Pressure on the Chinese rural Banks Pushes Them Towards Consolidation.

The rural commercial banks of china remain the topmost candidate in the list of most minor profitable lenders in the country. This may increase pressure for them to make the roots more solid. A lot of analysts know this. 

The default risk that persists for the small business and the critical customers of rural banks is still high, given that the country is on the road to recovery in terms of economy. The rural banks happen to be the chief firms to give the farmers the money that they need to develop the small business for the regions that are economically backwards. Here, the country’s gain in terms of economic growth is displayed late.

The pandemic has put the profits out of reach for most of the Chinese banks, with the rural banks being hit the hardest. The average gain of the companies taken as a sample in an index declined to more than 14% last year. This is the sharpest rally in the past five years. This is also the most brilliant fall in the 54 listed banks of china that were tracked by the market intelligence. 

Lagging recovery

The rural banks of china were still not recovering from covid while the earnings of the lenders began to pace up as the country gradually went towards the end of local lockdowns. In the first quarter of 2021, the rural commercial banks’ aggregate earnings were flat compared with the profits of 2020. This fact was cross-checked by the  China Banking and Insurance Regulatory Commission. 

This firm tracks almost all the lenders in the country. The banks backed up by the state had posted more than 2% in terms of profit, while the national banks recorded more than 5%. The data clearly shows. The performance of the rural banks is highly correlated with the strength and power of all the mid-cap firms. These are always susceptible to fallouts when a downturn is in the picture. These firms are making a comeback, but they also remain weak. This is also because the economy in the rural parts of the company still continues to be a step behind in the large businesses and urban centres. This statement was given by Rory Green, who is a senior economist based out in London. He also expects the rural banks to get back on their feet if the vaccination rate of the country passes the safe threshold of 80%. This will result in the opening of the country altogether. In 2020, more than 18% of China’s small-cap business was shut down. The survey was conducted on more than 50K firms. 

It is a well-known fact that most of the rural commercial banks lend money to small-cap firms. These firms find it hard to manage money from the bigger banks. Almost half of the loans put out from the rural banks are given to individual investors and mortgages. Around 20% of the exposure is given out to the manufacturing power, and 10% is put out to the developers of real estate and 8-10% to the retailers. The data is collected from a Shanghai-based analyst, Wang Zhen. 

For example, retail was majorly affected as the pandemic hit. This, in turn, destroyed the asset quality of lenders. Some of them even belonged to the biggest rural commercial banks, said Chen Shujin, the head of a Chinese financial institution group based in Hong Kong.

Government rescue:

Since the fall of 2019, the regulators of China have been on a mission to rescue the mid-sized lenders, and bailouts achieve this feat in terms of Ad Hoc and mergers that are government-induced. These steps were taken due to the fact that there were concerns about possible bank failures. The latest deals, which were all pushed by the government, included some significant mergers like that of 5 goliath lenders of the Shanxi province and bringing together three rural commercial banks of the Jiangsu province. 

“This is a long-standing goal for Beijing and the pandemic is likely accelerating the consolidation process. Performance [for rural commercial banks] will remain volatile in one-to-three years, however banking sector consolidation may reduce the cyclicality of rural bank earnings”. TS Lombard said this. 

Out of at least 4K banks that were listed in China in 2020. More than 1500 were commercial banks belonging to the rural sector. As a matter of fact, the credit unions, the rural banks and the financial institutions represented a mere 13% of the assets in the banking industry of china. As of the 4th quarter of 2020, following the data presented by the CBRIC. The consolidation is known to enhance the management of credit risk in terms of small lenders. 

Limits of scale

“Their relatively small size often results in investing less in credit risk management and consequently results in them having worse asset quality compared to other banks,” stated Chang. “If you start to merge a couple of the rural commercial banks, you get more scale.”

The sheer scale of profits and assets will, for sure, limit the ability of a commercial bank to engineer a buffer capable of absorbing any probable loss that can happen in the outcomes of bad loans. 

According to the data provided by CBRIC, the commercial banks in the rural sector have reported a loan ratio of more than 3% in the first few months of 2021. With that intact, all the other groups have reported less than 2%. The banks owned by the state have had an excellent covering ratio of more than 200%.

“The consequence of less provisioning buffers on their balance sheets means a larger increase to the provisioning expenses when asset quality worsens. This makes their net profit growth more sensitive to swings in the provisioning expenses line,” stated Chang again.

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