China Hot Market Without Profit Seen in Pretty Lady Card; “Some may never earn a profit out of it, but they have to join the fight, as that’s the most efficient way of grabbing deposits and cross- selling other financial services.”

China Hot Market Without Profit Seen in Pretty Lady Card

By Bloomberg News  Apr 22, 2013


The website of China Citic Bank Corp.’s Ms. Magic card is displayed on a computer screen. Ms. Magic card has attracted more than three million users since August 2005, according to the Beijing-based company

Huaxia Bank Co. (600015)’s Pretty Lady credit card, co-issued with Deutsche Bank AG (DBK), entices women with triple points for cosmetics and fitness-club memberships. The Ms. Magic card from China Citic Bank Corp. (998) dotted with Swarovski crystals offers free beauty treatments and health insurance.

They’re part of a high-end competition being waged by banks for a spot in consumers’ wallets in the world’s fastest-growing market for credit cards, even as delinquencies have tripled in the past four years and profit remains elusive.

“Credit cards are the ultimate growth area and also the battlefield for banks in China,” said Rainy Yuan, an analyst in Shanghai for Taipei-based Masterlink Securities Corp. (2856) “Some may never earn a profit out of it, but they have to join the fight, as that’s the most efficient way of grabbing deposits and cross- selling other financial services.”The competition is drawing global firms including New York- based Citigroup Inc. (C) — the first U.S. bank allowed, as of last year, to issue its own solo-logo cards in China — and HSBC Holdings Plc (HSBA) as they seek to grab market share from entrenched competitors such asIndustrial & Commercial Bank of China Ltd., the fourth-largest issuer in the world.

Card issuance in China more than tripled to 331 million over the past five years through Dec. 31, according to the country’s central bank, as companies seek to tap 43.6 trillion yuan ($7 trillion) in household savings, more than the combined gross domestic product of Germany andBrazil. Last year, 46 million credit cards were issued in the world’s second-largest economy, boosting the total 16 percent from the end of 2011.

Borrowing Spree

In the U.S., credit cards rose 3.4 percent to 536.6 million and debit cards increased 8.7 percent to 560 million, according to the Nilson Report, an industry newsletter. Debit cards outnumber credit cards 10-to-1 in China, central bank data show.

Encouraging debt has backfired elsewhere in Asia. LG Card Co., South Korea’s biggest credit-card lender, required a 4 trillion won ($3.5 billion) bailout from creditors after a consumer-borrowing spree encouraged by tax breaks and lax credit screening soured in 2002, pushing up defaults.

In China, banks have failed to generate enough interest income from debt rollover and annual fees to cover the costs of issuance after expanding marketing efforts, according to a survey of executives at 41 overseas lenders published by PricewaterhouseCoopers LLP in July. With annual interest fixed by the government at 18 percent, China’s banks can’t compete by lowering rates, and instead have to differentiate themselves by offering merchant discounts and gifts. Coach wallets, Hugo Boss quilts and free Starbucks coffee upgrades are all available.

Swipe Fees

Fees paid by retailers to banks whenever a customer uses a credit card range from nothing for schools and public hospitals to 1.25 percent of the purchase price for entertainment and catering. In the U.S., retailers are charged about 2 percent.

About 3 percent to 8 percent of cardholders in China roll over their debts generating interest charges, compared with about 40 percent in the U.S., according to Richard Huang, a Beijing-based partner at Boston Consulting Group. Meanwhile, it costs 200 yuan to 300 yuan to issue one credit card in the country, Huang estimated.

Only a few of more than 30 major credit-card issuers, including China Merchants Bank Co. (3968) and Shanghai-based Bank of Communications Co., have reported that their credit-card businesses are profitable. ICBC, with 77 million cards as of Dec. 31, doesn’t disclose figures.

Luring Customers

Credit-card issuers are targeting young, affluent users who desire a better lifestyle, are more inclined to use bank loans to fund purchases of cars and need other financial products such as mortgages. Consumers under the age of 35 with assets of more than 500,000 yuan hold the highest number of cards among all Chinese groups, with 2.6 on average. That’s lower than about four to five in Hong Kong and six to seven inSingapore, according to a Boston Consulting Group report.

