Foreign banks more optimistic: survey

Foreign banks are optimistic about their future performance in China despite the economic uncertainty and regulatory challenges ahead, accounting firm Ernst & Young (EY) said in a survey report released Tuesday.

The survey, which polled 41 foreign bank CEOs and senior executives during August and September 2014, found that 18 foreign banks expect to see a significant improvement in their financial performance in China over the next three years, up from seven foreign banks in the previous survey.

Foreign banks' optimism was mainly based on growth opportunities related to China's financial reform process.

"There are opportunities being generated by the evolving yuan internationalization and interest rate liberalization," Geoffrey Choi, assurance leader of EY's financial services in China, said in the report.

He also noted that the regulatory landscape will continue to challenge foreign players, who are hoping that Chinese authorities will give them the same access to the bond market as domestic banks and remove foreign debt and foreign guarantee quotas.

Foreign banks controlled just 1.73 percent of total banking assets in China by the end of 2013, down from a peak of 2.38 percent in 2007. Their aggregated after-tax profit was 14 billion yuan ($2.26 billion) in 2013, while the country's banking industry realized a net profit of 1.38 trillion yuan in the same year, according to data from the China Banking Regulatory Commission.

China has launched a series of measures to open up its financial sector. Starting from January 1, the State Council has loosened market access restrictions on foreign banks, including easing restrictions on branch openings and eliminating a three-year waiting period for them to obtain a license to operate yuan-based business.

"The [loosening of the restrictions] is a largely symbolic move to make good on promises to open the country's financial sector to competition. It [also] shows that China is preparing for the yuan's internationalization," said Choi.

As for financial reforms in the China (Shanghai) Pilot Free Trade Zone (FTZ), the survey found that the majority of foreign banks believed their expectations had not been fulfilled.

A total of 23 foreign banks had registered in the Shanghai FTZ as of the end of September 2014, one year after its launch. The survey indicated that other foreign banks are either still on the fence or have decided against setting up a presence inside the zone.

The regulatory requirement for a stand-alone system for conducting businesses inside the Shanghai FTZ has given foreign banks pause, as the cost of such a system could range from $2 million to $10 million, EY's report said. Also, the list of products that can be offered in the FTZ remains unclear, it noted.

"Foreign banks had high expectations for the Shanghai FTZ after the central bank issued guidelines offering financial support for the pilot zone in late 2013," Chen Bo, an expert on the FTZ at Shanghai University of Finance and Economics, told the Global Times Tuesday.

However, detailed rules released by the central bank's Shanghai branch in mid-2014 were more conservative in pushing forward financial reform and opening-up than earlier expectations, he said.

With three new FTZs having been approved in Guangdong and Fujian provinces and Tianjin Municipality, Chen said competition between the zones would stimulate broader and deeper reforms in the financial sector.

"The Shanghai FTZ is not the only choice for foreign banks that are currently hesitating over whether to set up a business there," Shelley Chia, financial services partner at EY, told the Global Times Tuesday. "They are also waiting to see if there will be better opportunities in the three new FTZs."