Foreign banks trim China branch networks as low returns test strategy

Almost two decades after gaining permission to conduct yuan business for local clients, foreign-funded banks are still refining their strategy in China, where the financial sector is dominated by state-owned lenders.

While Citi exited its China retail banking business, other foreign banks have continued to close branches and sub-branches, focusing instead on digitalisation, wealth management and core clients to strengthen their foothold in the market.

Deutsche Bank (China) announced the closure of its Chongqing branch last month after closing its Qingdao branch earlier this year, leaving the German lender with only four branches outside its Beijing headquarters.

HSBC Bank (China) and Standard Chartered (China) have each closed a Chongqing sub-branch over the past 12 months. HSBC also shut down a Beijing sub-branch this year.

“The problem for foreign banks is an inability to generate any real profitability,” said Jason Bedford, visiting senior research fellow at National University of Singapore.

Among 27 locally incorporated foreign banks, the median return on equity was 1.61 per cent last year, Bedford said, citing data from the annual financial statements of banks. That made them “by far the most unprofitable subset of the banking system in China”, he added.

A return on equity of 10 per cent or higher was generally considered healthy, a threshold met only by two of the 27 banks, Bedford said.

Compared to the growth of investment banking and other financial services, which could receive a further boost at next week’s Financial Street Forum – where China’s top financial regulatory bodies gather to announce new financial reform and development policies – the expansion of foreign banks in the country has long been subdued.

The 41 foreign-funded banking entities in China reported combined assets of 4.87 trillion yuan (US$727 billion) by the end of 2025, accounting for 1.3 per cent of the country’s banking industry assets, according to government data.

Foreign banks “simply cannot compete with Chinese banks in conventional lending and deposit-taking, given local players’ enormous advantages in scale, distribution networks and customer relationships”, Bedford said.

Grace Wu, senior director for financial institutions at Fitch Ratings, said she viewed the closure of sub-branches as “selective network optimisation, rather than a retreat”.

“Digitalisation has reduced reliance on physical outlets, particularly in lower-scale locations,” said Wu, highlighting yuan internationalisation and digital payments as strategic priorities for foreign banks in China.

She added that the closures differed from consolidation in China’s domestic banking sector, which Wu said was “policy-led and aimed at strengthening financial stability, supervision and resilience among weak local lenders”.

China has been consolidating small and rural banks as part of its financial de-risking campaign in recent years, with 670 entities closed in 2025, according to the National Financial Regulatory Administration.

Major Chinese commercial banks have also been closing outlets and reducing their use of ATMs amid the rapid rise of online banking.

Wu said she expected foreign banks to remain focused on higher-value wealth management and cross-border business. Assets under management per private banking client at foreign banks averaged 2.1 times those of domestic peers, according to Chinese media reports.

Bedford added that profitability did not fully capture the economic value of foreign banks’ presence in China.

“Onshore operations can generate substantial business for offshore offices,” so foreign banks in China could still be “strategically valuable to its parent group”, he said.

Asked about the recent bank closures, an HSBC spokesperson said that “since 2024, HSBC has opened 15 wealth centres across 11 cities in mainland China.”

A Standard Chartered spokesperson said the bank had “a sub-branch strategy” and adjusted locations “from time to time”.

A Deutsche Bank spokesperson said the lender’s “long-term commitment to China remains unchanged”.