4 reasons why Bank of China HK is top man in cross-border RMB business

It finished RMB417b cross-border settlements.

According to Barclays Research, BOCHK is currently the leader in both cross-border and offshore RMB business. In Jan-Oct 2012, BOCHK completed RMB417bn in cross-border RMB settlements as a participant bank (~13% market share) and RMB1.834tn in settlements as the clearing bank, according to BOC management.

Here's more from Barclays:

BOCHK is also the major market maker in the CNH interbank market (average daily market trading volume ~ RMB30bn). At end-Oct 2012, the RMB deposit balance of BOCHK exceeded RMB160bn, and RMB loan balances were around RMB35bn.

RMB asset deployment to be more flexible

BOCHK management believes the deployment of excess CNH liquidity won't be an issue since Hong Kong banks can easily transfer CNH to their mainland subsidiaries (under trade-related items) and earn interest from the mainland interbank market and bond market under the current regulatory framework.

Management expects further development of offshore RMB products and more policy announcements from the regulator. In the Shenzhen Qianhai area, the local government expects the Qianhai area to contribute RMB150bn to GDP (RMB1bn per square kilo meter) by 2020.

Synergy from cooperation with parent bank

BOCHK's management plans to expand its client base through RMB business, benefiting from the largest RMB network in Hong Kong, established business processes, its position as the sole clearing bank in Hong Kong, and synergy from cooperation with its parent bank, BOC.

Together with BOC, BOCHK says it provides innovative products to mainland companies with overseas business, e.g. offshore RMB financing with BOC's guarantee/credit letter/information check. However, we have concerns about risk transfer from the parent bank to BOCHK and potential profit-sharing arrangements with the parent.

Higher profit contribution from RMB business

BOCHK management expects higher profit contribution from both net interest income and non-interest income from RMB business.

According to BOCHK management, the NIM of RMB business has picked up to the same level as other currency business, and it sees upside potential since CNH funding cost has largely stabilized, but lending yield is increasing given the still large gap between the onshore and offshore lending rates. Apart from leading in RMB settlement, BOCHK has expanded its business in dim sum bond underwriting, participating in 24 dim sum bond issuances amounting to RMB12.7bn in Jan-Oct 2012.

BOCHK plans to develop regional and even global business leveraging its relationship with regulators, local and international commercial banks, global companies with RMB business, and numerous central banks and sovereign funds with established RMB business.

Along with RMB internationalization, BOCHK expects the RMB clearing business to eventually slow down in the long term, but its RMB business as a participant bank will always be a profit contributor. BOCHK's management says its major concern is not competition from other banks and regions, but the fading of interest in RMB.

Hong Kong's market share of RMB business to decline

Management has seen a decline of Hong Kong's share of RMB business with the expansion of other RMB offshore centres. Hong Kong's market share of global actual RMB receipts and payments business decreased to 60% in the first ten months of 2012 from 80% in 2011.

But management believes the development of more RMB offshore centres will increase RMB liquidity and products, and thus have a positive impact on Hong Kong's RMB business in the long term. 

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