"Many private companies are exiting from city banks, and we will see that going on through this year," said Fan Wei, an analyst at Beijing-based Hongyuan Securities. "Deteriorating asset quality and a gloomy outlook for stock market listings have made them frustrated."

Since 2010, private firms have been rushing to acquire stakes in the local lenders as Beijing encouraged investment from the private sector. Apart from a share in fat profits and easier access to bank loans, they also hoped for gains upon an initial public offering.

However, it is widely expected that the securities regulator will not allow city banks to float in the foreseeable future because of concern about the possible impact on the mainland's poorly performing stock markets.

Also, bank profits are under pressure as the interest rate deregulation in progress is set to invite competition in the long term and the potential insolvency of many local government financing vehicles, the lenders' major customers, could give rise to more soured loans in the near term.

"The banks' default risk is mounting as local governments and their financing vehicles are major borrowers," Fan said. "If the amount of non-performing loans is very high, banks could even see their net assets quickly come to nil."

At the end of June, outstanding loans to local government financing vehicles at commercial banks rose 6.2 per cent to 9.7 trillion yuan (HK$12.3 trillion) from a year ago, according to the China Banking Regulatory Commission. A big chunk of those loans, extended in 2009 and 2010 to stimulate the economy after the global financial crisis, will expire this year.

Banks liable to be hit the worst by the debt problem were those that sought rapid expansion by pouring out loans, especially small banks with no edge in their market segment, said Liao Qiang, an analyst at Standard & Poor's.

At Bank of Dalian, total assets expanded nearly 37 per cent last year from a year ago, but net profit edged up only 1.59 per cent because of impairment losses from non-performing loans, the bank said in its annual report.

The lender, with assets of 256.8 billion yuan, is owned by Dalian Rongda Investment, which holds an 18 per cent stake on behalf of the Dalian government and other shareholders, including property developers, investment firms and steelmakers.

There are about 140 city commercial banks across the country, which were transformed from collapsing local-government-owned city credit unions in the 1980s and 1990s. They had a combined 13.59 trillion yuan of assets at the end of June, an increase of 18.1 per cent year on year, and accounted for 9.6 per cent of the banking sector.

"Small-scale banks may have liquidity problems in the next few years, which will give nationwide banks and large regional banks an opportunity to make acquisitions," Liao said.

Possible buyers were also likely from other industries and the ranks of private entrepreneurs as the State Council had voiced support for private investment in banks, bankers and analysts said.

Hainan Airlines would acquire a city bank to forge a financial conglomerate, the carrier said at the end of last year. It already owns licences for insurance, trust, guarantee and leasing businesses. It was in talks with two city commercial banks in Henan for a possible acquisition of a stake, the reported this month. The airline was not available for comment.

Dong Wenbiao, the chairman of China Minsheng Banking, the largest joint-stock bank on the mainland, said the timing was good for private investment in city commercial banks and rural commercial banks.

It would be better for private capital to acquire stakes in the regional lenders than open new banks, provided that local governments stopped intervening in the lenders' operation, Dong said at a forum early this month.

However, an analyst with an investment bank said private investors he had contacted would rather open a new bank than buy into an existing lender with hidden problems.