24 April 2014

Asia Pacific Financial Service

Zennon Kapron - Kapronasia

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Expansion Challenges for China's tier 2 banks

14 December 2013  |  1100 views  |  0

After 18 years of economic development, China’s Tier 2 Banks, mainly city commercial banks, are growing to fill a gap in-between state-owned banks, and rural commercial banks. As part of their growth, many city commercial banks are attempting to expand their branches in other regions, however, the Chinese Banking Regulatory Committee (CBRC) regulations are, in certain cases, holding them back.

The recent tight regulation regarding supra-regional city commercial banks is largely the result of increasing internal fraud cases in city commercial banks such as Qilu Bank and Hankou Bank. The good news is that the CBRC is not prohibiting city commercial banks from expanding supra-regionally. Instead, the approval process is just longer and the standard of regulatory evaluation indicators such as asset scale, capital adequacy ratio, profit margin, and non-performing loan ratios are higher than before. In this case, if city commercial banks attempt to expand outlets in other regions, they need to enhance their internal control and risk management abilities above the required standard.

Because the asset scale and business model vary based on the local economies in each city, the evaluation regulation will be different. If the investment in other regions is excessive, the CBRC will require a higher capital adequacy ratio; if the risk management does not match the fast growing asset scale, the CBRC will restrict the expansion of these city commercial banks. Thus, regulators support supra-regional expansion if the tier 2 banks meet the entire set of regulatory requirements.

China’s tier two banks are some of the more dynamic banks in China in terms of business models and innovation – they have had to be in order to compete with their larger counterparts that typically have much larger deposit bases and distribution networks.

The tier-2 banks are still focused on expanding their asset base and while supra-regional expansion will help them accomplish this, it is not the ultimate goal of the banks, at least not in the near future. The regulations do serve a valuable purpose to ensure that banks’ expansion is based on quality assets and business practices.  

 

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Zennon Kapron

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