foreign banks in china

8/20/2019 Foreign Banks in China

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Financial ServicesBanking & Capital Markets

Foreign banks in ChinaMay 2007


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Foreword 1

About the author 2

Executive summary 3

Market environment 8

Competition and positioning 27Performance 47

Peer review 53

Appendices 60

Methodology 62

Bank groups 63

Participants 64

Background comments on participants 65

Foreign ownership in Chinese banks 75

European Chamber Bank Working Group KeyRecommendations 2006 76

CBRC’s Report on the Opening-up of the Chinese Banking Sector,January 2007 77

Chinese banks ranked by Tier 1 capital and assets 92

Partners in success 93

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Table of contents

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Foreign banks in ChinaDatePricewaterhouseCoopers 1

Foreword

Welcome to the second PricewaterhouseCoopers surveyon foreign banks in China, following the inaugural surveypublished in September 2005. This year, we are verypleased to have 40 financial institutions participate in thesurvey, up from 33 in 2005. The key objectives of the surveyare to:

raise awareness of strategic and emerging issues forforeign banks in China;

establish data on certain industry trends;

understand the thinking of Chief Executive Officers in thebanking industry;

provoke discussion and debate on the best optionsfor capitalising on trends to enhance and improveperformance of foreign banks;

provide insights and perspectives on how banking inChina may evolve over the next three years.

The growth of foreign banks in the Chinese market has

continued to accelerate with the recent announcementsof local incorporation marking another key stage in thedevelopment of the sector. The strong economy and agrowing middle class, together with the continued openingup of the banking sector under the terms of China’s WTOaccession, has led many foreign banks to continue to investin China’s financial sector. 2006 saw an influx of foreigninstitutions buying into Chinese retail banks in advance ofthe new WTO measures to allow foreign banks to competeon more equal terms with local institutions. According to

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Mervyn JacobFinancial Services Leader for

China and Hong KongHong KongMay 2007

the CBRC (China Banking Regulatory Commission), at theend of 2006, 74 foreign banks from 22 different countriesand regions had established 200 branches and 79 sub-branches in 25 Chinese cities. A further 242 representativeoffices have been established. The growth in foreign bankparticipants also demonstrates the continued commitmentof the Chinese government to bank reform and the role that

foreign banks can play in improving the competitiveness ofthe overall Chinese banking sector.

Findings of particular interest in the survey includeobservations on the changes in China’s financial market, thedevelopment of the regulatory environment, banking risksin China, future opportunities and the results of the peerreview.

We trust that bankers and other readers will find the materialuseful in this industry-wide survey.

I would like to thank the Chief Executive Officers and SeniorExecutives who participated in this survey for their time andefforts in making this publication possible. I would also like

to thank Dr Brian Metcalfe for his research and producingthis report. We look forward to feedback on this surveyand on topics to be included in future surveys on the Chinabanking industry.

To obtain further information, please contact thePricewaterhouseCoopers banking and capital marketsspecialist partners in your area of interest. They are listed atthe back of this survey.


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Dr Brian Metcalfe is an Associate Professor in the Business Schoolat Brock University, Ontario, Canada. He has a doctorate in financialservices marketing and has researched and produced over 30 reports,such as this one, on behalf of PricewaterhouseCoopers in 11 differentcountries including Australia, Canada, China, India, Japan and South Africa.

Previous reports have examined strategic and emerging issues incorporate, investment and private banking, life and property and casualtyinsurance, insurance broking and wealth management.

In the past he has been employed by National Westminster Bank, Bankof Ireland and Connecticut Bank & Trust Co. He has consulted for a widerange of organisations, including Royal Bank of Canada, Bank of NovaScotia, Barclays Bank, Clarica Life Insurance Company, Equitable Life ofCanada and several major consulting firms.

He has also taught an executive management course entitled “FinancialServices Marketing” at the Graduate School of Business, University ofCape Town.

About the author

This report was researched and written by Brian Metcalfe, Ph.D.Information presented herein, while obtained from sources believedreliable, is not guaranteed as to accuracy or completeness.This report has been commissioned by and distributed throughPricewaterhouseCoopers Inc.

Additional copies of this report can be obtained from Anna Lai of PricewaterhouseCoopers on[852] 2289 8719 or at [email protected].


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Executive summary


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This survey focuses on thestrategic and emerging issuessurrounding foreign banks’expanding activities in China. Itbuilds on the inaugural survey in2005.

The survey attempts to synthesisediverse viewpoints, protectconfidentiality and offer insightsinto this fast changing financialservices environment.

It is based on interviews with CEOsand senior executives and branchmanagers of 40 foreign banks.

The interviews were approximatelyone hour in length and wereconducted in five centres, Beijing,Hong Kong, Shanghai, Shenzhenand Tianjin, between January andMarch 2007.

Background

The participants in alphabeticalorder were:

ABN AMRO

Australia & New Zealand BankingGroup

Bank of America

Bank of Montreal

Bank of Nova Scotia

BNP Paribas S.A.

Business Development Bank

Calyon

Citibank

Dah Sing Banking Corporation

DBS

Deutsche Bank

Dresdner Bank

First Sino Bank

Fortis Bank

Hang Seng Bank

Hongkong and Shanghai BankingCorp.

Industrial Bank of Korea

ING Bank

JPMorgan Chase Bank

KBC Bank

Korea Exchange Bank

Maybank

Mizuho Corporate BankNatexis Banque Populaires

Norddeutsche Landesbank

OCBC

Rabobank

Raiffeisen Zentralbank Osterreich AG

Royal Bank of Canada

Royal Bank of Scotland

Sanpaolo Imi Bank

Shinhan Bank

Société Générale

Standard Chartered Bank

The Bank of East Asia

The Bank of New York

Wachovia Bank

UBS

Wing Lung Bank


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The following findings are basedon interviews with 40 bankswho are considered to provide asound representation of the viewsof the 74 foreign banks from 22countries/regions that are actively

engaged in the Chinese bankingmarket in 2007. The main findingsare summarised below:

Recent changes

The most frequently citedchange by the foreign bankswas the facility to move to localincorporation. These entities will beallowed to provide foreign currencyand RMB services to customers

and will be subjected to the sameregulations as domestic banks. InDecember 2006, the geographicand customer restrictions on RMBservices were also removed.

The opinions of the foreign bankersexpressed in this report suggestthat 20 to 30 banks will incorporatelocally (26 of the 37 respondentbanks recorded a viewpoint in thisrange). However, not all locallyincorporated banks will have an

interest in serving the retail market.

Main findings

Commitment to the ChineseMarket

The head offices of the foreignbanks are highly committed to theirChinese operations. Twenty nine

banks recorded a score of 8 out of10 or higher in terms of support.

Regulatory frustration

Many foreign banks remaincritical of the regulatoryenvironment particularly in areasof coordination, consistencyand clarity. They are frustratedby currency restrictions and bythe lack of credit history. Thebanks seek changes to foreignexchange regulations, foreigndebt quotas, liquidity ratios andcapital requirements. Although thebanks continue to define regulatorychange as the most importantdriver of change, capital markets,globalisation and technology arealso influential.

Staffing issues

Human resources along withregulations are the two mostpressing issues. The rapid growthin personnel needs over the next

three years will fuel an already tightlabour market. Annual turnoverrates are high, 35% of the banksrecorded a rate of 15% to 20%and over two thirds were above15%. Significant salary inflation iswidespread.

