Foreign banks bullish on reform: Ernst & Young survey

Foreign banks in China are upbeat about the country's ongoing financial reforms, and they are looking forward to expanding their market share in 2014, according to an Ernst & Young survey published on Monday.

The survey, which polled 38 locally incorporated foreign banks, found they are confident their management skills will give them an edge after reforms create a more level playing field among domestic and foreign institutions.

Foreign banks' market share in China has hovered near 2 percent over the past decade, as regulations made it difficult for them to mount a significant challenge to domestic banks, especially in the retail financing sector.

According to the survey, their market share stood at 1.7 percent in 2013, down from a peak of about 2.4 percent in 2007.

"All of these (reforms) are good news for foreign banks in China. Any move toward a more open, transparent and less regulated marketplace will be broadly welcomed," said Geoffrey Choi, a partner with Ernst & Young in charge of assurance business in China.

Interest rate liberalization is widely viewed as the most important of the reforms to China's banking industry.

The People's Bank of China has been gradually loosening control over interest rates as a key part of broader, market-oriented financial reforms. The last remaining control is a ceiling on deposit rates. Analysts believe its removal will reveal the true cost of funding and will fan competition among lenders.

Central bank governor Zhou Xiaochuan has said that, barring a crisis, the central bank won't give special treatment to Chinese banks that struggle to compete.

Lenders already are feeling the heat of competition, with most viewing the margin between loan and deposit rates - their main source of profit - narrowing.

Nine of 10 foreign banks polled by the survey also said they felt their profit margins were squeezed in 2013 and are likely to remain so in 2014.

But they also said they can make up for the narrowing margin better than their Chinese peers by increasing fees, rebalancing their portfolios and restructuring loans, according to the survey.

"Foreign banks' superior management and experience in other markets will help them cope with the changes better than their Chinese peers," said Choi.

But the new Shanghai free trade zone, where financial reforms are expected to be piloted, didn't offer as much excitement to foreign banks, as they are hoping that clarifications will spell out the benefits of establishing an operation in the zone, the survey said.