China is undergoing an historic economic and cultural transformation as it emerges as one of the largest consumer markets in the world. The government in Beijing has assembled the necessary ingredients for this change to happen, and providers of retail banking services are now starting to benefit.

The findings detailed in this report are based on interviews with executives from many of the leading domestic and international financial institutions active in China. The report focuses on three areas with particularly encouraging growth prospects, namely credit cards, mortgages and wealth management services.

The use of these services among customers remains extremely low relative to the conventional withdrawal, deposit and transfer functions offered by banks.

China’s size and rapidly growing middle class make it an obvious target market for foreign banks. Between them, the country’s 1.3 billion citizens hold nearly USD 2 trillion in personal savings.

One of the most interesting developments for foreign players is the newfound ability to offer local currency services and to incorporate locally. These developments will allow international banks to operate more like conventional retail banks, offering a full suite of services to domestic customers.

The wave of listings by Chinese banks is also encouraging. The well-received USD 21.9 billion dual listing of Industrial and Commercial Bank of China (ICBC) in October 2006, following successful initial public offerings from China Construction Bank (CCB) and Bank of China (BOC), served notice that international investors believed that domestic banks are improving their standards of governance and corporate reporting.

These capital markets transactions coincided with a flurry of investments from international banks such as Bank of America, RBS, Deutsche Bank and ING, which view the Chinese market as one of the world’s top growth opportunities. The following pages outline the status of the retail banking sector from the perspectives of both domestic and foreign banking institutions.

Download Retail banking in China: New frontiers

PDF format, 931KB, 32Pages. Provided by kpmg.com.hk.

Message from Simon Gleave, KPMG in China and Hong Kong SAR

Welcome to our inaugural report on the retail banking sector in China. The growth of the sector since the late 1990s has been phenomenal. With the recent opening up of the sector to foreign banks, we view the timing of this report as particularly opportune. We hope it will serve as a roadmap to both domestic and foreign banks seeking to better understand the retail banking sector and the challenges and opportunities presented by it.

The retail banking sector in China is still underdeveloped by international standards, but in light of the sheer scale of savings in China, the future potential of the sector is immense, making it one of the most attractive prospects in the world for banks. Gaining access to this sector is one of the major drivers behind the rapidly growing number of foreign banks setting up operations in China and making strategic investments in Chinese banks. At the time of writing this publication, nine foreign banks have applied to incorporate locally in China (a requirement to fully access the retail banking sector). However, we expect that by the end of 2007, this number will be higher, benefiting the sector as a whole.

While the retail banking market in China will continue to be dominated by domestic banks, there will be many areas, including credit card issuance, mortgage lending and wealth management, where foreign banks can make their presence felt. The expected long-term growth in the market will allow successful players to develop significant businesses and compete in one of the most exciting markets in the world.

I would like to thank Reuters for their efforts in conducting such extensive interviews and research for this report.

Simon Gleave
Partner in charge
Financial Services
KPMG in China and Hong Kong SAR

About KPMG

KPMG is a global network of professional firms providing audit, tax, and advisory services, with an industry focus. With more than 123,000 people worldwide, the aim of KPMG member firms is to turn knowledge into value for the benefit of clients, people, and the capital markets.

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