Brand recognition

Brand name recognition washighlighted as a growing concernas a number of banks plan to gearup for the retail market.

Domestic bank challenges

The foreign banks continueto believe that their domesticcounterparts face on-goingchallenges in the domestic loanmarket and in governance andmarket related practices. Noimprovements in their perceptionsof these areas have been made

since the 2005 survey.


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Continued opportunity

The banks clearly see growingopportunities in the Chinesemarket. Few could envisage aslowdown in economic growth

before 2010. Although 74 foreignbanks have branch operations anda further 186 have representativeoffices, only a third of respondentsthink the market is overcrowded.

Many point out that the foreignbanks represent less than 2%market share. Foreign banks areexpected to enter and leave themarket over the next year. Thecurrent number of 74 banks isexpected to exceed 85 banks by2010 by over half the group.

Product development

Credit cards, followed byinvestment products andmortgages are forecasted to growstrongly in the retail market. In thewholesale market the top threeareas of growth mentioned wereinterest rate and currency swapsand structured products.

Future growth

The 40 banks interviewed employ16,752 people and this will grow by113% to 35,685 by 2010. Twentyfive banks will more than double

in size. Expatriate employees arebeing used to alleviate a growingskills shortage. There are alreadyalmost 3,000 expatriates workingin the industry.

Assets are expected to double by2010 to over $100 billion while netprofits are expected to triple insize.

On the retail side at least six banksplan to serve in excess of 100,000customers by 2010 and totalcustomers will exceed the 1 millionmark.

Home country and globalcorporates are stronglyrepresented in the banks’ loanportfolios but Chinese basedcorporates are becoming veryimportant to some, particularlyEuropean banks.

Performance

Four banks anticipate 100%revenue growth in 2007 andanother 10 banks expect between50% and 100%. By 2010 one bank

continues to forecast 100% growthand only four banks predict growthwill fall below 20% at that time.

Of the 24 banks that provideincome data more than halfacknowledge that profits areminimal. Despite this a numberof segments such as corporatebanking, investment banking andtreasury show improvements inprofitability since 2005. Tradefinance was an important source ofrevenue to 19 banks.


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A summary of the top rankedforeign banks/financial institutionsin each category based on peerranking is shown in the tablebelow. Full details includingindications of how the rankings

have changed since 2005 areshown later in the report.

Peer ranking summary

First Second Third

Foreign exchange trading Citibank HSBC Standard Chartered

Treasury Citibank HSBC Standard Chartered

Derivatives Citibank HSBC Deutsche Bank

Corporate lending HSBC Citibank Standard Chartered

Project financing Citibank HSBC BNP Paribas

Investment banking Goldman Sachs Morgan Stanley Citibank

Asset management HSBC UBS CitibankCorporate finance Citibank Goldman Sachs HSBC

Mergers and acquisitions Morgan Stanley Goldman Sachs Citibank

Trade finance HSBC Standard Chartered Fortis

Retail banking HSBC Citibank Standard Chartered

Credit cards Citibank HSBC Standard Chartered


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Market environment


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Number of employees

The 40 banks interviewed employ16,752 people and this total isforecasted to expand by 113% to35,685 people by 2010. In 2005, 35

banks predicted a growth of 154%to 16,910 by 2008. This formerprediction is in line with the 2007number which includes one largeforeign bank not surveyed in 2005.

The strong growth predicted isassisted by six banks that plan toadd over 1,000 new employeesover the next three years. Threebanks in this group will add 3,000or more new employees.

The percentage increases alsoshow impressive employmentgrowth. For instance, 21 bankswill more than double theirexisting personnel and four banksanticipate growth above 200% by2010.

Number of expatriate employees

At present the 40 foreign banksemploy 2,872 expatriates. This

is a significant jump from 2005when the 35 banks surveyedemployed 475 expatriates. As aresult one can conclude that manyof the banks are supporting theirexpansion by importing trainedpersonnel from within their banks.Over the next three years they planto add another 639 expatriatesto produce a total of 3,511. Theoverall employment growth willhowever, reduce the expatriate

Background profile

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5

10

15

20

25

30

35

2005

2007

C r e d i t

c a r d

p r o v i d e r

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e b a

n k i n g

P r i v a t e b a

n k i n g

C o r p o r a t e & i n s t i t u

t i o n a l b

a n k i n g

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m m e r c i a l

C o r p o r a t e & i n v e s t m e n t b

a n k i n g

T r a d

e f i n

a n c i n g

Based on responses from 40 banksin 2007 and 35 banks in 2005

Numberof banks

Zero

0-50

50-100 100+

200+

300+

Percentage increases in employment by 2010

Based on responses from 40 banks

Classification of banks by participants

Projected increases in employment by 2010


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percentage from 17% in 2007 to9.8% in 2010.

There is a significant variationamongst the banks in terms ofthe level of expatriate staff. Forexample, 10 banks have more than

10% expatriate staff and sevenof these are Asian banks. Twentyone banks have less than 5%. Twosmaller banks have no expatriatestaff.

Assets and onshore loans

Thirty one of the 40 participantsprovided information on theirassets in 2007 and projectionsfor 2010. The total assets in 2007

were $51 billion increasing by111% to $108 billion in 2010. Thistotal excluded data for one largeforeign bank. Those larger foreignbanks that provided individual dataestimated that they may reach $15-20 billion in assets by 2010.

Net income

Twenty four participants estimateda combined net income of $328million in 2007 rising to $940million by 2010. This figureexcludes three large foreign banks.In addition to the 24 respondentsan additional four banks confirmedthat they were profitable. Twentybanks recorded net income of $10million or less in 2007. Within thisnumber 13 banks are generatingsmall profits.

Retail customers

Seventeen banks indicated theyhad retail customers and wereable to project growth forward to2010. Seven banks had a retail

base of less than 1,000 customers. Around six banks indicated thatthey planned to have a retail baseexceeding 100,000 customers by2010 and three of this group mightbe considered “front runners” onretail expansion.

In total the 17 banks had 173,200customers in 2007 growing by over500% to 1.1 million by 2010.

The participants provided creditcard projections but the smallnumber of players and theissuance of cards by some ofthe banks joint venture partnersmade this data too sensitive forpublication.

Retail operations

Fifteen participants confirmed thatthey had an interest in serving theretail sector. In addition several

banks indicated that their parenthad not yet decided on whetherto formally enter the retail sector.Other banks indicated that theyhad investments in domestic banksand this would be the entry vehicleto the retail market not the foreignbank entity.

Eighteen banks said they had nointerest in the retail sector.

Local incorporation

The following banks haveindicated publicly that they wish toincorporate locally.

Approved:

Citibank

HSBC

Standard Chartered Bank

The Bank of East Asia

Applications in process:

ABN AMRO

Bank of Tokyo-Mitsubishi - UFJ

DBS

Hang Seng Bank

JPMorgan Chase

Mizuho Bank

OCBC

Wing Hang Bank

Ten of these 12 banks plan tolocate their head office in Shanghai

while JPMorgan Chase will locatein Beijing and Wing Hang Bank inShenzhen.

CBRC has confirmed applicationsare being considered for:

Nanyang Commercial Bank

Citic Ka Wah Bank

United Overseas Bank

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Competition in the marketplace Retail banking

Twelve banks responded to thisquestion and almost 60% indicatedthat they consider retail banking tobe intensively competitive.

