Diverging paths: As China's big banks improve, smaller lenders lag

Shengjing Bank Co

31/08/2017 10:18

* China's big banks report upbeat half-yearly results 
    * Diverging from smaller lenders who see shrinking 
profitability 
    * Analysts see funding squeeze for China's struggling firms 
 
    By Engen Tham and Matthew Miller 
    SHANGHAI/BEIJING, Aug 31 (Reuters) - After a tough two 
years, China's largest banks are reporting green shoots, with 
the top four turning in consensus-beating profits and promising 
an upbeat second half.  
    But smaller, national and regional lenders - which control 
about a third of China's banking assets - are still feeling the 
strain, hit by a regulatory crackdown on risky activity that has 
made it difficult to sell some products and access the capital 
on which they have often relied. Many have reported shrinking 
balance sheets after years of expansion. 
    The result, analysts say, is likely to be a funding squeeze 
for China's struggling firms, which have depended on these banks 
for life-or-death credit and could now be pushed to costlier 
borrowing or grey market offers. 
    "Small- and medium-sized companies would suffer along with 
smaller banks," said Du Yang, acting head of the asset 
management team at China Securities International. 
    Lending may slow in any case into the second half, as some 
banks have exhausted most of their annual credit quota amid the 
push to bring shadow financing activities to the main loan book, 
raising the spectre of corporate defaults as financing costs 
climb in the world's No.2 economy.  urn:newsml:reuters.com:*:nL4N1L43KB 
    And the pain, as ever, is likely to be concentrated in 
China's rust-belt regions. 
    Sophie Jiang, analyst at Nomura, however, believes smaller 
balance sheets at mid-tier and regional lenders will lead to 
better capital allocation, as inefficient firms are squeezed 
out. "We think this is good for the real economy."  
     
    TWO HALVES 
    For now, it is a tale of diverging paths. 
    "This year, there has been some differentiation among banks. 
Large banks have experienced relatively better stability in 
their operations," Fang Heying, the vice president of China 
CITIC Bank  601998.SS  0998.HK , told reporters last week.  
    By contrast joint stock banks - smaller lenders that are not 
fully state-owned - have "generally seen a decline in revenue". 
Fang's own bank saw operating income slip and assets shrink. 
    At Shengjing Bank Co  2066.HK , a regional bank based in the 
northern province of Liaoning, first-half operating income fell 
almost 17 percent. Total assets, after increasing 29 percent in 
2016, slowed to a more modest 3.7 percent growth.  
    China Minsheng Bank, the nation's biggest private lender, 
saw assets drop 2.18 percent in the first half, after increasing 
more than 30 percent in 2016. Deposits also fell.    
    "A lot of these small banks need to rely on the interbank 
market to seek their source of funding," said Ken Shih, a DBS 
analyst, adding that higher interest rates have also increased 
costs. Larger banks fare better. 
    Indeed, most medium-sized listed banks reported contracting 
net interest margins (NIMs) - the difference between interest 
paid and earned, a key indicator of profitability. 
    But recovery seems to have set in for the bigger players, 
such as Industrial and Commercial Bank of China Ltd (ICBC) 
 601398.SS  and Bank of China Ltd (BoC)  601988.SS , that saw 
NIMs widen for the first time in more than two years, following 
six benchmark interest rate cuts in 2014-15.  urn:newsml:reuters.com:*:nL4N1LG46E 
     
    GOOD NEWS AT THE TOP 
    The emerging gulf in the sector comes as China's financial 
watchdogs unleash a 'regulatory storm' aimed at controlling 
risk, reckless loans and at improving supervision. 
    The government has focused particularly on non-traditional 
interbank borrowing and financing, a key source of balance sheet 
expansion for many smaller national and regional banks.  
    Xiao Yuanqi, head of the prudential regulation bureau of the 
China Banking Regulatory Committee, has said the crackdown, 
including efforts to tighten disclosure rules on off-balance 
sheet wealth management products - a key component of shadow 
banking credit - was working. 
    "Taking the ox by the nose, we grasped the three main 
problems of the banking sector: interbank, wealth management 
products and off-balance-sheet business," Xiao said. 
    But for the top lenders, pushing into the consumer segment 
with a boost in personal loans, 2017 still looks good, with 
asset quality, even overdue loans, improving. 
    Bankers at ICBC  1398.HK , BoC  3988.HK  and Bank of 
Communications Co Ltd (BoCom)  601328.SS  3328.HK  expect core 
lending business to improve during the rest of this year. 
    At the world's largest bank, ICBC, personal loans were up 9 
percent at the end of June from end-2016, helped by a 11.6 
percent rise in residential mortgages.  
    For China Construction Bank Corp  0939.HK , personal 
consumer loans more than doubled over the same period.  
    Investor confidence in the biggest five state-owned banks 
has soared and fuelled a share price rally, led by ICBC which 
has gained more than 30 percent in Shanghai so far this year.  
 
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GRAPHIC: Banking in China    http://tmsnrt.rs/2fGRZBq   
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 (Reporting by Engen Tham and Matthew Miller; Additional 
reporting by Shu Zhang; Editing by Clara Ferreira Marques and 
Himani Sarkar) 
 
Keywords: CHINA BANKS/