The challenge ahead for foreign banks in China

Implications: Citigroup, the biggest U.S. bank, last month became the first overseas financial company to manage a Chinese bank. It led a group that paid $3.1 billion for 86 percent of Guangdong Development Bank, a struggling Guangzhou- based lender with 500 branches

Foreign Banks Struggling with China valuations.

Foreign banks unlikely to try to build their own networks initially.

Foreign banks buying stakes in China banks and setting up distribution partnerships.

Analysis: A good way to evaluate the potential for foreign Banks in China is to look at a similar market place...In this particular case the Taiwan market may serve as a good leading indicator of things to come.

According to statistics released by the MOEA in Taiwan the markets for foreign banks in Taiwan started to open in the mid 1980's.  As of 2004, Taiwan had 45 domestic banks, 5 medium sized business banks, 35 credit co-ops, 253 farmers credit unions, 25 fishermans credit unions and 36 foreign banks.

The market share held by the foreign banks after nearly 20 years in business in Taiwan amounts to less that 3% of the overall market.

The number of branches operated by domestic banks in Taiwan is 67 times greater than those run by foreign banks

The average rate of returns on assets among foreign banks was double that of domestic banks. Shareholder return ratios averaged 39.92% for foreign banks, but just 3.52% for Taiwanese banks. Foreign banks achieved average profits per employee of NTD 2.68 million, while the average worker at a domestic bank generated only NTD 1.17 million in profits. Each branch or office of a foreign bank produced average revenues of NTD 933 million and average before-tax profits of NTD 240 million, while these figures were NTD 267 million and NTD 46.23 million for domestic banks.

Though foreign bank assets account for approximately 5% of total banking assets in Taiwan, in 2004, foreign banks were responsible for 10.99% of total before-tax profits in the banking sector.

Citibank's eleven branches are the most among foreign banks in Taiwan. Taiwan's big domestic banks generally operate around 100 branches. Despite this wide difference, Citibank has posted the tenth best profits among all banks in Taiwan this year through August.

Citibank is by far the leading foreign bank in Taiwan. In 2004, its before-tax net profits hit NTD 9.679 billion, making up 43.2% of the total before-tax net profits of the 35 foreign banks in Taiwan.

Citibank now has the cache of "Face status" in Taiwan and therefore having a Citi account in Taiwan is synonymous with success. 

Still China's pool of household and commercial wealth is estimated to be 32 trillion Yuan or approximately 4 trillion USD, and assuming the slow rate of market penetration as evidenced in the Taiwan market then 3% of 4 trillion is 130 billion.The $70 mio price of admission to the Chinese Foreign bank sector looks like a gamble worth taking.There will be booms and bust a-la Taiwan experience but the sheer scale of the market almost demands participation to some degree.