European banks are expanding their presence rapidly in China on the back of a fast-growing economy and promises of robust returns - but the road has not been easy and very few have actually managed to do well. And there is no indication that the trend will reverse soon. According to a report from accounting firm KPMG, foreign banks in China saw returns shrinking in 2009, while most of their domestic peers reported robust after-tax profit numbers.

HSBC Holdings Plc, Europe's biggest bank by market value, saw its profits from China dipping nearly 60 percent in 2009 to 718 million yuan (80.5 million euros) compared with 2008 figures, the report says. Standard Chartered Plc says earnings from China fell by 34 percent to 423 million yuan in 2009.

Assets owned by foreign banks accounted for just 1.7 percent of China's banking sector, estimated at about 78.77 trillion yuan in 2009, a recent report from the China Banking Regulatory Commission (CBRC) shows.

While there are no separate figures for European banks, industry analysts are of the view that the numbers would hardly surpass their global counterparts as they also face problems like regulatory hurdles and intense competition from domestic players.

The market share of foreign banks declined in 2009 due to intense competition from domestic lenders and decreased borrowing needs of foreign companies in China, a recent PricewaterhouseCoopers (PwC) survey reports.

More than half of the 42 participants in the PwC survey expect the market share of European banks in China to be about 2 percent till 2020, in the absence of what they perceive to be a level-playing field and limited product offerings.

That figure is significantly lower than the earlier market share estimates of foreign banks like Standard Chartered Bank. The bank, which set up its first branch in Shanghai in 1858, had envisaged a market share of 10 percent by 2010 compared with 2 percent in 2002. That now looks unlikely.

Senior executives of Standard Chartered were not available for comment.

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Banking was one of the sectors that witnessed a flurry of activity after it was opened up for foreign investment after China joined the World Trade Organization in 2001. By the end of July 2010, there were 37 incorporated foreign banks in China, including big European banks like HSBC, BNP Paribas and Deutsche Bank, KPMG reports.

Though the process of setting up a local entity is "costly and time-consuming" for European banks, it also represents a significant commitment to the China market and serves as the first step toward the creation of a larger organization, which is more independent from the group or head office, KPMG says in its report, adding, "many banks are still pursuing incorporation (in China) as a way to sustain their growth as their existing retail and commercial banking markets weaken".

European lenders have been relatively slow in their China expansion plans as they are facing problems in their home turf, says Geoffrey Wood, professor of Economics at Cass Business School of City University London.

"They have to make sure they're in good order at home before expanding overseas," he says.

The financial turmoil that originated in the United States has engulfed most of Europe and dealt a severe blow to the banking sector. The Chinese market, which remained relatively insulated to the financial crisis, is now emerging as the new frontier of hope for many of the ailing European lenders, analysts say.

Though the opportunities are immense in China, the intense competition from domestic lenders has queered the pitch for most European banks. "As more and more foreign banks set up units in China, competition will also intensify," says Charles Li, country executive of Royal Bank of Scotland (RBS) in China.