China’s midsize banks are falling out of investors’ favor as they continue to lag behind the country’s top five lenders due to a very competitive environment determined by online financial companies and rising funding costs.
Margins generated from lending have remained broadly stable at the larger banks. However, they have shrunk considerably for the smaller lenders like China Everbright or China Merchants Bank over the past six months, Reuters reported.
The smaller lenders are also lagging behind the big banks in terms of balance sheet strength, according to analysts. That is very likely to be highlighted in the banking sector’s Q3 earnings.
“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, CIO Asia Pacific CS’s private banking and wealth management unit.
China’s smaller lenders, also known as joint stock banks, have, on average, a market cap of less than 300bn yuan, a lot smaller than the big five banks.
“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 CS.
The average net interest margin for China’s top 5 banks, has remained stable at around 2.6% over the last year. On the other hand, the next 7 banks saw this indicator of profitability drop to 1.86% in Q2 from levels historically comparable to the top banks. Analysts say the margins are set to continue falling further in Q3.
Source: Reuters
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