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Asia-PacificApril 2 2006

China’s city commercial banks are next big prospect

After the latest investment bank beauty parade in Beijing for adviser to Industrial and Commercial Bank of China’s IPO, rating agencies’ focus has fallen on the city commercial banks. The Banker’s article ‘Best banks to buy in China’ (May 2005), identified several such banks in its analysis.
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At the close of 2005, there were 117 city commercial banks, none of them rated by the international agencies.

This is unsurprising as public financial reporting for these banks only started in 2003 and is to Chinese accounting standards. The banks remain private and are largely owned, directly and indirectly, by local government. Moody’s reports that sector assets at end-2005 were renminbi yuan 2040bn ($250bn) – an increase of 19.4% on the previous year.

However, this represents just 5% of the national banking assets and, in most cities, these banks come behind the big four state banks in terms of retail deposits.

Asset quality remains a problem for a large majority of city commercial banks, which are hampered by bad assets inherited from their precursors, the city credit cooperatives. Related-party loans still figure highly in most loan books.

However, the best of the city commercial banks can match the best listed state and shareholding banks in profitability and asset quality.

Foreign investors have been attracted to the city commercial banks because stakes can be acquired at relatively low costs, although such investment should be seen as one for the long term. The city commercial banks require not only capital but also products, risk management and systems.

Change does not happen overnight, and time spent building relationships with Chinese partners in these ventures will facilitate their willingness to embrace the changes necessary for success.

The table shows the current state of foreign investment in city commercial banks.

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