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Foreign Banks Are Optimistic on China Reform, Ernst & Young Says

HSBC Holdings Plc and Bank of America Corp. are among foreign banks that expect to benefit from China’s expansion of financial freedoms even as regulatory challenges persist, according to Ernst & Young LLP.

“With gradual and successive financial reforms taking place in China, foreign banks are optimistic about their future in China,” Ernst & Young said in a statement in Shanghai today after surveying 38 overseas lenders. Respondents expect a “modest improvement” in their performance over the next three years, the New York-based accounting firm said.

Foreign lenders are struggling to expand their market share of less than 2 percent in the world’s second-largest economy, where banking assets more than doubled since 2008 to 147 trillion yuan ($24 trillion) as of Sept. 30. Global banks face government restrictions on adding branches and offering products as local rivals churn out record profits.

Moves last year to increase global use of the yuan, liberalize interest rates and set up a free-trade zone in Shanghai may be beneficial to overseas banks, depending on their scope and timing of implementation, Ernst & Young said.

Foreign lenders see a loosening of controls on interest rates as the key to rebalancing China’s economy, even as the move may have a short-term effect on their profitability, the survey showed. The Communist Party, which pledged in November to give markets a “decisive” role in the economy, in July eliminated a floor on lending rates. It has yet to remove a ceiling on deposit rates.

Challenges Remain

Challenges for foreign banks in China include complex regulation, capital and liquidity constraints, skill shortages, and tight interest-rate margins, according to the Ernst & Young report. About 89 percent of the lenders expect rate margins to remain compressed in 2014, the survey showed.

Combined profit of foreign banks in China fell to 16.3 billion yuan in 2012 from a record 16.7 billion yuan the previous year, according to the China Banking Regulatory Commission. Overseas banks had 412 branches in the country as of December 2012, compared with about 17,000 outlets run by Industrial & Commercial Bank of China Ltd., the nation’s largest lender.

With 150 outlets on the mainland, HSBC is the biggest foreign bank in China by assets and branch network. The London-based lender boosted its China profit by about 12 percent in 2012 to 3.8 billion yuan, according to its website. It agreed last month to sell its 8 percent stake in Bank of Shanghai Co.

Global banks from HSBC to Bank of America and Goldman Sachs Group Inc. have raised at least $14 billion by divesting shares in Chinese financial institutions since the start of 2012.

Ernst & Young’s survey was based on interviews with chief executive officers and senior officials at 38 foreign banks from July to September.

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