Foreign banks may not profit in China for a decade, says KPMG

By Sundeep Tucker in Hong Kong

Intense competition in China could prevent foreign banks from profiting from their investments in credit card and mortgage ventures for another 10 years, according to a KPMG report.

More than 70 overseas banks now operate in China, having invested billions of dollars in the sector over the past five years. Several have raised expectations that local joint ventures would deliver early returns.

However, the report, partly based on a survey of foreign and local banking executives, suggests that executives are becoming increasingly bearish about the prospects of making profits from their operating ventures in the short-to-medium term, though many have earned handsome paper profits from equity stakes in state-owned banks that have listed in Hong Kong or Shanghai.

Simon Gleave, KPMG financial services partner for China and Hong Kong, said: “There is a culture of no fees. It could take 10 to 20 years to make profits. China is not the same as other markets that banks might have come across.”

Citigroup, Royal Bank of Scotland and HSBC are among the overseas banks to have launched co-branded cards with local banks, while rivals such as Bank of America and Deutsche Bank are waiting to launch.

Card transactions in China have risen massively in recent years but the growth has largely been via debit cards, 700m of which are now in circulation. China's 1.3bn consumers have a cultural aversion to revolving credit, as well as $2,000bn in personal savings to fund purchases.

The report says: “Average merchant fees are about 60 basis points, meaning little profit for [credit card] issuers.” It offers an equally pessimistic outlook for the mortgage sector with industry players “worried that intense competition will hit profits”.

Overseas executives also accept that it will be tough to win market share from established former state-owned lenders, who boast a combined 75,000 branches nationwide.

KMPG suggests that foreign lenders adopt a “steady and prudent” entry into developed [mortgage] markets such as Beijing and Shanghai, “though fears of a property bubble are never too far from a banker's thoughts”.

The report says that overseas lenders need to find creative distribution channels, such as mobile phone banking or partnerships with large insurance companies