On Thursday, Bloomberg reported that Bank of America Corporation (BAC), one of the Wall Street giants, is all set to speed up its expansion in China. For this expansion, the bank is aiming to double its profits and enhance its workforce.
Currently, BofA has three outlets in Shanghai, Beijing and Guangzhou. Further, the bank plans to open five branches in China over the next two to three years. The company is working on the layout of its three-year strategic plan, which includes increase in growth targets. This plan is yet to be submitted to the higher management.
Among other foreign banks, JPMorgan Chase & Company (JPM), HSBC Holdings Plc (HBC) and Citigroup Inc. (C) have also came forward with investments in China driven by slow rate of economic growth in US economy. China’s third position in the banking market, after the US and Japan, was responsible for inducing these Wall Street biggies to invest in the country.
Moreover, Singapore-based DBS Group Holdings Ltd. also plans to augment its workforce in China by about 25% to 2,000 in 2012, after it recorded double profit in 2011.
In the last decade, China has moved ahead from a closed, centrally planned system to a more market-oriented country. In 2010, China became the world’s largest exporter.
The streamlining of the economy, followed by efficiency gains, resulted in more than ten times increase in GDP since 1978. Moreover, in 2010, China was declared as second-largest economy in the world after the US surpassed Japan in 2001.
In December 2006, China liberalized its banking industry to foreign companies, which increased competition among banks there. The country recorded corporate and household savings of $12.7 trillion in January 2012. Moreover, combined assets at foreign banks outpaced 1 trillion Yuan ($159 billion) by the end of October 2011, which is double the amount recorded around five years ago.
However, in 2009, overseas demand for Chinese exports reduced, attributable to the global economic downturn. Yet, in the following year, China recovered promptly and surpassed all other major economies in 2010 with a GDP growth of around 10%. Moreover, strong economic growth was recoded in 2011, as the government came forward with lending credibility to the inducement policies during the global financial crisis.
BofA is one of those foreign banks which have shown interest in the Chinese economy. The bank’s global expertise, experience and financial strength will help it to expand its footprints in China. We expect more of such investments in the near term. BofA’s strategic plan indicates its aim to gain exposure in the Chinese economy whose growth is stimulated by the developing resources of the country and capture significant market share among competitors.
Like other big Wall Street banks such as The Goldman Sachs Group Inc. (GS) and Wells Fargo & Company (WFC), BofA has been buckled under the weakness in the wider economy and the fundamental pressures on the banking sector. Last month, the bank reported fourth-quarter earnings of 15 cents per share, substantially lower than the Zacks Consensus Estimate of 23 cents.
BofA currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.
