Artikel

Banking on the future

With increasing financial deregulation and stiffer foreign competition, it's never been more challenging—or potentially rewarding—for banks in China.

Von Johnson Chng, John Ott, and Nick Palmer

First published on Mai 12, 2008
Min. Lesezeit


With increasing financial deregulation and stiffer foreign competition, it's never been more challenging—or potentially rewarding—for banks in China. What will it take to thrive in this new environment? What lessons are available for leading China banks? They could learn from the telling patterns that emerged from our study of 30 of the largest publicly held European and US financial services firms such as Citibank and HSBC. Our analysis identified which companies generated the highest profit growth and best total shareholder returns from 1996 to 2006. While their assets and strategies differ, we found that investors tend to reward companies that focus on three priorities—three priorities that could be useful to China's banks as they continue to reform and grow. First, the top performers attain best-in-class earnings for each business in which they compete. The companies that concentrated on a few key customers and markets segments usually outperformed their more diversified competitors. In the retail banking sector, industry leaders like Santander and Wells Fargo posted earning growths that outpaced the sector's 17.9 percent average. In China, a prime example is China Merchants Bank (CMB), which has risen to the fore as a leader in retail and affluent banking. In addition to winning numerous industry accolades, an analysis of China retail bank customers conducted by Bain shows that CMB has the highest customer loyalty rating amongst national banks. CMB has achieved this success by targeting the retail sector in the Chinese market more than other domestic banks and offering products like the "All-in-one" card, one of the first debit cards with integrated multi-currency deposit accounts. As a result of its disciplined focus, CMB has the highest average deposit volume by branch, has one of the fastest-growing consumer loan portfolios and is also the top issuer of credit cards in China. These successes are reflected in its share price. Second, leaders benefit from strong concentration, measured by market share in a few key markets. Companies like Morgan Stanley and Royal Bank of Canada, whose market share in their main business was at least 60 percent that of the market leader, had shareholder returns nearly one-third greater, on average, than their rivals with smaller market share. Likewise, firms that derived more than half their revenues from a single large geography, such as the EU or the US, generated annual shareholder returns 50 percent higher than more dispersed competitors. In China, a concentrated geographic footprint has contributed to strong returns. For example, Minsheng Bank and China Merchants Bank have centered their attention on prosperous urban areas and expect to continue to see robust growth in these areas. Third, sector leaders in Europe and the US traditionally grow their current businesses organically but shift to mergers and acquisitions when industry cycles favor deal-making. For China's banks, other motives are driving M&A activity. In recent years, companies have begun to take small steps beyond the domestic Chinese market to acquire international experience, provide services to existing customers with a presence outside of China and develop internal M&A expertise. So far they have acquired small banks close to home or small stakes in larger banks and have remained passive in management style and integration. The Industrial and Commercial Bank of China (ICBC) alone, over the last two years has completed three deals: two majority stakes in small banks in Indonesia and Macao; and one smaller stake in South Africa's Standard Bank. In all three deals, there has been limited active involvement from ICBC in target bank operations. Going forward, as China's banks become more confident in their abilities to merge with their targets and with their operational expertise, deal sizes will get bigger, Chinese managers will become more active and there will be much greater integration of operations. But as these banks venture out of their own market and compete with global titans, they also will face mounting pressure. From our analysis, only three of the companies we examined that were among the ten biggest in 1996, remain in the Top 10 or survived the decade as independent organizations. And the list of names will invariably change again within the next few years. Heeding lessons from today's winners, it will be companies that focus on growing their core profits and market share that will remain in control of their destiny. Johnson Chng is a partner in Bain & Company's Beijing office and leads its Greater China Financial Services Practice. John Ott is a Bain partner in London. Nick Palmer is a Bain partner in Hong Kong.

With increasing financial deregulation and stiffer foreign competition, it's never been more challenging—or potentially rewarding—for banks in China. What will it take to thrive in this new environment? What lessons are available for leading China banks?

They could learn from the telling patterns that emerged from our study of 30 of the largest publicly held European and US financial services firms such as Citibank and HSBC. Our analysis identified which companies generated the highest profit growth and best total shareholder returns from 1996 to 2006. While their assets and strategies differ, we found that investors tend to reward companies that focus on three priorities—three priorities that could be useful to China's banks as they continue to reform and grow.

First, the top performers attain best-in-class earnings for each business in which they compete. The companies that concentrated on a few key customers and markets segments usually outperformed their more diversified competitors. In the retail banking sector, industry leaders like Santander and Wells Fargo posted earning growths that outpaced the sector's 17.9 percent average.

In China, a prime example is China Merchants Bank (CMB), which has risen to the fore as a leader in retail and affluent banking. In addition to winning numerous industry accolades, an analysis of China retail bank customers conducted by Bain shows that CMB has the highest customer loyalty rating amongst national banks.

CMB has achieved this success by targeting the retail sector in the Chinese market more than other domestic banks and offering products like the "All-in-one" card, one of the first debit cards with integrated multi-currency deposit accounts. As a result of its disciplined focus, CMB has the highest average deposit volume by branch, has one of the fastest-growing consumer loan portfolios and is also the top issuer of credit cards in China. These successes are reflected in its share price.

Second, leaders benefit from strong concentration, measured by market share in a few key markets. Companies like Morgan Stanley and Royal Bank of Canada, whose market share in their main business was at least 60 percent that of the market leader, had shareholder returns nearly one-third greater, on average, than their rivals with smaller market share. Likewise, firms that derived more than half their revenues from a single large geography, such as the EU or the US, generated annual shareholder returns 50 percent higher than more dispersed competitors.

In China, a concentrated geographic footprint has contributed to strong returns. For example, Minsheng Bank and China Merchants Bank have centered their attention on prosperous urban areas and expect to continue to see robust growth in these areas.

Third, sector leaders in Europe and the US traditionally grow their current businesses organically but shift to mergers and acquisitions when industry cycles favor deal-making. For China's banks, other motives are driving M&A activity. In recent years, companies have begun to take small steps beyond the domestic Chinese market to acquire international experience, provide services to existing customers with a presence outside of China and develop internal M&A expertise. So far they have acquired small banks close to home or small stakes in larger banks and have remained passive in management style and integration. The Industrial and Commercial Bank of China (ICBC) alone, over the last two years has completed three deals: two majority stakes in small banks in Indonesia and Macao; and one smaller stake in South Africa's Standard Bank. In all three deals, there has been limited active involvement from ICBC in target bank operations.

Going forward, as China's banks become more confident in their abilities to merge with their targets and with their operational expertise, deal sizes will get bigger, Chinese managers will become more active and there will be much greater integration of operations.

But as these banks venture out of their own market and compete with global titans, they also will face mounting pressure. From our analysis, only three of the companies we examined that were among the ten biggest in 1996, remain in the Top 10 or survived the decade as independent organizations. And the list of names will invariably change again within the next few years. Heeding lessons from today's winners, it will be companies that focus on growing their core profits and market share that will remain in control of their destiny.

Johnson Chng is a partner in Bain & Company's Beijing office and leads its Greater China Financial Services Practice. John Ott is a Bain partner in London. Nick Palmer is a Bain partner in Hong Kong.