Even when Beijing approves of the 'cross-location' sub-branches measure proposed by the Financial Services Development Council (FSDC) to allow Hong Kong banks to expand their sub-branches to various provinces on the mainland, it is not likely to be snapped up and implemented quickly.

This is because Hong Kong banks have a weak competence compared with State-owned banks especially in the retail business sector.

"It is difficult for Hong Kong banks to gain a competitive edge on the mainland," Dickie Wong, executive director of research at Kingston Securities Ltd, said.

In echoing a similar view, Sonny Hsu, vice-president of Moody's, said that the 'cross-location' sub-branches measure will have very limited effect on mainland banks because the State-owned banks have developed great distribution networks.

"The assets of Hong Kong small banks are generally $2 to $3 billion. Usually the capital expenditures budget for a mainland business operation will not be large, but it will cover a fifth to a tenth of the total assets," Hsu said.

Under the present rule, branches of Hong Kong banks in any municipality in Guangdong province may apply to the authorities to set up sub-branches in other municipalities within the province.

If Beijing gives a green light for Hong Kong banks to establish mainland cross-location sub-branches beyond Guangdong province, the bank will have to set up a branch in each location. But now if the Hong Kong bank wishes to maintain a presence in multiple municipalities, its sub-branches can only be established in the same municipality as the branch that it belongs to.

But Hong Kong banks especially the smaller ones may not be appreciated and not considered for expanding cross-location sub-branches due to their limited capital and short-handed human resources.

Hsu of Moody's said, "The banking market in Guangdong province is huge enough for Hong Kong banks where there are thousands of small- and medium-sized enterprises and a great population of almost 100 million there. So I believe Hong Kong banks will not show great interest in expanding their cross-location sub-branches beyond Guangdong province even if FSDC's proposal is approved."

"Hong Kong banks' sub-branches are always confined and their competence is weak due to limited distribution network. I believe the proposed consideration for Hong Kong bankers may have little help to their mainland business," Wong of Kingston said.

So far, about six Hong Kong banks have set up more than 60 cross-location sub-branches in Guangdong province. Until early 2014, the total assets of such cross-location sub-branches are 23.6 billion yuan ($3.8 billion), and the total loans and deposits were 18.5 billion yuan and 16.0 billion yuan, respectively. Compound average growth rates of the three items were 50.0 percent, 45.6 percent and 80.1 percent, respectively.

Peter Wong, who was the chairman of the Hong Kong Association of Banks in 2009 when the current measure for cross-location sub-branches was assigned, said, "The measure of cross-location sub-branches in Guangdong province will facilitate Hong Kong banks in Guangdong to provide services in more cities. It can bring benefits and convenience to local mainland residents as well as businesses operating in the area."

celia@chinadailyhk.com

(HK Edition 09/17/2014 page8)