Partnering with commercial banks in China has become less appealing to foreign banks since last year, when Beijing allowed them to establish wholly owned subsidiaries in the country, a PricewaterhouseCoopers (PwC) survey says.

In terms of future strategic expansion, most foreign banks favor organic growth as the most-desirable method of expansion. Major foreign banks that have already bought into Chinese lenders - such as Citigroup Inc, BNP Paribas and HSBC - are in no rush to raise their stakes.

"It's interesting to note that partnering with a joint-stock commercial bank became a less desirable option this year, compared with findings in 2005 and 2007, as most respondents think organic growth is a less-costly option," Mervyn Jacob, PwC Financial Services Leader for China, said at a press conference yesterday.

China's banking authorities fully opened the country's financial sector for local incorporation of foreign banks early last year - a milestone of the country's financial reform.

While more than half of the 42 foreign banks surveyed by PwC are expected to make further acquisitions in China by 2011, many will focus on non-banking sectors.

"In the next few years, an increasing number of foreign banks are expected to walk out of the banking sector when they consider making investments in China," said Raymond Yung, PwC's Financial Services Leader for the mainland market. "They are becoming more interested in making investments in non-banking sectors, such as Chinese trust, leasing and futures companies."

The study also found the majority of foreign banks in China anticipate strong revenue growth over the next few years, with some foreseeing up to 50 percent annual growth. And nine of 42 foreign banks expect to double their revenue growth in 2008.

Moreover, 38 out of 40 foreign banks surveyed anticipate profits in the next three years to exceed those currently, even as China becomes increasingly integrated into the world economy; market volatility and the impact of a global economic downturn are inevitable.

Despite the prosperous outlook, foreign lenders continue to identify the regulatory environment and staff retention as the biggest challenges. "The latter issue has increased in importance, as foreign banks are expanding their branch networks and product offerings," PwC said in a report.

(HK Edition 06/24/2008 page2)