City commercial banks stand before new frontiers

Reform of the rigid mainland banking sector poses a challenge for state-owned lenders and an opportunity for technology-savvy entrants

PUBLISHED : Monday, 16 September, 2013, 12:00am
UPDATED : Monday, 16 September, 2013, 4:16am

Premier Li Keqiang has put a stamp of approval on speeding up reforms of state-dominated financial institutions, interest rate liberalisation, and the free conversion of the mainland's currency - all of which are part of the government's top economic reforms identified for the next few years until 2015.

Given that green light, Huishang Bank, based in eastern Anhui province, aims to raise more than US$1 billion from a listing in Hong Kong this year. The offer will provide a test of whether city commercial banks can differentiate their strategies and present executable merger and acquisitions agendas to take advantage of industry consolidation.

Today's problems in the mainland banking industry are not confined to concerns over capital, liquidity and funding. State-owned banks, which are in favourable positions due to their strong ties with other state-owned enterprises, will need to rethink their strategies in the coming years as the mainland's burgeoning internet sector offers new ways to lure customers and depositors from putting money in the often troublesome and inefficient large banks.

That could prove alarming to smaller players as many rely heavily on external funding.

Household names such as Alibaba and Tencent have started to invade the financial services industry by offering more customer-focused services. Alipay offers an online payment service that is similar to the United States' PayPal, and recent market speculation is that the China Banking Regulatory Commission has approved Tencent's application for a banking licence in Guangdong.

Hangzhou-based Alibaba and Tencent, the Shenzhen-based internet giant which has started commercialising its popular messaging application WeChat in China, have both leveraged their online strengths and sophisticated databases to break into the mainland's antiquated financial services.

Against this background, will listings of city commercial banks trigger more mergers and acquisitions?

Analysts are keen to get answers to this question, especially after Li said his government intended to take "active steps towards market-based interest rates", which has suggested a higher degree of capital and funding pressure for the small lenders who often borrow through interbank markets.

Given Li's calls for reform, the landscape of the financial system could be in for a transformation, which is obviously good news for the foreign players who have been lobbying for years to be allowed a greater slice of the financial sector which has been dominated by a few state-owned behemoths.

Under the new leadership, foreigners may be expected to invest directly in their own operating platforms on the mainland, marking a change from joint-venture agreements that frequently resulted in legal disputes.

Will Li Keqiang's bold reform plans take place and open a window for the small lenders in the next few years? Or will they be a double-edged sword to city commercial banks who will need to catch up quickly with the fast-changing market dynamics and opportunities ahead?