Chen Junjun, a marketing manager at Guangzhou-based China Guangfa Bank Co., spends 10 hours a day, seven days a week, trying to lure customers to his roofless booth outside a subway station in Shanghai’s Pudong district. Among the gifts he offers: a wireless mouse, storage boxes and coffee mugs.

“No annual fees, buy-one-get-one free for Starbucks coffee, and you get a free Coach wallet, too,” Chen said to a female passerby. “If you have a job, you are qualified. If you have a credit card, you are qualified.”

In a tie-up with Apple Inc. announced in January, China Merchants Bank is allowing cardholders to buy iPhones and MacBook laptops costing as much as 30,000 yuan with zero- interest installments over two years.

Starbucks Upgrade

China Construction Bank Corp. (939), the nation’s second-largest lender, offers those who use its card to buy coffee at Starbucks a free upgrade to a larger size. In January, the Beijing-based bank signed a three-year sponsorship with Manchester United Plc, winning solo rights to issue team-branded cards in China. The club, which has won the English soccer championship 19 times, estimated that it has 108 million followers in China.

Citic Bank’s Ms. Magic card has attracted more than three million users since August 2005, according to the Beijing-based company. Now holders are in for another treat — a 10 percent discount on hotel bookings.

Neither Huaxia Bank nor Frankfurt-based Deutsche Bank would provide figures for the number of Pretty Lady cards issued. The German lender provides “business assistance and cooperation in various areas including developing Huaxia Bank’s credit-card business, which now has more than 2 million cards on issue,” said Michael West, a Hong Kong-based spokesman for Deutsche Bank, which owns about 20 percent of the Chinese firm.

Unseating Citigroup

Some banks have gone to extremes to grab market share. Beijing-based ICBC, with about 23 percent of China’s credit cards, gave customers in Hunan province cards with a credit limit of 1 cent, the National Business Daily reported on Dec. 4. The bank declined to comment.

ICBC Chairman Jiang Jianqing, who heads the world’s largest bank by market value, told shareholders in Beijing in May that when he was invited to a 2002 Citigroup celebration of its 100th anniversary in Asia he was embarrassed by a question from Sanford “Sandy” Weill, former chairman and chief executive officer of the U.S. lender.

“He asked me how many credit cards ICBC had issued,” Jiang said. “I answered we have about 7 million. He proudly told me that they have issued 50 million. Of course there was nothing much I could say at that time.”

Jiang told shareholders ICBC would take “only a few years” to unseat Citigroup as the world’s largest issuer, with at least 200 million cards in more than 50 countries.

Solo Logos

In his last major speech as Communist Party chief in November, Hu Jintao vowed to double China’s per capita income by 2020 from 2010. That may pave the way for the rest of China’s banks to overtake their U.S. counterparts by 2020 as the biggest issuers of credit cards. China may have 1.1 billion cards by 2025 with revenue of issuers’ surging 20 times and their profit growing 30 times by then, Purchase, New York-based MasterCard Inc., the second-biggest U.S. payment network, predicted in 2010, the last time it forecast the market.

Foreign banks remain far behind their Chinese counterparts. The only two permitted to issue solo-logo credit cards are Citigroup and Hong Kong-based Bank of East Asia Ltd. HSBC, based in London, is offering technical expertise to local partner Bank of Communications and issues co-branded cards.

Overseas banks have 387 branches in China compared with about 66,600 operated by the five largest state-owned lenders and held just 1.6 percent of the nation’s 83 trillion yuan of deposits, according to the latest figures available from the China Banking Regulatory Commission.

Waiving Fees

“Foreign banks lack the scale to reach out to retail customers,” said Stanley Li, a Hong Kong-based analyst at Mirae Asset Securities HK Ltd. “It’s better for them to run the credit-card business with China’s major local banks, as they can rely on the extensive branch network and merchant relationship of local banks.”

Citigroup waived the first-year’s annual fee of 300 yuan for Rewards cardholders applying before March or spending more than 20,000 yuan by the end of December.

The bank, targeting affluent customers in China, requires applicants to have a business card and a minimum monthly income of 3,500 yuan for a local-currency card and 10,000 yuan for a U.S. dollar-denominated one. Approval, which normally takes two to four weeks, can be sped up if the applicant submits a copy of an income statement and residence record, according to Citibank China’s application materials.

