Red faces at China's state banks

Despite the frenzy of restructuring surrounding the Bank of China, China Construction Bank and Bank of Communications ahead of their forthcoming local and international IPO's, their Beijing branches failed to impress an elite team from the central bank of China.

In a just-released report, originally compiled in summer of this year, BoCom, ICBC, BoC and ABC were listed in descending order at the very bottom of the survey.

As predicted by many experts, and justifying the buy-in by HSBC, BoCom outperformed the big Four, possibly on account of its smaller size and more recent history.

The performance of ICBC, just behind BoCom, is slightly surprising, as it is one of the banks most tightly connected to China's traditional industrial sector. Many state-owned firms have enormous debts to the bank, in the process pushing to the bottom of the prospective IPO list.

ICBC is huge in Beijing, with 40% of all branches in the capital. It broke the Rmb 10 billion mark in operating profits in 2003.

The banks were ranked according to points awarded for excellence in operations; ability to scale up operations; capacity for innovation; organizational structure; and corporate governance. But despite their combined market share of over 70%, the local banks failed to crush the foreign banks, which cannot even carry out Rmb services until later this year.

The report suggested the state banks had lost a lot of ground with regard to corporate governance.

Some analysts have suggested the report has not taken into account the efforts made under the current reorganization. But the compilers of the report state that Bank of China and CCB have only just started to organize an independent board of directors.

"Despite their efforts, it will take a long time before the state banks have an adequate system of corporate governance in place," one author of the report told journalists.

Top of the pile came Standard Chartered, Beijing branch, followed by Calyon, Beijing branch, and HSBC Beijing Branch in third place. Citibank came in sixth.

The best local bank, China Merchants Bank, came in 13th place, followed by Minsheng Bank in 30th place.

Calyon is recently-created entity derived from the wholesale and investment banking units of Credit Lyonnais and the investment banking unit of Credit Agricole Indosuez. CA Indosuez is the investment and wholesale banking unit of Credit Agricole, which took over Credit Lyonnais earlier this year.

The entity has five sister branches in China and one rep office. Branches include Tianjin, Shanghai and Xiamen; while the rep office is located in Shenzhen.

The presence of Calyon in the list, which only takes deposits and lend to companies, rather than individuals, has created some interest about the methodology used in the list.

Calyon was a representative office and not allowed to carry out business until October last year. Given that the report was compiled in June this year, the bank did not have much of a track record to be judged upon, some observers have noted.

However, the PBOC has divulged few details, and some observers feel that the central bank is more interested in giving the state-owned banks a sharp reminder of the difficulties to come, rather than a really detailed competitive analysis.

A spokesman for Standard Chartered says they had no idea the survey had even taken place, adding that the PBOC had not conducted on-site interviews and research.

"We learned about the whole event from the media," she says.

Amongst the report's most urgent recommendations to the local banks was to improve the quality of new product offerings in order to compete with the foreign banks and to gain greater expertise in segmenting the market in order to capture a high-end customer base.