Citigroup and HSBC Take On China
Mary is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Stifled by regulation in China, foreign banks are missing out on an epic lending boom. Five years after China said it fully met World Trade Organization obligations to open its economy to global financial firms, Citigroup (NYSE: C) and HSBC (NYSE: HBC) are among banks still largely shut out of China, the world’s biggest banking market. Foreign financial companies hold less than 2% of assets in China. This represents the lowest market share among the major emerging markets. Meanwhile state-owned firms such as the Industrial and Commercial Bank of China have been transformed from insolvent into profitable firms with the assistance of large government bailouts. The Chinese market is simply dominated by Chinese lenders.
Failure to grab market share has limited profitability. Foreign banks combined have earned approximately $10 billion in China over the past decade. These earnings only came after spending $27 to build franchises and $33 billion to buy stakes in local lenders. Out of the four largest banks in the U.S., Citigroup is the only one building a retail banking network. JP Morgan (NYSE: JPM), Wells Fargo (NYSE: WFC), and Bank of America (NYSE: BAC) have all decided to steer clear of consumer banking in China. They have chosen instead to focus on treasury and corporate services.
Citigroup established a presence in China back in 1902 and currently has only 49 branches in the country. It has a target of 100 branches by 2013. The company announced in February that it will begin issuing its own cards in China, becoming only the second foreign bank to do so. Citigroup believes this segment in China has huge growth potential in coming years. This is a strong bet on a highly regulated economy that hasn’t fared extremely well for Citigroup in all its time and efforts there. However, shifting its products toward cards might be just the thing to fuel growth in China.
HSBC is another financial institution that has not yet given up on China. It currently operates 117 branches there. HSBC has hopes of expanding this number to 800, even loftier ambitions than Citigroup. In addition to branch expansion, HSBC has also decided to target businesses for growth, mainly companies with international needs such as trade financing and foreign expansion. It is targeting corporate customers as well as the affluent Chinese.
For both Citigroup and HSBC, niche areas might be the place to look for success in China if they can be entered where you can offer a good proposition with competitive advantage. Cards and corporate banking might be the way to get these companies even further into China’s market. And if these two are successful, perhaps others such as JP Morgan, Wells Fargo, and Bank of America might follow suit. China is one of the largest financial markets, after all. It would not be wise for any institution to give up without exhausting all possibilities of opening up this market.
MaryPosey has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo & Company and has the following options: short APR 2012 $21.00 puts on Wells Fargo & Company, short APR 2012 $29.00 calls on Wells Fargo & Company, short OCT 2012 $33.00 puts on Wells Fargo & Company, and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
