AMTD Research - 13 January 2017

China Rural Banks: New urbanization, new growth engine


A top-down + bottom-up study on rural banks

Not much has been written on rural banks in China, given their relatively small sizes and low publicity. But, they are in fact as a whole not that small, with a 12-13% share of banking system assets. This is slightly bigger than that of Industrial and Commercial Bank of China (ICBC). In this report, we look at the macro level data as well as bottom-up financial data of rural banks, in an attempt to provide better insight on their performance trends, challenges they are facing and future opportunities.

Rural banks target local small & micro enterprises and rural lending

To differentiate from other types of banks, rural banks target on loans to small & micro enterprises and rural lending. Financial inclusion in these two segments have been on the top reform agenda of Chinese government. Favorable policies and improving financial infrastructure on rural lending and lending to small & micro enterprises support the fast balance sheet expansion of rural banks in recent years. We expect this trend to continue in the next few years.

Opportunities arise from the new-type urbanization plan

The opportunities arising from this new urbanization plan include growth potential for rural banks in: 1) financing demand for urban infrastructure projects in the form of bank loans as well bond financing; 2) developer loans in the new sub-cities and towns; 3) financing demand for industry upgrade along with the urbanization; 4) housing mortgage demand by rural migrants; 5) personal consumption loans by the rural migrants and 6) wealth management service demand.

Branch productivity, intermediary businesses and risk pricing have room to improve

We find out that rural banks have lower branch productivity compared to other banks. Rural banks tend to have lower revenue contribution from intermediary business. With on-going urbanization and financial disintermediation, rural banks should focus on product innovation and diversification. Improving risk management system with accumulation of credit data give the rural banks good potential to improve their loan risk pricing capability thus risk-adjusted returns on loans.

Profitability diverges; reflecting different operating efficiency

We take a closer look at the operating data of the top 15 rural banks in China. While rural banks in general have lower profitability than other banks, their performance diverged in recent years. Some leading rural banks have demonstrated much stronger risk pricing, fee generating capabilities and cost efficiency.

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