Shares in Smaller Banks Battered by 2018 Policy Concerns

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Shares in China’s smaller lenders have taken a battering across the opening trading sessions of 2018, due to concerns that Beijing will further tighten banking sector regulation its deleveraging drive continues.

Bloomberg reports that Bank of Tianjin has seen its share price drop by around 12% in the first two trading days of the year, for its largest two-day decline since listing in March 2016.

Other smaller lenders such as Bank of Jinzhou, Bank of Qingdao and Huishang Bank have fallen by more than 3%, despite the bigger banks posting strong performances.

Regulators announced last week that they would cut the banking sector some slack during the Chinese New Year Festival, by granting them a 2 percentage point reduction in their reserve requirements for a 30 day period.

While the directive would appear to bode well for Chinese banks, smaller lenders who experience the most difficulty tapping funds are excluded from the arrangement, heightening concerns about the policy environment in 2018 as regulators continue to forge ahead with their deleveraging campaign.

Natixis SA said in a December note that Beijing’s 2017 deleveraging campaign has hit China’s smaller banks the hardest, by driving up borrowing costs, undermining profit growth and exacerbating solvency risks.

According to Alicia Garcia Herrero, Natixis SA’s chief economist for Asia Pacific, smaller banks lack the sizeable deposit bases of the bigger banks that possess an extensive branch network, and are thus better capable of weathering any regulatory crackdowns.

The regulatory tightening of Beijing’s deleveraging campaign has already had an adverse impact smaller banks, whose are dependent on more costly alternative funding channels to shore up liquidity, such as sales of wealth management products and interbank borrowing.

Additional tightening could further hamper the performance of China’s smaller banks in 2018.

The People’s Bank of China will include negotiable certificates of deposit as interbank liabilities for the macro-prudential assessments of banks with more than 500 billion yuan in assets starting in January, while the China Banking Regulatory Commission is also stepping up its scrutiny of smaller lenders with the launch of a trio of new quantitative indices, and plans to further curb interbank lending.

Smaller Chinese banks could find their access to capital further stymied by the introduction of new asset management rules that target wealth management products and the implicit guarantees that undergird them.

This will weaken the ability of smaller banks to compete for funds by selling wealth management products that provide a higher rate of return than conventional deposits.

The China Securities Regulatory Commission is also hampering access to capital by limiting the ability of money market funds to invest in NCD’s issued by banks with poorer ratings.

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