M&A wave set to hit China financial sector

November 06, 2015 16:34
Minsheng Bank lost much of its allure due to unsatisfactory risk management. Photo: CNSA

China's economy is facing strong headwinds. Many firms sink deeper into losses and find it hard to collect receivables.

As bad debts rise amid the slowing economy, how can banks lend out their clients’ money?

Capital cost for some financial institutions is already high. How can their business continue when there are not enough qualified borrowers?

More bankruptcies and heavy losses will affect micro lending firms, guarantee corporations as well as rural, municipal and provincial banks. That's why I believe there will be more merger and acquisition opportunities in the sector. 

But who will be the winners?

China Merchants Bank (CMB, 03968.HK) saw its net profit rise by only 1 percent in the third quarter from a year ago, below market expectations.

Impacted by poor asset quality, the bank's asset losses jumped 167 percent during the period while its core capital adequacy ratio rose 0.38 percent to 10.05 percent.

For mid-sized banks, that's already a high level, even better than Agricultural Bank of China’s (01288.HK) 9.72 percent.

Most mainland banks’ return on equity fell to below 15 percent. Some were even negotiating with regulators to lower credit loss provision requirements so that they could lend more and increase their profits.

In the past, Minsheng Bank (01988.HK) performed quite well. However, due to Minsheng's unsatisfactory risk management, CMB became the most attractive investment target among listed banks on the mainland.

If CMB can grab M&A opportunities to expand its business, it may grow to be China’s fifth or sixth largest bank.

This article appeared in the Hong Kong Economic Journal on Nov. 6.

Translation by Myssie You

[Chinese version中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.