Prospects brighter for foreign banks in China

Margins are generally getting tighter for all of them. Among the executives in 38 banks that EY interviewed for their January report, as many as 33 expect their margins from interest rates to get smaller.

Slight improvements

On the other hand, a significant majority of 25 respondents expect to see slight improvements in the market while seven are much more optimistic. The regulatory opening is likely to help to some degree but is not likely to lead to any great surge in market share.

Asia banking on expansion

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"The benefits for the foreign bankers also significantly depend on the scope, interpretation, timing and implementation of the proposed changes," says Geoffrey Choi, assurance leader for financial services in China at EY.

International banks like HSBC, Standard Chartered, Citibank, UBS and Deutsche Bank, along with a host of other regional players like Overseas-Chinese Banking Corp and DBS in Singapore or Maybank in Malaysia, are expanding their presence.

They are gaining mandates in areas like trade financing, corporate mergers or acquisitions and even larger deals like initial public offerings but, so far, they have not really managed to tap into the retail market. To date, they account for just 2 percent of the market - 1.82 percent at the end of 2012.

The domestic giants like Industrial and Commercial Bank of China or Bank of China continue to dominate with tens of thousands of branches.

Still, for most foreign banks already in the market, China is one of the top three most important growth markets in the world, according to EY.

But there are a significant number of challenges including too many rules and regulations, limited access to the growing bond market and constraints on liquidity and capital.

There are also issues with human resources and difficulties keeping profits up as interest rate margins compress, retail customers stick with the traditional domestic banks and competition grows.

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