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Asia-PacificMay 1 2005

The best of the rest

Banking analysts say that there are about 30 city commercial banks among China’s city lenders that have decent balance sheets and are worth considering for investment. Though the banks still need more capital injections from local and foreign strategic partners, they are small and do not require multibillion-dollar investments.
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Their total assets account for only 5.2% of all banking assets in China, compared with the 54% held by the country’s four biggest state-owned commercial banks.

The most important problem with the city banks is that most do not provide full, reliable information about their financial condition. With that caveat, banking analysts and foreign bank officials say other good candidates for foreign investment include Tianjin City Commercial Bank, Guangzhou City Commercial Bank, Dalian City Commercial Bank, Xiamen City Commercial bank, Chongqing City Commercial Bank and Changsha City Commercial Bank. They are already in talks with a number of foreign investors, but negotiations are said to be in the early stages.

The city banks, scattered from the north-east to the south, still enjoy local government patronage but China’s banking regulators want to break those links. This is considered to be a crucial step for ending the subsidies to insolvent state firms and lending for the showcase construction projects that are behind most NPLs.

Chongqing City Commercial Bank, in the huge south-western municipality of Chongqing, wants to list shares on the domestic bourse and is seeking foreign investors to help increase its capital base. But its capital adequacy ratio and NPL ratio are unknown. China’s state media reported that Morgan Stanley, Citibank and ABN AMRO had expressed interest, but the Chinese bank declined comment.

Dalian City Commercial Bank’s vice-president, Xu Wen, said in early March that his bank was in preliminary talks with about 20 overseas banks. The bank, based in the north-eastern port city of Dalian, hopes to raise about $360m with a share listing in Hong Kong in 2006. Other bank officials have said that the timing of the plan depends on how soon the lender can achieve the minimum 8% capital adequacy ratio required by the CBRC.

Changsha City Bank, located in the central Hunan province, is reportedly in talks with the IFC. But it is still in the process of restructuring, reducing its NPLs and raising its capital adequacy.

Most of these banks tend to have bigger NPL ratios compared with the eight city commercial banks mentioned above. Tianjin City Commercial Bank’s NPL ratio was 14.67% at the end of 2003, suggesting that it would be a more costly investment than some other candidates. In many cases, the lack of disclosure presents huge hurdles for investors seeking to do due diligence on acquisition targets. Some banks disclose only by what percentage they have lowered their NPLs, without providing NPL figures.

Foreign banks that hope to take stakes in China’s commercial banks will need to do a full investigation of their targets. Even with due diligence, investing in a Chinese bank is a wager on the lender’s ability to compete in an increasingly challenging market. But it may be a bet well-placed for gaining a foothold in the hard-to-penetrate Chinese banking industry and also for winning favour with Beijing’s banking regulators, given their keenness to import the expertise and technology that local lenders need to survive as the market opens to foreign competition.

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Read more about:  Asia-Pacific , China