Squeezed between cut-throat competition from online financing firms
and rising funding costs, China's midsize banks are falling out of
investors' favor as they increasingly lag behind the country's top
While margins generated from lending have remained broadly stable at
the larger banks, they have shrunk considerably for the second-tier
lenders like China Everbright Bank and China Merchants Bank over the
past six months, a Reuters data analysis shows.
And like some of their European peers, those smaller lenders are
also lagging behind the big banks in terms of balance sheet
strength, analysts say, a factor that is likely to be highlighted in
the banking sector's third-quarter earnings.
China's five biggest banks are Industrial and Commercial Bank of
China Ltd, China Construction Bank Corp, Agricultural Bank of China
Ltd, Bank of China (BoC) and Bank of Communications Co Ltd.
"The divergence between big and medium or small-sized banks will
increase, as the latter see higher fundraising risks due to their
weaker capital base," said Fan Cheuk Wan, chief investment officer
Asia Pacific in Credit Suisse's private banking and wealth
CCB is due to kick off the banking sector's third-quarter earnings
season on Thursday.
Second-tier lenders, also known as joint stock banks, have, on
average, a market capitalization of less than 300 billion yuan,
significantly smaller than the big five lenders.
Chinese banks' net interest margins (NIMs), or the gap between what
the lenders pay out for deposits and rake in from loans, have come
under pressure from aggressive competition from online financing
firms such as e-commerce group Alibaba's <BABA.N> Yuebao platform.
This is particularly a problem for smaller banks, which have to pay
more to fund themselves as their regulatory capital ratio - a
measure of balance sheet strength - is on average 1.5 percentage
points weaker than that seen at the larger players.
"Net interest margins are likely to decline faster for smaller banks
in China going forward, as they face rising costs of funding," said
Vincent Chan, head of China research at Credit Suisse.
[to top of second column]
The average net interest margin for China's top five banks, has
remained stable at around 2.6 percent over the last year.
In contrast, the next seven banks saw this key indicator of
profitability drop to 1.86 percent in the second quarter from levels
previously comparable to the big banks. The margins are seen falling
further in the third-quarter.
To counter the profit squeeze, investors say second-tier lenders may
look to innovate by embracing online finance.
"Online e-commerce is one area where the small- and mid-sized banks
are a lot more flexible in partnering with a lot of the e-commerce
retailers," said Tony Chu, who manages a portfolio for RS
Investments, which manages $22.3 billion of capital and positions in
The big five banks also benefit from closer ties to the country's
top state-owned companies, known as SOEs. Lending to these
conglomerates is considered much safer because of implicit
"Large SOEs will emerge as winners and you want to be the bank
that's lending to them, not the guys that are going to be driven
out," said Matthew Smith, a banks analyst at Macquarie. Smith said
he was positive about ICBC and CCB versus the smaller lenders since
they count more large public companies among their clients.
(Editing by Lisa Jucca and Miral Fahmy)
[© 2014 Thomson Reuters. All rights
Copyright 2014 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.