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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (14840)	11/4/2004 1:41:59 PM
From: RealMuLan	Read Replies (1) \| Respond to of 116555

Retail Banking In China The McKinsey Quarterly, 11.04.04, 10:25 AM ET Chinese banking faces a dramatic transformation over the next ten years. While we expect the overall profits of the sector to grow at an annual rate of about 10%, the source of its earnings will change significantly: By 2013, we estimate, corporate banking's now overwhelming share of the sector's profits will decline to little more than half as profits from retail banking increase more quickly. The McKinsey Quarterly makes available its research by special arrangement with Forbes.com. Click here to read the full text of this article on The McKinsey Quarterly site. Free registration is required. Three main forces will propel these developments. The first is strong and increasingly consumption-driven GDP growth, ranging from 7% to 9% in recent years. Prosperity will boost demand for retail-lending products such as car loans, credit cards and mortgages. Second, demand for traditional corporate-banking products, particularly deposits and loans, will fall. As Chinese companies centralize their cash management, the "stocks" of deposits held by each of their provincial operations will be greatly reduced. Moreover, Chinese companies now rely almost entirely on bank debt for financing, but over the next ten years we expect the development of capital markets to reduce demand for loans. Third, over the next five to seven years, we believe that the Chinese government will gradually deregulate interest rates. That will significantly reduce margins on both deposits and corporate lending. The shift in the profit mix from corporate to retail gives foreign banks a golden opportunity to tap into the Chinese banking market by targeting affluent customers, by far the most attractive segment. Their financial needs are diverse, and they account for the vast majority of auto, mortgage and personal-lending balances. Although they make up a mere 2% of the retail customers of Chinese banks, they account for as much as 55% to 65% of retail-banking profits. The "mass-affluent" segment accounts for 18% of all customers and for 40% to 50% of retail-banking profits, while the 80% of customers in the mass-market segment are largely unprofitable. Affluent customers are highly concentrated geographically: Three-quarters of them live in Beijing and in major coastal cities such as Shanghai and Guangzhou. Domestic banks can't serve this segment effectively because they lack risk-assessment skills in retail lending and a sales-and-service culture in their operations, which focus primarily on processing deposit account transactions. Some of the large institutions don't even know who their affluent customers are, since they have little integrated information about the people who bank with them. McKinsey's surveys of Asian banking consumers show that affluent Chinese are less satisfied with the level of service they receive than are their counterparts elsewhere in the region, and that they would switch to banks providing better service even at the cost of higher fees or interest rates. Foreign banks, with their greater experience in serving the affluent market, are thus well positioned to capture this opportunity, for they will have to provide only a relatively small number of branches in a few big cities. The creation of wholly owned branch networks is likely to be a critical component of a winning strategy because they provide a platform for customer access and brand building. Leading foreign banking groups such as Citibank and HSBC (nyse: HBC - news - people ) are building their own branch networks in central locations (for instance, the Bund and Pudong financial districts in Shanghai) and luring top customers. For now, these branches are limited by regulation to foreign currency deposits and loans, mainly to expatriates and affluent locals. But come deregulation, in 2007, they will be free to take local currency deposits and to offer renminbi-denominated credit cards, mortgages and other personal-lending products--a market whose profits are likely to grow by 30% a year. They will also have the right to market other products, such as life insurance and mutual funds. To read the rest of the story, click here. Excerpted from The McKinsey Quarterly forbes.com