Drop it low: Why ROE of Singapore banks' subsidiaries in China are painfully low

Even after almost a decade of being there.

Singapore banks may have to rethink putting more stepping stones in China's banking industry as ROEs of their local subsidiaries keep disappointing everyone with its low numbers.

According to Barclays, even seven to eight years after local incorporation, the ROE of the China banking subsidiaries remains low, and in most cases, is significantly lower than the returns generated by the parent/group (with the exception of HSBC).

Here's more from Barclays:

The ROE of the Hong Kong and Singapore banks’ subsidiaries in China averaged 5.5% in 2013, vs ROEs in excess of 20% for the large local Chinese banks in our coverage universe.

We believe ROEs are low mainly due to regulatory constraints. This could be because of the complex and time-consuming approval system to expand branch and sub-branch network, approval and licence requirements for new products and services, weaker relations with regulators in China compared to local peers and heavy administrative burden for smaller foreign banks, strict financial regulatory restrictions, including loan-to-deposit limits and high reserve requirements, inability to own a controlling stake in a local Chinese bank.

Foreign banks limited to a maximum 20% stake (25% collectively).

Another reason could be heavy investment spend which could be attributed to competition for talent and wage inflation and investment in IT systems, premises and branch openings.