Over 70% of the respondentsindicated that they had madesignificant or fundamental changesto their retail strategy. The first fourbanks to incorporate domesticallyall plan to offer Yuan-denominatedmortgages, wealth managementproducts and deposit and loanservices.

Press reports stated that, with theexception of Citibank, they wouldalso launch their own brand ofcredit card.

Money market

Only 27% of the 34 banks thatresponded to this questionsuggested that competition wasintensive. A higher percentage

– 33% – indicated that it was light.

Almost 60% of banks have madeeither no change or minor changeto developments in the moneymarket. There has been littlechange in this market since 2005.

Retail banking

Note: Based on responses from 12 banks. Shadingrepresents greater than 20%

Intensive

Minorchange

Significantoperationaland organi-sationalchange

Fundamentalchange instrategy andpositioning

No change

Response

C o m p e t i t i o n

17% 33% 8%

8% 33%Moderate

Light

None

Money market

Note: Based on responses from 34 banksShading represents greater than 20%

Intensive

Minorchange



No change

Response


3% 6% 12% 6%

6% 18% 18%

15% 9% 9%

Moderate

Light

None

Numbers of banks reporting a response in the

eight markets reviewed will vary as participantswere requested not to comment on a specificmarket unless they were familiar with thecompetitive nature of that market.


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Foreign exchange andderivatives

The opinion on the degree ofcompetition in foreign exchangeand derivatives remains similar to

2005 although a higher percentageof respondents suggested theyhad made minor or no change tostrategy – 50% in 2007 comparedto 43% in 2005.

Trade finance

In 2005, trade finance representedthe most competitive market forforeign banks in China.

Ninety per cent believed it tobe intensively competitive whileover half had made significant or

fundamental changes.

In 2007, the level of competitionhas been scaled back to 64% and61% of the banks have made nochange or minor change.

Foreign exchange and

derivatives


Intensive

Minorchange



No change

Response


13% 3% 25% 6%

9% 19% 13% 3%

6% 3%

Moderate

Light

None

Trade finance


Intensive

Minorchange



No change

Response


14% 22% 25% 3%

8% 17% 11%Moderate

Light

None


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Treasury

The treasury market continues tobe relatively underdeveloped.

Although a third of the 33

respondents believed the marketwas intensively competitive onlytwo banks have made fundamentalchanges.

Corporate lending

Almost 70% of the banks havemade minor or no change tocorporate lending strategy.

Fewer banks in 2007 recordedan intensively competitiveenvironment. The percentagedeclined from 75% to 60%.

Treasury


Intensive

Minorchange



No change

Response

C o m p e t i t i o

n

18% 6% 6% 3%

9% 18% 30% 3%

3% 3%

Moderate

Light

None

Corporate lending


Intensive

Minorchange



No change

Response


15% 27% 12% 6%

6% 21% 9%

3%

Moderate

Light

None


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Investment banking

The investment banking markethas become marginally morecompetitive than in 2005.

However seven of the 21respondents said they had notaltered the strategy while fivebanks indicated they had made aminor change.

Credit cards

Only four banks responded to thisquestion and three of them said themarket was intensively competitive.In 2005, five banks unanimouslyrecorded an intensive market.

The market will become morecompetitive with the local

incorporation of foreign banks.The media has reported that threebanks already plan to launchlocal cards while Citibank plansto issue debit cards and continueto issue credit cards throughits local partners, ShanghaiPudong Development Bank andGuangdong Development Bank.

Investment banking


Intensive

Minorchange



No change

Response

C o m p e t i t i o

n

10% 24% 33% 5%

19% 5%

5%

Moderate

Light

None

Credit cards

Note: Based on responses from four banksShading represents greater than 20%

Intensive

Minorchange



No change

Response


25% 25% 25%

25%Moderate

Light

None


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Foreign banks in ChinaDate

PricewaterhouseCoopers 15

0 1 2 3 4 5 6 7

Guangdong Development Bank

Huaxia Bank

Bank of Beijing

Shenzhen Development Bank

Industrial Bank

China Everbright Bank

Bank of Shanghai

CITIC Bank

Shanghai Pudong Development Bank

China Minsheng Bank

Bank of Communications

China Merchants Bank

Agricultural Bank of China

China Construction Bank

ICBC

Bank of China

Average score on a scale of 1 to 10

Q Can you score on a scale 1 to10 your perception of the levelof competitiveness of thefollowing domestic banks inthe Chinese market?

Not all banks were able to providescores on some of the less wellknown banks and the scores reflectthe averages of scores provided bybankers that had some knowledgeor experience of these banks.

The “Top 3” banks were identifiedas Bank of China, ICBC and ChinaMerchants Bank.

Six banks recorded a score below 5.

The foreign banks were asked toscore the level of competitivenessof 16 banks operating in thedomestic market.

These views are recognised as

being very subjective but theynevertheless reflect a degree ofdifferention in the minds of theforeign bankers interviewed.


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Q How would you characterisethe commitment of yourparent bank to the Chinesemarket in comparison to othermarkets around the world ona scale of 1 to 10 (where 1

represents no commitmentand 10 is extremelyaggressive)?

Thirty nine banks shared theirviews on the commitment of theirparent bank to the Chinese market.Only four banks recorded a scoreof 5 or below.

At the other end of the scale 29banks recorded a score of 8 orhigher, with seven banks awardingtheir parents the maximum score of10 out of 10.

The high levels of support identifiedin the 2005 report remained inplace in 2007, suggesting that theforeign banks commitment andinterest in the Chinese market hasnot faltered.

0

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Number of

banks7

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10

12

The majority of banks found itdifficult to explain what mightinitiate a decline in interest. Somesuggested an Asian economiccrisis similar to that of the 1990sbut most could not envisage an

economic slowdown before 2010.

Several European banks suggestedthat a lowering of interest by theirparent in Eastern Europe mightbe reciprocated by an increasedinterest in China. Another bankcommented that its parent’sinterest might increase if a foreignbank was allowed to gain control ofa domestic Chinese bank.


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Regulatory issues

The bankers continued to expressconcern about the level and natureof regulation. They indicated thatregulation was multi-layered and

often lacked a “clarity of co-ordination”.

They reported a lack of co-ordination between SAFE(State Administration of ForeignExchange) and CBRC andsuggested different CBRCoffices provided contrastinginterpretations.

Senior management in the bigbanks

One bank commented that the bigbanks’ management teams havebeen in place since the 1990s andthe system would benefit frommore turnover at this level.

Currency controls

The banks noted that the currencyis not fully convertible andrecorded their frustration with

currency restrictions.

Credit history

The lack of a comprehensivecredit history was considered ashortcoming of the banking systemespecially by banks planning toenter the retail market.

Other concerns included:

Q Can you identify three majorconcerns of the Chinesebanking system at present?

Every bank has a foreign debtquota and once reached theborrower has to pay a 5%business tax

There may be an

underestimation of the NPL(non-performing loan) portfoliosin the big banks

There is no national treatmentregarding the capitalrequirement for each foreignbank branch

There is a lack of marketdiscipline and good governanceregarding personal relationshipsin the domestic loan market

Limits on offshore funding

Too protectionist in a financialmarket where foreign bankshave less than 2% market share

The policy of directing theforeign banks to expand north,south and west needs furtherclarification

Low productivity in the domesticbanks

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Q What are the most importantchanges taking place inChina’s financial market?

