European Banks Counting on China for Growth

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The banking industry seems to have set its eyes on the Asian Market. UBS AG (NYSE: UBS) recently launched its locally-incorporated unit in China, which will allow it to conduct business in areas like wealth management. UBS operates brokerage and mutual fund joint ventures with local partners along with private equity units. The Zurich-listed bank is the first Swiss bank to set up a wholly-owned subsidiary in China.

China is the world’s second biggest economy with more than 330 western institutions operating within its boundaries. The past few months have seen 40 outside banks, including JP Morgan Chase (NYSE: JPM), the Asia-focused European bank HSBC (NYSE: HBC) and Morgan Stanley injecting capital there.

A total of $111.7 billion of foreign direct investment (FDI) flew into China in 2012. 

In the financial sector, the current surge of foreign investment came in when the Chinese Government relaxed its foreign investment rules in May 2012. The foreign banks were allowed to increase their stakes in domestic investment banking joint ventures to 49% from 33%. Last May, JP Morgan invested $394.08 million into its China unit, while HSBC added $450 million into its Chinese operation in 2011.

Foreign banks have been operating in China for decades, however according to a report by KPMG, they account for less than 2% of the total assets in the banking sector. This is mainly because foreign banks have only been allowed to serve individual Chinese customers since 2007. But in the bigger picture, world economy is lagging while, according to HSBC, Chinese GDP will increase by 8.6% in 2013 and will improve further in 2014. The nation’s GDP is predicted to touch between $16 trillion to $20 trillion by 2020, which will translate into per capita GDP of more than $10,000.

In other words, even with the slowdown, the Chinese economy is still moving at forward at an incredible clip as compared to their North American or European peers. Financial institutions cannot afford to ignore it.  The issue is going to be whether they will be competitive.  U.S. banks have to slash staff and outsource so much of their research as a consequence of the huge bubble they helped build in the first part of the century.  UBS is actively streamlining operations but keeping particular focus on Southeast Asia, which it considers a ‘second home market.’

HSBC also believes that the US, Japanese and European market remain bearish as compared to the Chinese economy which is showing great growth opportunities hence the bank itself continues to invest in its core operations in China while divesting its non-core assets such as in insurance. 

HSBC agreed on selling its Ping An stake to Thailand’s Charoen Pokphand Group for an estimated $9.4 billion. 3.24% of the stake has already been sold. HSBC is hoping to net a post tax gain of $2.6 billion on the sale. However, according to the WSJ, the regulators are likely to reject HSBC's proposal of selling its 15.57% stake in Ping An due to concerns over funding sources. On the other hand, in an effort to expand on its core operations, HSBC (China) has become the first foreign bank to obtain approval from the State Administration of Foreign Exchange (SAFE) to implement a foreign currency netting solution. Eyeing a big opportunity in the Yuan bond market, HSBC has planned on selling a $160.5 million two year floating rate dim sum bond in the off-shore market.   HSBC has been one of the major champions of the dim sum bond market, so this approval by SAFE is a natural outgrowth of that relationship. 

UBS (China) currently has 12% of its work force working in the Asian Region. However, with more focus on other emerging markets like India this percentage will increase. As long as China’s economy continues to grow along current projections, things look good for foreign investment. Banks like UBS and HSBC moving in quickly will have a distinct advantage long-term over others with more pressing concerns at home.   

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>UBS</strong></p> </td> <td> <p><strong>HSBC</strong></p> </td> </tr> <tr> <td> <p><strong>Stock past 6 Mos.</strong></p> </td> <td> <p>62.35%</p> </td> <td> <p>28.28%</p> </td> </tr> <tr> <td> <p><strong>Beta</strong></p> </td> <td> <p>1.63</p> </td> <td> <p>1.14</p> </td> </tr> <tr> <td> <p><strong>Enterprise Value</strong></p> </td> <td> <p>-$46.68B</p> </td> <td> <p>-$233.40B</p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>N/A</p> </td> <td> <p>15.75</p> </td> </tr> <tr> <td> <p><strong>EPS</strong></p> </td> <td> <p>-0.17</p> </td> <td> <p>3.51</p> </td> </tr> <tr> <td> <p><strong>Yield</strong></p> </td> <td> <p>0.40%</p> </td> <td> <p>3.30%</p> </td> </tr> <tr> <td> <p><strong>ROA</strong></p> </td> <td> <p>-0.02%</p> </td> <td> <p>0.54%</p> </td> </tr> <tr> <td> <p><strong>ROE</strong></p> </td> <td> <p>-0.57%</p> </td> <td> <p>8.44%</p> </td> </tr> </tbody> </table>


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