City commercial banks strive to expand, raise funds

(Ecns.cn) -- City commercial banks have played an important role in China's economic development, but they face far greater risks than big state-owned banks, the China Economic Weekly reports.

Transformed from urban credit cooperatives less than two decades ago, city commercial banks often struggle with high non-performing loan ratios, poor capital adequacy ratios and limited market penetration.

Most of these fast-growing banks have been unable to find a clear direction for further development and are eager to try new things, such as issuing bonds, going public and setting up branches outside of their home cities.

Looking for capital

China's city commercial banks have a very short history in the banking sector, dating back to 1995 when the Shenzhen City Commercial Bank was created. Since then, city governments have transformed urban credit cooperatives through mergers and restructuring, leading to more than 140 city commercial banks across the country today.

But as most regional banks use management systems that lag far behind international standards, their quality is always a concern for the public.

In recent years, China's slowing economy has further intensified such concerns; and because they are more vulnerable, regional banks must use every means to acquire capital.

Theoretically, the main channels to improve capital adequacy ratios include raising equity and issuing debts, which are qualified tools in China.

In 2007, the Bank of Beijing, the Bank of Ningbo and the Bank of Nanjing went public on the Chinese mainland. Although more than 40 Chinese city commercial banks also made plans to go public, none have managed to get listed, according to the China Economic Weekly.

Under the circumstances, many banks have had to find other alternatives. Last year, a total of 16 city commercial banks issued subordinated bonds to raise capital, and most of their nominal interest rates are higher than 6 percent, the magazine adds.

Ready to expand

After continuous efforts to raise funds, statistics show that city commercial banks are generally performing well.

Data released by the China Banking Regulatory Commission (CBRC) show that total assets of city commercial banks reached 10.33 trillion yuan ($1.62 trillion) and deposits stood at 7.3 trillion yuan (US$1.15 trillion) as of the first three months of this year, the Global Times reports.

The CBRC said the city commercial banks have met the main risk control targets set by the government, as their average capital adequacy ratios reached 13.56 percent, higher than the 10.5 percent requirement, according to the newspaper.

However, regional banks have not been satisfied with the status, and some have branched into places other than their home cities.

Eight city commercial banks from other areas have set up branches in Beijing for example, including the Baoshang Bank, the Shengjing Bank, the Bank of Hangzhou and the Tianjin City Commercial Bank.

But trans-regional development does not necessarily bring about larger profits for ambitious city commercial banks, says the China Economic Weekly.

The annual reports of listed city commercial banks show that their performance outside their home cities has not been satisfactory. The Bank of Beijing has even suffered major losses from its branches in Nanjing and Jinan.

Making adjustments

Between June 7 and 8 of this year, the forum on the development of national city commercial banks was held in Chengdu, southwest China's Sichuan Province, where the CBRC backpedaled on a previously advised objective for regional banks – nationalization.

The CBRC made the decision because expansion by the banks to other places might be "inappropriate" at the moment. The CBRC said the banks should instead focus on their home cities and nearby rural areas, according to the China Economic Weekly.

Last year, Vice Premier Wang Qishan also mentioned this problem, and criticized the Bank of Beijing for blindly setting up branches elsewhere.

Concerning the stricter rules on IPOs by city commercial banks, the CBRC responded that it supports qualified regional banks to go public, but the approval process must be rigorously carried out.

An industry watcher says there is still great potential for smaller banks to get listed, because the percentage of listed city commercial banks among the overall number in China is very small when compared to the United States.