Diverging paths: As China's big banks improve, smaller lenders lag

After a tough two years, China's largest banks are reporting green shoots, with the top four turning in consensus-beating profits and promising an upbeat second half.

But smaller, national and regional lenders - which control about a third of China's banking assets - are still feeling the strain, hit by a regulatory crackdown on risky activity that has made it difficult to sell some products and access the capital on which they have often relied. Many have reported shrinking balance sheets after years of expansion.

The result, analysts say, is likely to be a funding squeeze for China's struggling firms, which have depended on these banks for life-or-death credit and could now be pushed to costlier borrowing or grey market offers.

“Small- and medium-sized companies would suffer along with smaller banks,” said Du Yang, acting head of the asset management team at China Securities International.

Lending may slow in any case into the second half, as some banks have exhausted most of their annual credit quota amid the push to bring shadow financing activities to the main loan book, raising the spectre of corporate defaults as financing costs climb in the world's No.2 economy.

And the pain, as ever, is likely to be concentrated in China's rust-belt regions.

Sophie Jiang, analyst at Nomura, however, believes smaller balance sheets at mid-tier and regional lenders will lead to better capital allocation, as inefficient firms are squeezed out. “We think this is good for the real economy.”

For now, it is a tale of diverging paths.

“This year, there has been some differentiation among banks. Large banks have experienced relatively better stability in their operations,” Fang Heying, the vice president of China CITIC Bank, told reporters last week.

By contrast joint stock banks - smaller lenders that are not fully state-owned - have “generally seen a decline in revenue”. Fang's own bank saw operating income slip and assets shrink.

At Shengjing Bank Co, a regional bank based in the northern province of Liaoning, first-half operating income fell almost 17 percent.