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Friday, October 13, 2017, 16:30
Big banks win in China's battle of unequals as curbs bite
By Bloomberg
Friday, October 13, 2017, 16:30 By Bloomberg

In this Aug 11, 2015 photo, a worker counts Chinese currency Renminbi (RMB) at a bank in Linyi, east China's Shandong Province. (ZHANG CHUNLEI / XINHUA)

Claude Tiramani is buying shares of China’s biggest banks, betting the deleveraging campaign that’s widened the lenders’ competitive advantage over smaller rivals means their stock rally has further to go.

The fund manager, who oversees about US$1.3 billion at LA Banque Postale Asset Management SA, is buying top-tier Chinese state-run lenders listed in Hong Kong, saying the government’s efforts to contain excessive debt will reduce risks. The sector has done well this year, with an index of China’s four biggest lenders listed in the city climbing 23 percent to outpace a 16 percent rise in a broader measure of financial firms.

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The extensive branch networks of the larger lenders give them a distinct advantage over smaller peers, even as deleveraging drive are pushed ahead

The extensive branch networks of the nation’s larger lenders give them a distinct advantage over smaller peers, allowing them to attract deposits even as policymakers push ahead with the deleveraging drive. Regulators have taken several steps to enhance financial supervision this year, targeting excessive interbank lending as well as a shadow financing sector that has helped smaller lenders expand aggressively. The drive is beginning to show a pronounced impact, with mid-sized lenders finding it increasingly difficult to find money.

“I definitely prefer big banks to smaller ones,” said Paris-based Tiramani. “China’s debt-to-GDP ratio may drop in a couple of years, reducing systemic risks. The government has tried to put shadow banking back into banks’ balance sheets, and, the ones that would get more exposed to this gray area are mid-sized banks. The ones that are much weaker are unlisted city and cooperative banks.”

Industrial & Commercial Bank of China Ltd, the world’s largest lender by assets, has advanced 36 percent in Hong Kong this year, while Bank of China Ltd has added 17 percent. That compares with a 4.5 percent increase in China Citic Bank Corp and an 8.6 percent drop in China Minsheng Banking Corp in Shanghai, the top five lenders have handed investors almost eight times the returns of smaller peers, and three times that of the benchmark equity gauge.

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Chinese mid-tier lenders’ off-balance-sheet wealth management products and interbank borrowing accounted for 43 percent of total funding at the end of June, compared with 19 percent at the biggest state-run banks, according to a Fitch Ratings Inc report released in September.

It’s not all bad news for smaller lenders. The PBOC’s targeted reserve-requirement ratio cut announced at the end of last month may benefit Citic, Minsheng, China Merchants Bank Co, and China Construction Bank Corp the most, according to calculations by Nomura Holdings Inc. There’s no clear bias between the big and small ones because cuts will depend on the amount of lending granted to small businesses, said Nomura analyst Sophie Jiang.

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