Local incorporation of foreignbanks

The most important change takingplace in the financial marketwas widely recognised as local

incorporation.

The impact of this move will havefar reaching implications for foreignbanks.

Areas mentioned includedincreased capital requirements,wider supervision, greatertransparency and new productopportunities.

One of the biggest obstacles forforeign banks will be attractingenough low-cost deposits to fundtheir yuan banking operations.

Lifting of geographic restrictions

The banks predicted furtherexpansion with the removal ofthe previous restriction to 25“open” cities following the expiryof the WTO accession five yearadjustment period in December

2006.

“Foreign banks don’t pose a significantthreat to Chinese ones. What China’s

banking industry needs next, in the post-IPO period, is transformation, innovationand deregulation.”

Zhang Jianguo, President of ChinaConstruction Bank

Bloomberg News, December 11, 2006

The CBRC had increased thenumber from 18 to 25 in December2005 with the addition of Shantou,Ningbo, Harbin, Changchun,Lanzhou, Yinchuan and Nanning.

Opening of capital markets

A general opening of the capitalmarket was forecasted with bondmarket development and furtherdevelopment of derivatives.

One banker compared thecurrent situation in China to hisexperiences in Japan in the 1980sand 1990s.

Foreign exchange market

One bank mentioned that theforeign banks were now beingrequired to arrange onshorefunding for foreign exchangetransactions.

Other predicted changes include:

a lifting of the SAFE quota andthe ability to do RMB options

further stock market reforms

the ongoing restructuring of thestate-owned banks

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The most important driver ofchange among the 40 bankscontinues to be the pace ofregulatory change.

This factor exceeded the next

driver, capital markets, by almosttwo to one and overshadowedother drivers such as technology,new entrants and globalisation.

Q What are the major driversof change in the Chinesebanking industry?

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2007

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t i o n

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Score

Based on responses from 40 banks2005 responses adjusted


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The regulatory environmentremains the most difficult aspectof Chinese banking in 2007. Ona scale of 1 to 5 where 5 is mostdifficult the regulatory environmentalmost received the maximum

possible score.

Finding and keeping goodpersonnel have been elevatedto second place followed bycompetition from other foreignbanks.

Q What does your bank find themost/least difficult aspects ofthe Chinese banking industry?

-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0

2005

2007

Competition from non Bank FIs

Level of NPLs

Identifying profitable clients

Economy and market volatility

Risk management

Corporate governance

Competition from domestic banks

Building a customer base

Accounting framework and tax

Product/Revenue diversification

Innovative product/service offerings

Brand name recognition

Competition from foreign banks

Finding and retaining good personnel

Regulatory environment

increasing difficulty

More difficult

Less difficult

Brand name recognition hasbecome more important perhapsreflecting the foreign banks’ widerlaunch into the retail bankingspace.

Product and revenue diversificationalong with corporate governancehas declined in relative importancesince 2005.


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The graphs below show that theforeign banks continue to recordvery high scores regarding thescale of the challenges facing thedomestic banks.

In the loan market little haschanged since 2005. Indeed themagnitude of the challenge hasonly receded in the collateralarea, and that decrease was onlymarginal.

Q Can you score on a scaleof 1 to 5 the followingchallenges for the Chinesebanking system, accordingto your perception, where5 represents the greatest

challenge?

Governance

Domestic loan market

Market practice

0 1 2 3 4 5

Reliance on collateral

Accuracy of loan grading system

Collecting NPLs

Credit monitoring

0 1 2 3 4 5

Ability to cross sell limited by regulator

Poor product differentiation

Primitive customer information system

Fee/commission regulation

Interest rate regulation

Focus on high risk, low margin lending

0 1 2 3 4 5

Functional overlaps in front/middle/back office

Lack of disclosure

Independence of directors

Poor management information system

In governance and market practicethe scores closely mirror the 2005scores.

In terms of market practice there isone exception to the 2005 findings

– cross selling limitations imposedby the regulator has declined from4.03 in 2005 to 3.05 in 2007. In allother areas the perceived level ofchallenge faced by the domesticbanks remains extensive andformidable.


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Q What are the most pressingissues you face? Can you ratethem 1 to 5?

Participants were required to scoreeach issue on a scale of 1 to 5,where 5 was most pressing.

The 0 centre axis thereforerepresents 3 in the 1 to 5 scale and

those to the right side are “mostpressing” and range from 3 to 5.

-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0

2005

2007

Increasing competition from non banks

Insurance

International accounting standards

Quality of loan books (NPLs)

Basel II

Internet security risks

Rogue trader

High dependence on new technology

Consolidation of financial industry

Globalisation

Liquidity of banks

Understanding complex productsMarket volatility

Global economic downturn

Business continuity (disaster recovery)

Service quality

Fraud prevention and detection

Domestic economic downturn

Corporate governance

Introducing new information technology

Risk management

Increasing competition from domestic banks

Retaining existing clients

Product/revenue diversification

Building a customer base

Legal risksIncreasing competition from foreign banks

Cost control

Appropriate staff incentive schemes

Improving revenue growth

Operational risk management

Recruiting/training front office staff

Increasing number of new regulations

More pressing issue


Less pressing issue

2005

2007

New regulations continue to bethe most pressing issue facedwith recruiting and training andoperational risk managementbecoming more important pressingissues in 2007.

Revenue growth, governance andthreat of an economic downturnall recorded a lower level ofimportance.


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Q Which of the following typesof risk represent the greatestpotential threat to you as aforeign bank in China? Pleaserate each risk between 1and 4, where 1 is among the

greatest threats and 4 is not athreat.

Confirming the responses in otherquestions in this report the foreignbanks ranked regulatory risk as thegreatest threat in 2007. Regulatoryrisk was placed ahead of credit riskand reputational risk. At the bottom

of the scale representing minimalrisk was IT risk and businesscontinuity risk.

Operational risk and market riskwere considered to be majorthreats but a collection of risksincluding fraud, treasury, liquidity,currency, business strategy andgovernance were all judged to beminor threats. Political risk wasconsidered to be a minor threat by70% of the participants.

Greatest threat

Major threat

Minor threat

Not a threat

Extremely effective

Effective

Ineffective

Extremely ineffective

Greatest threat

Major threat

Minor threat

Not a threat

Extremely effective

Effective

Ineffective


Greatest threat

Major threat

Minor threat

Not a threat

Extremely effective

Effective

Ineffective


Magnitude of the risk Effectiveness of risk management

Reputational risk

The second part of this questionasked respondents to commenton how effectively they managedthese different risks.

Only credit risk achieved a 100%

score by combining effective andextremely effective management.

The banks believe they have aneffective handle on managing thelist of different risks.

Setting aside political risk, whichis outside the banks’ sphere ofinfluence, the risk that had thelowest combined score of effectiveand extremely effective, at 84%,was regulatory risk.

