Citigroup Inc.’s plan to exit its retail business in China and India underscores the frustrating battle for market share international banks face in two of Asia’s largest economies despite plowing in billions of dollars over the past decade.

Increased rivalry from domestic lenders, especially in consumer financing, and fierce competition for top talent contributed to the challenges that overseas banks have often struggled to overcome. High capital and regulatory requirements also proved onerous.

Citigroup Chief Executive Officer Jane Fraser said Thursday that the bank had decided it didn’t have the scale it needed to compete in China, India and 11 other markets. Overall, international banks had a 1.2% share of assets in 2020 in Asia’s largest economy, compared to 1.8% in 2010,

McKinsey & Co. data showed. In India, that number slipped to 6.8% last year, down from 7.2% a decade ago, according to the data.

China’s government-controlled rivals and tougher capital requirements for overseas banks in India requiring them to hold larger buffers leave many foreign firms struggling. As Citigroup decides how to leave retail banking operations in the two countries, other players from HSBC Holdings Plc to Singapore’s DBS Group Holdings Ltd. are still pushing ahead with ambitions to grow in these markets.

“The ability to scale rapidly is a very important factor, and that’s one of the reasons why local banks move so fast, and are in a better competitive position in retail and consumer banking,” said Joydeep Sengupta, senior partner at McKinsey in Singapore. “For foreign banks, it’s likely to get harder to scale profitability.”

In China, international banks face challenges despite moves by authorities to make it easier to compete. HSBC, Standard Chartered Plc and Citigroup became the first foreign banks allowed to set up locally-incorporated subsidiaries in China around 2007. Beijing continued to relax rules for foreign players in the subsequent decade, and has since removed the $10 billion threshold necessary for foreign banks to set up locally-incorporated banks.

However, competition remains fierce from state-owned rivals that dominate the financial system, have longstanding relationships with other government-controlled enterprises that drive much of China’s economic activity and enjoy a higher return on average assets.

Citigroup is also shuttering retail banking operations in countries from Australia to Indonesia and South Korea, according to a statement Thursday. The lender said it will continue to serve corporations and private banking clients in the markets tagged for sale.

Pedestrians walk past the site of a vacated Citigroup Inc. Citibank branch in Sydney, Australia, on Friday, April 16, 2021. Citigroup plans to exit retail banking in 13 markets across Asia and the Europe, Middle East and Africa region.

“While the other 13 markets have excellent businesses, we don’t have the scale we need to compete,” Citigroup’s Fraser said. “We believe our capital, investment dollars and other resources are better deployed against higher returning opportunities in wealth management and our institutional businesses in Asia.”

In India, where return on average assets is higher than local competitors, international banks have mainly shunned requirements to set aside additional capital and establish local subsidiaries. Instead, they’ve largely remained operating as branches, underscoring their reluctance to expand and offer a wider range of financial services. Of the 46 foreign lenders, just DBS and State Bank of Mauritius operate as subsidiaries.
Foreign banks haven’t expanded their loan books substantially over the past 18 months. The lenders’ loans shrank 5.7% in the quarter ending December after contracting 7.1% three months prior. In contrast, lending books for state and private banks grew more than 6% during this period, according to the RBI.

Still, some large foreign institutions are betting on growth in the two markets, targeting areas such as wealth management. HSBC is looking to deepen its push into mainland China and has singled out South Asia as a geography for expansion, specifically in wealth management.

In India, DBS Group is taking over India’s Lakshmi Vilas Bank Ltd. That was a deal orchestrated by the nation’s central bank, the first time authorities have turned to a foreign lender to bail out a struggling local rival. Japanese lenders including Mitsubishi UFJ Financial Group Inc. have expressed interest in expanding in the nation.

“The game changer here could be digital banking,” said McKinsey’s Sengupta. “If someone can build a successful digital model, I think one could level the playing field. Some players may take that bet, but it’s a big bet.”