China's banking sector is ripe for consolidation, especially among second-tier joint-stock commercial banks and lesser known city commercial banks, as the weaker players succumb to intense competition, the rating agency Standard & Poor's (S&P) said in Beijing yesterday.

 

Ryan Tsang, a credit analyst with the agency, said smaller banks with weak financial profiles, or those that lack a niche market or a clear advantage enabling them to compete with larger institutions are likely to be snapped up by their stronger peers.

 

"The central and local governments are likely to encourage consolidation of weaker and smaller banks to increase their chances of survival," Tsang said in a report studying China's top 50 banks.

 

Smaller banks with satisfactory market positions in major cities may attract the attention of foreign investors, which would provide capital and tools to enable them to compete with their larger competitors, he said.

 

The country's 117 city commercial banks are less competitive, as they are short of capital and restricted geographically.

 

The pace of consolidation is likely to speed up in the coming years, Tsang said.

 

China's top 50 banks have rapidly improved their financial profiles during past years.

 

"This was mainly because of the capital injection from the government and domestic and foreign strategic investors, and reforms by the banks themselves," said Liao Qiang, another analyst with the agency.

 

The government has injected US$60 billion of foreign reserves to recapitalize Bank of China, China Construction Bank and the Industrial and Commercial Bank of China since 2003, greatly improving their financial profiles.

 

International financial institutions such as Bank of America Corp and Royal Bank of Scotland also spent more than US$14 billion buying stakes in these banks to expand in the country.

 

However, there is still one State-owned bank, some joint stock banks and a large number of smaller financial institutions which need substantial financial support to restore their financial health.

 

Delays in bailing out the smaller players will give the big banks competitive advantages, Liao said.

 

Meanwhile, the China Banking Regulatory Commission (CBRC) last December approved the merger of six city commercial banks and seven credit cooperatives in East China's Anhui Province, as part of an effort to spur consolidation.

 

Nine city commercial banks, including Bank of Beijing, Bank of Shanghai and Nanjing City Commercial Bank, have already sold stakes to foreign investors

 

The Standard & Poor's report expressed confidence for the further improvement of China's banking industry.

 

Reform of the sector and the regulatory regime is continuing, although it is likely to be uneven, the report said.

 

"Banks are reorganizing internal procedures, adopting new risk management techniques, closing branches and reducing their work forces."

 

The report also said stricter capital adequacy rules are likely to instil greater degrees of credit control.

 

Moreover, a rising number of cases involving corruption or misappropriation suggest tighter supervision and lower tolerance for abuse, according to the report.

 

"The level of future bad loans is likely to fall as new loans are used increasingly productively," it said.

 

The Standard & Poor's lowered its estimate of non-performing assets in the sector to 21-25 percent of total loans, while loan books look significantly leaner than they did in the late 1990s.

 

"To ensure the full health of the banking system, more concerted efforts are required to improve the operating environment," the agency said. "They include clarification of the roles of the central government and local governments, and reform of the legal system and State-owned enterprises."

 

"If the reforms become entrenched and future bad loans are reduced, then there are chances of the government's ratings being upgraded," said Ping Chew, the agency's director of Asia sovereign ratings.

 

(China Daily February 23, 2006)