Market risk

Credit risk


27/101


Greatest threat

Major threat

Minor threat

Not a threat

Extremely effective

Effective

Ineffective


Greatest threat

Major threat

Minor threat

Not a threat

Extremely effective

Effective

Ineffective


Greatest threat

Major threat

Minor threat

Not a threat

Extremely effective

Effective

Ineffective


Greatest threat

Major threat

Minor threat

Not a threat

Extremely effective

Effective

Ineffective


Greatest threat

Major threat

Minor threat

Not a threat

Extremely effective

Effective

Ineffective


Greatest threat

Major threat

Minor threat

Not a threat

Extremely effective

Effective

Ineffective



Regulatory risk

Business/strategic risk

Operational risk

Fraud risk

Liquidity risk

Currency risk


28/101


Legal risk

Greatest threat

Major threat

Minor threat

Not a threat

Extremely effective

Effective

Ineffective


Greatest threat

Major threat

Minor threat

Not a threat

Extremely effective

Effective

Ineffective


Greatest threat

Major threat

Minor threat

Not a threat

Extremely effective

Effective

Ineffective


Greatest threat

Major threat

Minor threat

Not a threat

Extremely effective

Effective

Ineffective


Greatest threat

Major threat

Minor threat

Not a threat

Extremely effective

Effective

Ineffective


IT/technology risk

Greatest threat

Major threat

Minor threat

Not a threat

The participants believedthat they were unableto manage the polititicalenvironment and as aresult a chart showing theirlevel of risk management

effectiveness was notprepared for this factor.


Business continuity risk

Treasury/liquidity planning

Governance risk

Political risk


29/101


Less than 5%

5 to 10%

10 to 15%

15 to 20%

20 to 30%

30 to 40%

40% or above

35% recorded 15% to 20% turnover

Over two-thirds were above 15%

Q What is your staff turnoverrate?

One of the greatest challengesfor the foreign banks in China istalent management. The banksare finding it difficult to recruit andretain staff. Over two-thirds of thebanks are experiencing turnover

above 15%, and 35% recordedturnover levels of 15% to 20%.

A small group of the leadinginternational banks appear to bethe most effective in holding staffand have managed to suppressturnover rates to below 5%.

At the other extreme some bankshave experienced acute staffingproblems. One Asian bank saidthat two years ago it had 80%turnover; last year it dropped to50% and in 2007 it predictedturnover would be 20%.

Another Asian bank indicated ithad lost a key member of theirwealth management team as aresult of a competitive offer of triplethe employee’s salary.

A European bank voiced concernthat employees had returned fromhead office training programmesand immediately resigned.

Several participants pointed outthat although the banking industrywas growing rapidly there was achronic shortage of experienced,senior management.

It was predicted that the move tolocal incorporation and continuedexpansion will increase the staffingneeds.


30/101

Competition and positioning


31/101


Q Do you believe the bankingmarket continues to beovercrowded?

The banks unanimously agreedthat foreign banks would continueto enter and leave the Chinesemarket.

No Yes


100%

Yes


In 2005 over half the participantsbelieved the banking market wasovercrowded. In 2007 only athird of the 40 banks viewed it asovercrowded.

This reversal reflects the openingup of the market along multiple

dimensions such as productrange, geographic coverage andregulatory framework.

The foreign banks acknowledgethat they currently account for less

than 2% of the banking market.

Q Will other foreign banks enteror leave?


32/101


0

2

4

6

8

10

M o r e t

h a n 2 0

0 1 5

0

M o r e

t h a n

1 0 0

1 0 0 9 0 8 5 8 0 7 5 7 0 6 5


Number of

banks

1 1

9

4

2 22

3

10

4

0

2

4

6

8

10

12

L e s s t h a n

1 0

1 5 - 1 9

2 0 - 2 4

2 5 - 2 9 3 0

M o r e

t h a n

5 0


Number of

banks

2

8

7

2

7

11

Although 15 banks predict amarginal increase to less than80 banks by 2010 the majorityanticipate a larger number.Seventeen banks anticipate 100 ormore foreign banks.

Q How many foreign banks willbe operating in the Chinesemarket in 2010? Of these howmany will incorporate locallyby 2010?

Twenty six banks anticipate 20 to30 banks to incorporate locally by2010. Two banks expect more than50 banks to incorporate.


33/101


Q What product areas do yousee as becoming increasinglyimportant in the Chinese retailbanking industry in the nextthree years?

Three product categories areexpected to experience rapidgrowth by 2010. They are creditcards, investment products andmortgages.

0

5

10

15

20

25

30

Foreign currency

RMB

O t h e

r r e t a i l

p r o d u

c t s

T a x e

f f e c t i v e

p r o d u

c t s

L e

v e r a g e

d i n v

e s t m

e n t p

r o d u

c t s

M o r t g

a g e s

I n v e

s t m e n t p

r o d u

c t s

C r e d i t

c a r d s


Number of

banks

In April 2007 media reportsstated that the first four banksto incorporate locally will offeryuan-denominated mortgages,wealth management products anddeposits and loans. The reports

also stated that The Bank of East Asia plans to waive its accountmanagement fees as a promotionalincentive while HSBC will charge300 yuan a month for value-addedpremium services to customerswith balances below 500,000 yuan.There will be no fees for customerswith balances exceeding thisamount.


34/101


Q What product areas do yousee as becoming increasinglyimportant in the Chinesewholesale banking industry inthe next three years?

The four RMB denominatedproduct areas expected to growby 2010 are interest and crosscurrency swaps, structuredproducts and debt capital marketswith over 25 banks expecting

these areas to become increasinglyimportant.

0

5

10

15

20

25

30

Foreign currency

RMB

P e r f o r m i n g l o a n

t r a d i n g

N P L t r a d i n g

E q u i t y

c a p i t a l m

a n a g e m e n t s o l u t i o n s

H y b r i d

f i n a n c i n g t e c h n i q u e s

O n l i n e t r a n s a c t i o n s

s y s t e m s

S e c u r i t i s a t i o n

E q u i t y

c a p i t a l m

a r k e t s

D e b t

c a p i t a l m

a r k e t s

S t r u c t u r e d

p r o d u c t s

C r o s s c u r r e n c y s w a p s

I n t e r e s t r a t e

s w a p s


Number ofbanks


35/101


The foreign banks expect a rangeof new entrants into the financialsector. Suggestions on “new”entrants (some already are present)included:

Auto finance companies suchas Ford Credit, Toyota Finance,GMAC, etc.

Large international insurancecompanies expanding theirfinancial services presence

Private equity firms participatingin some of the domestic banksor financial institutions (forexample, the Carlyle Group withits partner Prudential Financialacquired a 25% stake in ChinaPacific Life in 2005)

Leasing companies such as VWLeasing or Siemens Leasing

Global retailers such asCarrefour which plans to have112 outlets by year end 2007and Wal-Mart (perhaps in acredit card joint venture) whichplans to have 123 outlets

•

•

•

•

•

Q Can you name three newentrants from outside thefinancial services industrythat you believe will representa significant threat in thefinancial services market over

the next three years?


36/101


Twenty one different markets wereidentified, covering both retail andinvestment and merchant banking.If the participating banks weredeemed to be active in a particularmarket, they scored their perceived

levels of success on a scale of 1 to5 where 1 was “very unsuccessful”and 5 was “very successful”.

Since 3 is perceived as neutral, tosuggest a degree of measurablesuccess, it is important that theaverage scores for the participants

Q How successful has yourbank been in penetrating thefollowing markets in the last year?

in that market exceed 3. Figures inparentheses indicate the numberof participants providing a scorein that particular market. In theradar diagrams appearing on thefollowing pages, a 21-sided frame

based on the value of three hasbeen drawn.

If the line pierces the frame (i.e. theline moves to the outside of thecircle frame), success has beenachieved in that respective market.


