On the retail side, the foreign banks will seek to grow their local retail business in credit cards, mortgages and investment products.

Local network advantage

"Domestic banks traditionally have the advantage of a huge client base and an intensive branch network, which currently dwarfs foreign banks to niche players in certain markets," says Dirk Chanmueller, vice-president and Financial Services leader of Capgemini Greater China.

It will take years for foreign banks to build their networks up to the domestic banks' scale in China.

In any case, among the biggest beneficiaries of the market's fully opening are the banking customers.

Chinese companies, especially those doing overseas business, and high-income families will have more options in choosing banking service providers.

Ordinary customers will see further improved service and a growing number of products in domestic banks, spurred by competitive pressure from foreign banks.

According to Capgemini's Chanmueller, domestic banks need to take the competition seriously, use their advantages and invest in their wealth- and risk-management capability.

"The speed with which they achieve this will be decisive and every month lost due to hesitation in taking action will have a negative impact," he says.

He predicts an increased number of projects initiated by the major institutions to improve risk management, wealth management and retail banking as capital for investment is now available.

International standards

The domestic banks also need to prove they are able to decrease the non-performing loan (NPL) rate in the long run to the international standard of 1 to 2 per cent.

"The international banking community will be keeping a close eye on the further progress of the NPL ratio and overall profitability of the top-tier banks in China," Chanmueller says.

He expects the increased activities of foreign banks in 2007 will also push domestic commercial banks' shareholding reform and improvement in business structure, processes and systems.

Chanmueller says there will be more initial public offering s (IPOs), especially from some of the second-tier and third-tier city commercial banks in 2007.

1

2

3

(For more biz stories, please visit Industry Updates)