China's economic slowdown hits foreign banks
外國銀行受中國經濟低迷沖擊

China's economic slowdown has hit bank earnings hard. Last week, the country's top five banks all reported a first quarter profit growth of under two percent. Asset quality deterioration and interest margin contraction will continue to weigh on their growth through the year.

China's Big Five state-owned banks all racked up double-digit growth in the first quarter of 2014, and now they've all seen that figure plummet to under 2 percent in the same period this year. Consultants at PwC say that while the big local banks are off to a weak start in 2015, foreign banks in China could have their market positions seriously shaken.

"I also heard in 2014, foreign bankers have revised, or tightened loan underwriting and loan monitoring policies, so as to ensure that there's no more deterioration in asset quality. I expect that the foreign banks will also have a difficult year for 2015," said Jimmy Leung, senior partner of PWC China.

The People's Bank of China has joined other nations' central banks in loosing monetary policies by cutting interest rates and reserve requirement rates more than once in the past 6 months.

These moves, according to Leung at PwC, may wind up hurting the foreign banks in China more than the Chinese banks, because the foreign banks are relevantly smaller in size here.

They may have to give up more interest rate margin in order to retain existing customers by offering deposit rates higher than the central bank's reference rates.

"Foreign banks have been struggling in the past on their deposit base so as to fund the business. They are much more vulnerable to changes in interest rate," said Leung.

"If in a lower interest rate environment, the customers of the foreign banks will not be satisfied with current interest income, so they will look for alternatives. As a result the foreign banks will have to raise the floating part of the interest rate, so as to retain the customer deposits. They need to go to alternative funding, such as interbank and parent company. All these will be more costly than customer deposits."

Unlike the big Chinese banks that required quarterly reports of which all shows profit growth under 2% , foreign banks are not listed locally and so are only required to announce earnings on a yearly basis.

Last year most of them reported much weaker growth than their Chinese peers, and have not reported at all for this year. But if they're all in trouble, Singapore-based OCBC may be the most aggressive in adjusting to the new situation.

The bank saw its net profits growth in the Chinese mainland more than triple in 2014 from a year earlier. Its China chief executive officer Kng Hwee Tin says China's strategy of encouraging businesses to expand abroad has expanded the bank's cross-border business as well, while a more liberalized Renminbi has created new currency hedging demands.

"The other trend is of course, we noticed the RMB changes. That is actually a good trend, because it encourages a lot of corporates to hedge their risks. Previously they didn't want to hedge their risks. Now they do hedging," he said.

"That's actually prudent risk management from their perspective. We have played a large part because we offer our forex services, and therefore the clients take advantage of this to hedge their positions. So that has contributed to some of our profits."

Smaller branch networks have always been foreign banks' weak spot in China.

To expand its presence in China, OCBC last year bought Hong Kong-based Wing Hang Bank to strengthen its network by adding Wing Hang's 70 branches spanning Hong Kong, Macau and the Chinese mainland.

Both PwC and OCBC say 2015 will not be an easy year for the foreign banks, but that taking advantage of Chinese policies like the One Belt, One Road initiative, and new Free Trade Zones could prove to be the foreigners' silver lining for the next few years.

Even if things are tough, they stay engaged with China, as it's a market too big to ignore.