37/101


All banks – Levels of success

1

2

3

4

Other (2)

Transactional & custodial services (11)

Trade finance (33)

Money marketactivity (26)

Securitiestrading (9)

Foreignexchange (31)

Funds

management (6)

Internet banking (4)

Retirement products (3)

Transaction services (6)

Retail deposits (7)

Consumer loans (2)

Residentialmortgages (3)

Credit cardmarketing (1)

Retail markets (5)

High net worthindividuals (13)

SME lending (18)

SME treasury (17)

Derivatives (24)

Global corporates (18)

Top 100 corporates’lending (21)

Top 100 corporates’treasury (20)

Global corporates, derivatives and transactional & custodial services are new categories in 2007

2007

2005

The foreign banks as a grouprepeated average levels of successin their chosen market segments.In most product categories, thescore hovers around 3 out of 5 orneutral in an index of success.

The chart indicates only onecategory, other, where the scoreexceeded 4 out of 5. In one case itreferred to correspondent bankingand in the other home countrycorporates of an Asian bank.


38/101


1

2

3

4

Other (1)

Transactional &custodial services (4)

Trade finance (11)




Fundsmanagement (2)



Transaction services (3) Retaildeposits (4)

Consumerloans (1)


Credit card

marketing (0)

Retail markets (3)


SME lending (9)

SME treasury (6)

Derivatives (7)





2007

2005

Asian banks –Levels of success

The Asian banks in both 2005 and2007 considered themselves tobe successful in trade finance andSME lending.

They scored below 3 among Top100 and global corporates.


39/101


European banks –Levels of success

The European banks record onlyaverage levels of success. Fifteenbanks believe they were successfulin trade finance.

1

2

3

4Other (0)


Trade finance (15)

Money market

activity (13)



Fundsmanagement (3)


Retirement

products (2)

Transactionservices (2)

Retaildeposits (2)

Consumerloans (1)

Residential

mortgages (1)


Retail markets (2)


SME lending (7)

SME treasury (8)

Derivatives (14)





2007

2005


40/101


The North American banksrecorded strong scores in foreignexchange, top 100 corporateslending, global corporates andtrade finance.

North American banks –Levels of success

1

2

3

4

Other (1)


Trade finance (7)



Foreignexchange (5)

Fundsmanagement (1)

Internet banking (1)Retirementproducts (1)

Transaction services (1)Retail

deposits (1)

Consumer loans (0)



Retail markets (0)


SME lending (2)

SME treasury (3)

Derivatives (3)


Top 100 corporates’

lending (3)



2007

2005

As a group they were unsuccessfulin the retail segment, SME lendingand HNW individuals.


41/101


To identify the markets that thebanks believe will be of greatestimportance over the next threeyears, the 40 participants rankedthe following 21 markets on a scaleof 1 to 5.

Q How important are thefollowing markets for yourbank over the next three years?

Future importance – All banks

1

2

3

4

Other (1)


Trade finance (36)




Fundsmanagement (15)




Retaildeposits (18)

Consumerloans (15)




SME

lending (24)

SME treasury (24)

Derivatives (29)





2007

2005

Going forward the foreign banksscored above 3 for most segments.

A score of 1 indicates little or noimportance while a score of 5 canbe considered very important.

Since 3 is perceived as neutral,average scores for the group

should exceed 3, and thereforemarkets viewed as importantproject beyond that line.

They attached major levels ofimportance to the top 100 andglobal corporates, trade finance,foreign exchange, retail deposits,high net worth individuals and theSME sector.


42/101


Future importance – Asian banks

A group of Asian banks attachedmajor importance to the largecorporates and a sizeable number

1

2

3

4

Other (0)


Trade finance (13)




Funds

management (7)

Internetbanking (9)

Retirementproducts (5) Transaction

services (7)

Retaildeposits (11)

Consumerloans (9)




SMElending (12)

SME treasury (9)

Derivatives (9)Global corporates (6)




2007

2005

also propose to be very active inthe retail sector. Areas such astrade finance and foreign exchangealso received strong scores.


43/101


The European banks assignedhigh importance to the Top 100and global corporates, derivatives,foreign exchange and tradefinance.

1

2

3

4

Other (0)


Trade finance (15)



Foreign

exchange (15)

Funds

management (4)


Retirementproducts (4)


Retaildeposits (5)

Consumer loans (5)




SMElending (10)

SMEtreasury (12)

Derivatives (15)



Top 100 corporates’

treasury (13)


2007

2005

Future importance –European banks

A smaller group attached strongimportance to the retail sector.


44/101


Future importance –North American banks

The North American bank groupalthough smaller in number thanthe Asian and European bankgroups assigned significant scoresto almost all the different marketsegments.

1

2

3

4

Other (1)Transactional &

Custodial services (3)

Trade finance (8)



Foreignexchange (7)

Fundsmanagement (4)



Transaction services (1)

Retaildeposits (2)

Consumer loans (1)


Credit card

marketing (1)


SMElending (2)

SMEtreasury (3)

Derivatives (5)

Globalcorporates (4)




2007

2005

Values closely matchedthose given in 2005 with theexception of consumer loansand mortgages where only oneparticipant provided lower levels ofimportance.

The SME sector demonstrated anincreased level of interest.


45/101


Asian banks European banks North Americanbanks

All banks

2007 2010 2007 2010 2007 2010 2007 2010

Retail banking

Credit cards 3 4 2 5 1 1 6 10

Mortgages 5 7 3 4 1 1 9 12

Term deposits 5 8 6 5 1 1 12 14

Internet banking 1 5 3 5 1 1 5 11

Transaction & custody services 2 3 4 5 1 1 7 9

Private banking 5 7 5 5 1 2 11 14

SME lending 7 8 3 5 1 1 11 14

SME venture capital 2 3 1 3 1 1 4 7

Wholesale banking

Bonds 1 4 8 11 1 3 10 18

Treasury/FX/money market 9 10 14 15 5 6 28 31

Corporate banking 10 11 15 16 4 4 29 31

Project financing 7 8 10 12 2 2 19 22

Investment banking 7 8 10 13 3 4 20 25

Corporate finance 7 9 8 11 3 3 18 23

Trade finance 10 10 15 16 6 7 31 33

Correspondent banking 5 6 10 11 6 6 21 23

Wealth management 2 2 0 1 0 1 2 4

Funds management 1 4 6 7 0 1 7 12

Life insurance/risk products 1 3 2 4 0 1 3 8

To disguise the identity ofindividual banks, the 36 banksthat responded to this questionhave been grouped into Asianbanks, European Banks and North American banks.

The results suggest that around 12banks plan to be active in the retailarena. The Asian banks will makeup almost half of this group.

Q Which of the following areasare you presently involved inor plan to be in by 2010?

Present and future product areas by number of respondents

At least 14 banks plan to be activein private banking and small andmedium enterprise lending by2010. Not all banks seeking toincorporate locally plan to enter theretail banking market.

On the wholesale banking side,most participants are already activein core areas such as corporatebanking, treasury/FX/moneymarket and trade finance.

The bond market will becomeincreasingly important.


46/101


Q Will your business modelchange over the next three years?

In 2005, almost three quarters ofrespondents said their businessmodel would change by 2008. Thatresponse fell to just over half in2007 looking forward to 2010.

