China’s big banks emerge as winners from ‘regulatory windstorm’

2017-09-24 19:58Source:FTAuthor:FT
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China’s four biggest commercial banks all reported faster profit growth in the first half on Wednesday as Beijing’s “regulatory windstorm” aimed at controlling financial risk boosted larger lenders at the expense of smaller ones.

For the past decade, smaller lenders have far outpaced larger rivals in terms of asset and profit growth. But that trend has begun to reverse this year.

The People’s Bank of China has pushed up interest rates this year in a bid to discourage leveraged investment in the bond market, benefiting the country’s largest banks — Industrial & Commercial Bank of China, China Construction Bank, Agricultural Bank of China, and Bank of China. Their retail deposit franchises provide a plentiful supply of low-cost deposits, generating excess cash that they lend to smaller rivals in the interbank market. ICBC, the world’s largest bank by assets, said net income rose 1.8 per cent in the first half, up from 0.4 per cent growth in 2016. Bank of China, the fourth largest, posted the fastest net income growth among big lenders, 11.5 per cent, up from 1.9 per cent last yer, and the fastest first-half pace since 2013.

At the same time, the banking regulator has ordered banks to curb risky shadow-bank activity. This double blow has hit mid-sized banks the hardest.

“Small and mid-size lenders mainly relied on interbank borrowing to expand their balance sheets. That era is now past. Under the new regulatory framework unveiled this year, it’s not feasible any more,” said Liao Zhiming, chief China banks analyst at TF Securities in Beijing.

Mid-sized lenders have been the most aggressive in lending through shadow-banking channels that regulators are now clamping down on. That includes off-balance-sheet assets as well as on-balance-sheet “investments” that analysts say are effectively loans in disguise.

The China Banking Regulatory Commission’s data showed its “Big Five”— which also includes Bank of Communications — posted higher annual asset growth than the 12 mid-sized lenders in the second quarter for the first time since 2007.

Additional reporting by Nan Ma