‘Very Optimistic’

“We’ve had an exceptionally strong response in terms of new accounts and indeed usage on our cards,” Jonathan Larsen, Citigroup’s global head of retail banking and Asia-Pacific head of global consumer banking, said at a Jan. 23 news briefing in Singapore. “We are very optimistic about this opportunity.”

Normally it would take five years for the credit-card business to break even, according to Simon Chow, head of consumer banking at Citigroup’s China unit. The bank sought to turn a profit earlier than that, he said.

Bank of East Asia, the first overseas lender to issue its own credit card in China in 2008, said at the time it planned to break even in four to five years. The business has been losing tens of millions of yuan annually and is struggling to attract users, said a person with knowledge of the matter who asked not to be identified because he wasn’t authorized to speak.

Dormant Cards

“It’s tough for foreign banks to expand into the credit market, as the local players have already established their presence,” Cartier Lam, Shanghai-based deputy CEO of Bank of East Asia (China) Ltd., said in a phone interview. “As a new player, you can either give credit-card holders more benefits or a larger credit limit so that they will consider a second card. This is cost to banks. The break-even period is very long.”

Cardholders often have more than one card to take advantage of promotional campaigns. Some users sign up just for the gifts, leading to many dormant cards. About 47 percent of cards issued in China as of the end of 2011 were dormant, an increase from 38 percent the previous year, according to the China Banking Association. Figures for 2012 aren’t available yet.

At Merchants Bank, China’s second-biggest credit-card issuer after ICBC, more than half of its 45 million cards were inactive by the end of last year, according to the Shenzhen- based lender’s annual earnings report.

“Instead of chasing market share, we have long focused on pursuing targeted customers and card quality,” Ma Weihua, president of Merchants Bank, said in an interview in Beijing in March during the National People’s Congress. “China needs more credit cards, but it needs to increase the card usage first. It’s a waste of money if you just look at the volume.”

Interest Income

About 53 percent of Merchants Bank’s credit-card revenue came from interest income on revolving balances last year. The remainder derived from annual fees and merchant commissions.

China’s government cut so-called swipe fees charged to merchants for accepting debit and credit cards by about 24 percent in February to support small businesses, which often complain they don’t have wide enough profit margins to switch from cash payments to card payments.

The move will reduce merchant-fee income by almost 30 percent for banks and lower total pretax profit by 1 percent to 1.5 percent, according to Moody’s Investors Service.

Banks may adopt more aggressive strategies, including lowering underwriting and card-issuance standards, to encourage spending and promote card usage for overdrafts and installment payments to increase fees, the ratings firm said in December.

Overdue Payments

Lower standards could lead to a rise in defaults. Payments at least six months overdue amounted to 14.7 billion yuan as of Dec. 31, compared with about 5 billion yuan at the beginning of 2009, according to China’s central bank. The delinquency ratio of 1.3 percent also exceeded the average nonperforming loan ratio of 0.95 percent for Chinese banks, the data show.

In the U.S., the delinquency rate for credit-card borrowers 90 days or more past due stood at 0.83 percent in the fourth quarter of last year, according to TransUnion Corp., a U.S. provider of credit information to banks and consumers. In Hong Kong, the ratio for card receivables more than 90 days overdue was 0.2 percent as of Dec. 31, according to the Hong Kong Monetary Authority.

Merchants Bank’s 1.06 percent ratio for credit-card loans overdue more than 90 days as of Dec. 31 was the highest for all types of retail lending and most corporate loans, according to the bank’s earnings statement.

China’s economy expanded 7.8 percent last year, the weakest since 1999. Average annual growth may slow to 7 percent by 2016 and 5.9 percent in 2021 “assuming steady reforms and no major shock,” the World Bank estimated in a February 2012 report.

“People may have concerns over the course of China’s credit-market development, but the growth potential makes all of them trivial,” said Boston Consulting Group’s Huang. “If banks dare to venture into untapped smaller cities and change their strategy from grabbing market share to differentiating themselves and being more innovative, it may take them only two to three more years to make money.”

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at; Stephanie Tong in Hong Kong

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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