No Yes

Based on responses from 39 banks in 2007

and 34 banks in 2005

20072005

0 5 10 15 20 25

Other

State of the economy

Parent bank strategy changes

Increasing competition

Increasing customer demands

Product changes

Regulatory change

Number of banks

This suggests that the banks’strategies are becoming moredefined in the new post WTOenvironment. Sixteen banks saidtheir model would not change by2010.

The primary influence on strategycontinues to be regulatory changefollowed by product changes andincreasing customer demands.

The pace and direction ofregulatory change continues todictate the strategic responses ofthe foreign banks.


47/101


No

Yes


Of the 33 banks that responded tothis question, 31 banks indicatedthat they would implement theirparents’ systems.

One of the requirements of local

incorporation requires that banksselecting this vehicle will berequired to maintain full control oftheir operational systems in China.

Q Will the local operationprimarily implement parentsystems?


48/101


Q Below are a list of strategicoptions that your bankmay choose to increase itspresence in the Chinesemarket. Can you scoreon a scale of 1 to 10 the

attractiveness of each option?

As in 2005 the most popularstrategic option for expansion inChina remains organic growthfollowed by partnership with acommercial bank.

Creating a new financial entityincreased its attractiveness scorein 2007.

0

2

4

6

8

10

2005

2007

P a r t n

e r w i t h

a n o t h

e r f o r e i g

n b a

n k

P a r t n

e r w i t h

a n H K

, T a i w

a n , S i n g

a p o r e a

n b a

n k

C r e a t e

a n o n

b a n k f

i n a n c i a l

i n s t i t u

t i o n

P a r t n

e r w i t h

a “ B i g

4 ” b a n k

C r e a t e

a n e w

f i n a

n c i a l

e n t i t y

P a r t n

e r w i t h

a j o i n t

s t o c k c

o m m e r c i a

l b a n k

O r g a

n i c g r o w t h

Based on responses from 37 banks in 2007and 35 banks in 2005

Number ofbanks


49/101


Q On a scale of 1 to 5, where5 represents greatestimportance, if you were tochoose a joint venture howimportant would the followingconcerns be to your bank in

China?

If a foreign bank was to select a joint venture relationship then thegreatest concern would be itsability to exercise managementcontrol. The pattern of other issuesthat are important in a joint venture

relationship remain unchanged.

0 1 2 3 4 5

2005

2007 Ability to integrate

non bank financial services

Ability to build in

exit mechanisms

Ability to leverage

JV involvement

Ability to increase stake in domestic financial institutions

Protection of

foreign investors’ rights

Ability to exercise

management control

Based on responses from 35 banks in 2007

and 35 banks in 2005

Maximum score is 5


50/101

Performance


51/101


The chart indicates the rate ofrevenue growth anticipated by 37respondents.

Four banks anticipate 100%growth in 2007 and another 10

banks envisage growth between50% and 100%. Only six of the37 respondents predicted revenuegrowth of less than 20% in 2007.

Q What is your estimate of theannual growth in revenues of your business for 2007 andover the next three years?

0

20

40

60

80

100

B a n k 3

7

B a n k 3

6

B a n k 3

5

B a n k 3

4

B a n k 3

3

B a n k 3

2

B a n k 3

1

B a n k 3

0

B a n k 2

9

B a n k 2

8

B a n k 2

7

B a n k 2

6

B a n k 2

5

B a n k 2

4

B a n k 2

3

B a n k 2

2

B a n k 2

1

B a n k 2

0

B a n k 1

9

B a n k 1

8

B a n k 1

7

B a n k 1

6

B a n k 1

5

B a n k 1

4

B a n k 1

3

B a n k 1

2

B a n k 1

1

B a n k 1

0

B a n k 9

B a n k 8

B a n k 7

B a n k 6

B a n k 5

B a n k 4

B a n k 3

B a n k 2

B a n k 1

Percentage

growth


2007

2010

By 2010, one bank continuesto expect 100% growth while afurther eight banks plan growth tobe 50% or greater. Only four banksforecast annual growth below 20%in 2010.


52/101


The performance of the foreignbanks has improved since 2005.

Q In the next three years, do youthink profits for your bank willbe greater than at present,as at present or less than atpresent?

Optimism on profit performanceis also apparent in this relatedquestion which suggests that all 39

Q Over the last three yearsin the market, have yourbank’s profit expectationsbeen greater than expected,as expected or less thanexpected?

Less than expected

As expected

Greater than expected


2007

2005

Greater than at present


As present

2005

2007

The level indicating profits greaterthan expected has expanded to50% while the less than expectedcategory has declined from sevenbanks to four banks.

respondents expect their profits tobe greater in 2010 than at present.


53/101


To ascertain which bank segmentshave recorded contrasting levels ofprofitability, the banks were askedto identify levels of return frommarket sectors in which they wereactive.

The overall pattern of profitabilityportrays improved profitability in allsegments in 2007 relative to 2005.

For example, in the retail bankingarea no banks fell above marginallyprofitable in 2005. By 2007, fourbanks were in this category.

Bank profitability ina number of differentsegments over the last year

Retail banking

Loss 30%

Corporate banking

Investment banking

Private banking

Treasury

Internet banking

Wealth management

Life insurance

Individual banks

Credit cards

In 2005, 20 banks were marginallyprofitable in corporate bankingand 10 banks were profitable orvery profitable. In 2007, 28 bankswere profitable, very profitable orextremely profitable in corporate

banking.

The pattern repeats in privatebanking where seven banks areprofitable or above and in Treasury,where the number in profitable orabove expanded from 14 banks in2005 to 19 banks in 2007.


54/101


The foreign banks providedinsight into their loan portfolios byrevealing the percentage of loansto Chinese-based corporates,global corporates, home countrycorporates, Chinese banks and

foreign banks (a home countrycorporate would be a loan to aKorean corporate, granted by aKorean bank).

Q Can you provide some moredetails on your loan portfolio?


To Chinese-basedcorporates

To globalcorporates

To home countrycorporates

To Chinesebanks

To foreignbanks

Other Total

Asian bank 10 60 20 10 100

Asian bank 80 10 10 100

Asian bank 20 8 48 24 100

Asian bank 20 80 100

Asian bank 10 55 35 100

Asian bank 60 20 15 5 100

Asian bank 100 100

Asian bank 5 5 90 100

Asian bank 10 80 10 100

Asian bank 10 30 50 5 5 100

Asian bank 10 15 65 10 100

Asian bank 5 40 45 10 100

Asian bank 22 70 8 100

European bank 10 40 20 15 15 100

European bank 20 80 100

European bank 4 90 4 2 100

European bank 10 90 100


European bank 10 60 20 8 2 100

European bank 20 60 20 100


European bank 100 100





European bank 34 5 12 35 14 100

European bank 100 100



North American bank 100 100

North American bank 30 35 10 20 5 100

North American bank 50 25 25 100

North American bank 60 20 10 8 2 100North American bank 60 25 15 100

North American bank 100 100

Thirty six banks provided data and29 banks had loans to Chinesecorporates, 27 to global corporatesand home country corporates, 29to Chinese banks and 11 to otherforeign banks. Eight banks (Asian

and European) had more than50% of their portfolios with globalcorporates.


55/101


Q What percentage of yourbusiness in terms of bankingrevenue is undertaken in thefollowing business lines?

Thirty five banks provided anestimate of their revenue across19 different lines of business.To respect confidentiality theregional location of the banks wasomitted from this table. In a few

cases, banks were only willing tobreakdown revenue by retail versuswholesale/investment banking.

