Online financing, rising costs squeeze profits at China's midsize banks

Wed Oct 22, 2014 11:30pm EDT
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By Engen Tham and Lawrence White

SHANGHAI/HONG KONG (Reuters) - 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 five lenders.

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 (601818.SS: Quote) and China Merchants Bank (600036.SS: Quote) 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 (601398.SS: Quote)(1398.HK: Quote) (ICBC), China Construction Bank Corp (601939.SS: Quote)(0939.HK: Quote) (CCB), Agricultural Bank of China Ltd (1288.HK: Quote)(601288.SS: Quote), Bank of China (BoC) (601988.SS: Quote) (3988.HK: Quote) and Bank of Communications Co Ltd (601328.SS: Quote) (3328.HK: Quote).

"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 management unit.

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 capitalisation 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: Quote) Yuebao platform.   Continued...

A security personnel on duty stands next to the reception desk at a branch of China Everbright Bank in Hefei, Anhui province August 18, 2010.    REUTERS/Stringer