New | Joint-stock banks' M&A lending a cause for concern
As Western banks retrench in their lending appetite requiring new balance sheet expansion, more mainland bankers now are weary of domestic competition and warn of the associated risks that may be now spilling out onto the offshore market.
International banks that have banked on China dollar loan demand have seen a large portion of that dropped off compared to the previous year when the yuan-dollar volatility spiked in 2015. In the last quarter of the year coming up to 2016, almost all bankers now bank on mergers and acquisitions-related lending, mainly coming out of China, to sustain new loan demand.
But even under the overriding growth story, international bankers say new competitive threats lurk - not from the big mainland state-owned banks in general, but increasingly from the even more aggressive sisters in the form of the mainland joint stock banks.
“M&A is new to China banks. It is a relatively recent development for Chinese banks in the past two to three years. Surprising they learned very quickly. I don’t know how they get it. But they did. They grabbed the deals very quickly. Now if you give them two to three days, they can work it work. They can match international banks in efficiency,” said a banking source who did not have permission to speak to the media.
“Those smaller banks, the joint stock banks have caught on more quickly than us and came in a big way more aggressively. This is a very interesting situation right now. Whereas, we [used to] think we are the front runners. Now these people run faster than us. The question is whether this is sustainable,” he added.
Some bankers questioned whether smaller players may be playing above their heads.
“For people that have done a few things, they now start to think and ask the same question themselves. We are in a review thinking [mode]. There ought to be a boundary for these things. If you stretch too far, you are bound to come to problems later. We will see. It will give a lesson to some people,” a source added.
Chinese banks in the past few years have grown their balance sheets substantially – to the extent that the growth of Chinese banks’ balance sheet in absolute size actually outweighs the balance sheet of corporate borrowers.
“Their growth is much faster in a way,” a source added.
In deals that international banks traditionally will look to share with partners such as through syndications, the new comers have been absorbing the entire risks onto their balance sheets.
“Their appetite or capability to seed on those bilaterals have grown tremendously. Even internally, we are sometimes quite amazed at the size of the deals they can seed.”
If pricing or efficiency is no longer an exclusive competitive advantage, big banks now will need to look for new means to add value.
“With names that are difficult to seed, we don’t contribute. But they look to us to distribute. That’s our value,” the source added.
Syndication bankers, the once exclusive club of loan bankers who specialise in lending to big corporates, say this year they are challenged by the disintermediation by the bond market, which for much of this year offers significantly more attractive pricing.
None of the Western banks’ management has the appetite to see further growth in their balance sheet, under the new regulatory and capital requirement restraints. Management is also keen to cut down their team size along with their level of compensations.