Retailbanking

Mortgages Termdeposits

SMElending

Wholesale/ investment

banking

Bonds Treasury/ FX/money

market

Corporatebanking

Projectfinancing

Investmentbanking

Corporatefinance

Tradefinance

Corresp.banking

Wealthmanagement

Total

Bank 1 30 70 100

Bank 2 10 30 20 10 30 100

Bank 3 90 10 100

Bank 4 10 90 100

Bank 5 10 10 20 5 30 10 15 100

Bank 6 10 50 10 30 100

Bank 7 30 20 50 100

Bank 8 50 25 25 100

Bank 9 80 20 100

Bank 10 5 10 5 70 10 100

Bank 11 70 10 10 10 100

Bank 12 10 80 10 100

Bank 13 20 20 60 100

Bank 14 30 70 100

Bank 15 25 30 45 100

Bank 16 10 80 10 100

Bank 17 20 30 10 40 100

Bank 18 25 50 25 100

Bank 19 10 50 40 100

Bank 20 30 40 30 100

Bank 21 5 90 5 100

Bank 22 20 80 100

Bank 23 30 20 40 10 100

Bank 24 10 30 10 30 20 100

Bank 25 5 80 15 100

Bank 26 5 30 50 5 10 100

Bank 27 35 25 25 15 100

Bank 28 5 15 80 100

Bank 29 60 40 100

Bank 30 5 30 60 5 100

Bank 31 5 95 100

Bank 32 30 50 10 10 100

Bank 33 90 10 100

Bank 34 100 100

Bank 35 90 4 6 100

A further five areas were included in this question: credit cards, internet banking, transaction and custody services, SME venture capital and private banking. However the respondents reported no revenue in any ofthese areas. As a result the columns have been eliminated.

As a result the table displays, forinstance, a 30:70 line split but nofurther detail. The most populatedcolumns relate to the Treasury andcorporate banking. Trade financewas a source of revenue to 19

banks and generates over 80% ofrevenue for two banks.


56/101

Peer review


57/101


First Second Third Score ChangeCitibank 12 7 3 53

HSBC 6 10 4 42

Standard Chartered 1 2 9 16

Deutsche Bank 2 2 1 11

JPMorgan Chase 2 1 2 10

ABN AMRO 2 1 8

Bank of Montreal 1 3

The Bank of East Asia 1 1

BOTM UBJ 1 1

Lehman Brothers 1 1

Based on 26 banks

Q Can you name the top threebanks in terms of success(performance, presence,momentum, etc.) across avariety of different markets?

Treasury

A simple scoring method awardedthree points to first place, twopoints to second and one point tothird place. This allowed the banksto be ranked based on a totalscore.

Banks were asked not to record anopinion unless they were active inthat segment and were comfortablein providing an accurate rankingin terms of success (performance,

Foreign exchange First Second Third Score Change

Citibank 13 11 1 62

HSBC 7 11 7 50



ABN AMRO 1 1 4

JPMorgan Chase 2 4

Mizuho Bank 1 3

UBS 1 1 3

Société Générale 1 2

BOTM UBJ 1 1

Bank of Montreal 1 1

Based on 28 banks

presence and momentum) asopposed to mere size.

They were not permitted to ranktheir own institution. Often bankswould choose just to indicate first

or second places.

The “Change” column indicateswhether the ranking has moved up,down or remains unchanged fromthat recorded in the 2005 survey.


58/101


Corporate lending

Derivatives First Second Third Score

Citibank 11 2 3 40

HSBC 1 9 3 24


JPMorgan Chase 4 12

Société Générale 1 2 1 8 ABN AMRO 1 2 7

Goldman Sachs 1 2 7

Standard Chartered 1 5 7

UBS 1 3

BNP Paribas 1 3

Credit Suisse 1 1 3

Sumitomo Bank 1 2

Merrill Lynch 1 2


BOTM UFJ 1 1

Morgan Stanley 1 1

RBOS 1 1

Based on 24 banksNew category in 2007 therefore no change

First Second Third Score Change

HSBC 15 10 3 68

Citibank 10 5 5 45


The Bank of East Asia 1 4 6

Mizuho Bank 1 1 5

BOTM UFJ 1 2 4

DBS 1 1 3

Deutsche Bank 1 1


BNP Paribas 1 1

Based on 29 banks


59/101



Citibank 10 4 2 40

HSBC 4 8 3 31

BNP Paribas 3 3 2 17

Société Générale 4 2 1 17

Standard Chartered 4 6 14 Deutsche Bank 2 1 8

BOTM UFJ 1 3

ABN AMRO 2 2

Mizuho Bank 1 2

Calyon 1 1

DBS 1 1

Based on 24 banks

Investment banking

Project financing

Asset management


Goldman Sachs 13 3 45

Morgan Stanley 2 8 4 26

Citibank 2 3 3 15


UBS 1 4 1 12

HSBC 1 2 5

Lehman Brothers 1 3 5

Merrill Lynch 1 1 4

Deutsche Bank 1 1 3

Standard Chartered 1 2

ABN AMRO 1 1

Based on 23 banks


HSBC 3 1 11

UBS 3 9

Citibank 1 2 1 8


ABN AMRO 1 1 4

Fortis 1 1 4

AIG 1 3

Deutsche Bank 1 2

Standard Chartered 1 2

Allianz GlobalInvestment

1 2


Merrill Lynch 1 2

Based on 11 banks


60/101


Mergers and acquisitions

Corporate finance First Second Third Score Change

Citibank 9 1 1 30


HSBC 1 5 1 14


ABN AMRO 1 3 6 Morgan Stanley 1 1 1 6


UBS 1 1 5

JPMorgan Chase 2 1 5

BOTM UFJ 1 1 3

BNP Paribas 1 2


Bank of America 1 1

Based on 18 banks


Morgan Stanley 4 5 1 23


Citibank 5 3 21

HSBC 1 2 7

JPMorgan Chase 1 5 7

UBS 2 6

ABN AMRO 1 1 3

Deutsche Bank 1 1 3


Merrill Lynch 2 2 Standard Chartered 1 1

Lehman Brothers 1 1

Based on 18 banks


61/101


Trade finance First Second Third Score Change

HSBC 13 5 49


Fortis 5 1 17

Citibank 6 5 17

BOTM UBJ 2 6 JPMorgan Chase 1 1 5

DBS 1 2 4

ABN AMRO 1 1 3

ANZ Bank 1 1 3

ING 1 2

Nord DeutscheLandesbank

1 2


Mizuho Bank 1 2

RZB 1 1

Sumitomo Mitsui 1 1

Hang Seng Bank 1 1

Deutsche Bank 1 1

Wachovia 1 1

Based on 27 banks


62/101


Credit cards

Retail banking First Second Third Score Change

HSBC 15 7 3 62

Citibank 10 8 4 50



ABN AMRO 1 2 1 8 Hang Seng Bank 1 2

Based on 26 banks

First Second Third Score

Citibank 9 5 37

HSBC 6 7 2 34



Based on 16 banksNew category in 2007 therefore no change


63/101


Appendices


64/101


Methodology 62

Bank groups 63

Participants 64

Background comments on participants 65

Foreign ownership in Chinese banks 75European Chamber Bank Working Group KeyRecommendations 2006 76

foreign banks in china

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