategy to develop our mainland market business, we will continue to expand our network by establishing new branches, upgrading representative offices to full branches and to provide additional counter support through sub-branches in cities where the bank already has a presence,' Mr Chan said.

He said a combination of experienced Hong Kong Bank of East Asia managers and locally trained managers would take responsibility for the key management roles of new branch operations. In line with Hong Kong BEA practices, comprehensive training will be provided to mainland employees.

Employee welfare and career development is an important issue for the bank. Care is taken to ensure that staff receive support and career development opportunities.

Employees at all levels are encouraged to join training programmes and to keep up to date with industry developments such as changes in regulations. Managers are provided with training programmes that focus on modern banking management techniques.

Mr Chan said with well trained staff ready to take advantage of the mainland's changing regulatory banking environment, the bank would be in a position to expand its product base and introduce new products to new customers. The portfolio would include retail products such as mortgages and investment products.

Deregulation could also open up the market to wholesale products such as debt capital markets, credit derivatives/structured products and risk management products.

Another area the bank is keen to explore is the mainland demand for wealth management services. The bank believes there is a pent up need for wealth management products and alternative investment tools.

'As large numbers of people across the mainland become more sophisticated and increasingly wealthy, they are looking for ways to invest and protect their wealth,' Mr Chan said.

Mainland people have few options other than to save their money in fixed deposit accounts. There is a growing need for customers requiring mortgages, credit cards and other fee-producing products that foreign banks are keen to provide. These are also the same products of which domestic banks have little experience.

Mr Chan said banks such as the Bank of East Asia would also gain a more prominent foothold in the mainland when foreign banks were allowed to conduct domestic currency business with local customers, a key segment of the Chinese banking market.

'This [development] is very important and significant,' Mr Chan said. 'The vast majority of retail banking revenue is generated by local residents. Opening this segment of the market up to banks such as BEA will allow us to go after and capture the customers that generate the most revenue,' he said.

To be close to this market, banks have dotted their branches around affluent cities where these key customers live.

Some banking experts believe that over the next 10 years mainland retail banking will become a significantly more important part of banks' revenue and profits. In the short-term, foreign banks see much potential for profit from underwriting and investment banking fees as the Chinese markets open up and a fresh wave of initial public offerings, including banks, hit the markets.

According to a recent report by consulting firm McKinsey, by 2013 the mainland's consumer credit market (which includes credit cards, home loans and other personal loans) would account for about 14 per cent of profits, up from the current 4 per cent. But the report warned that foreign banks could face difficulties winning over clients in the mainland without partnering with a domestic mainland bank, given the propensity for Chinese customers to sign up for cards with those local banks they have a direct relationship with.

Mr Chan said in spite of competition from other local and international banks, the bank was confident it could attract new customers and build a strong market share.

'I believe we can continue to build a solid customer base on the quality of the services we can offer,' Mr Chan said.