{"text":[[{"start":9.74,"text":"This article only represents the author's own views."}],[{"start":13.58,"text":"The latest annual results from Bank of Gansu Co. Ltd. (2139.HK) and Jiangxi Bank Co. Ltd. (1916.HK) — regional lenders anchored in two of China’s less developed provinces — paint a bleak picture of this corner of the Chinese financial sector."}],[{"start":34.87,"text":"Small regional banks like this pair are suffering the most in an industry-wide margin squeeze afflicting Chinese lenders. Loan demand is weak in a slowing economy, and the central bank’s low interest rate environment is crushing loan yields. At the same time, these smaller banks are struggling to reduce high costs for deposits. As their profitability comes under growing pressure, external capital support from their state-owned shareholders increasingly looks necessary. That would further undermine long-suffering private investors who have already seen the value of their shares shrivel."}],[{"start":71.47,"text":"Let’s start with Bank of Gansu, based in the country’s less affluent Northwest. Not only did the bank’s new lending shrink last year, but its net interest margin (NIM) also dropped to 1.09% from 1.18% in 2024, and 1.65% as recently as 2021, according to its report. As a result, net interest income, its primary revenue source, dropped 4.8% to 4.4 billion yuan ($637 million). Jiangxi Bank managed to boost its new lending, but its NIM narrowed even more, by more than 0.20 percentage points, to 1.41%, driving down its net interest income by nearly 10% to 7.7 billion yuan, according to its report."}],[{"start":123.27,"text":"The two banks are structurally more susceptible to margin pressure than big state-owned national lenders or regional banks in wealthier provinces."}],[{"start":133.79999999999998,"text":"Unlike those peers that benefit from deep pools of low-cost demand deposits generated by big corporate customers and high-velocity transaction flows, Jiangxi Bank and Bank of Gansu rely heavily on time deposits that carry much higher interest rates. That funding structure is a costly difference and one that’s difficult to escape."}],[{"start":158.27999999999997,"text":"That’s likely because large proportions of their retail customers are risk-averse individuals who prefer the certainty of fixed interest rates in exchange for limited access to their funds, over greater flexibility that comes with keeping money in near-zero-yield on-demand accounts. Meanwhile, these banks’ corporate clients — mostly small enterprises and local government financing vehicles — either keep minimal balances in their low- or no-interest on-demand accounts, or try to get high rates for those deposits."}],[{"start":190.45999999999998,"text":"For Jiangxi Bank, retail time deposits, which carry an average interest rate of 2.61%, account for almost 90% of its retail deposit base, which make up a little more than half of its total deposits. By comparison, the bank pays a far lower 0.06% for demand deposits. The story is similar for Bank of Gansu, which is even more reliant on retail depositors."}],[{"start":219.24999999999997,"text":"Term deposits do offer some benefits for banks compared with demand deposits. Most notably, the former provide stability for a bank’s liquidity. But they become a severe drag on profitability when loan yields decline as they have been in China these days. Bank of Gansu is facing a bigger headache as it struggles to make new loans in a slowing economy where borrowers are increasingly unable to repay their debt. The ratio of its loans to its deposits fell to just a little over 66% last year, meaning a significant share of its deposits is sitting idle, costing the bank money without generating returns."}],[{"start":261.28,"text":"Buffer erosion"}],[{"start":263.65999999999997,"text":"In an apparent effort to defend their bottom lines against these headwinds, Bank of Gansu and Jiangxi Bank are doing something that doesn’t look so prudent — reducing their buffers against loan losses."}],[{"start":277.14,"text":"Jiangxi Bank cut its provisions for credit losses by about 15% last year. This helped it limit the decline in its net profit to 4% last year, a good outcome compared to a 22% plunge in its operating income. The decrease in loan-loss provisions may suggest that the bank’s management has become more confident about its asset quality, with its nonperforming loan (NPL) ratio falling to 2.00% last year from 2.15% in 2024. But skeptics might see this as imprudent maneuvering to prop up its profits."}],[{"start":317.46999999999997,"text":"And even though Jiangxi Bank’s NPL fell, it’s still higher than the average for large commercial banks. Meanwhile, the ratio of its provisions relative to bad debt, at about 160%, is lower than the 200%-plus industry norm. That means Jiangxi Bank operates on a thinner cushion against any major crisis that could be triggered by a wave of defaults."}],[{"start":345,"text":"Bank of Gansu has an even weaker buffer, which eroded further after it cut its loan-loss provisions to about 131% of NPLs at the end of last year, a good 3 percentage points lower than a year earlier. Helped by this trick, its net profit actually grew 1% last year despite a 9% fall in its operating income."}],[{"start":370.73,"text":"The bank’s bad loan ratio held steady at 1.93% last year, but it also sold a large chunk of its bad assets to an asset management company that is a subsidiary of one of its large shareholders. That kind of clean-up – basically shifting bad assets from a listed company to an unlisted related company – is an important reminder that headline numbers of Chinese banks, especially small ones, often require some scrutiny."}],[{"start":400.88,"text":"Now, the biggest challenge for the two banks is the erosion of their capital buffers. In effect, they can’t generate sufficient capital to cover their business growth. Particularly, Jiangxi Bank’s Common Equity Tier 1 (CET1) capital ratio fell below 9% as of the end of December, dangerously close to the regulatory minimum requirement."}],[{"start":426.17,"text":"If their capital deterioration continues, these lenders will have little choice but to ask their controlling shareholders, usually regional government entities, for fresh injections in exchange for new shares. That would cost other shareholders in the form of dilution."}],[{"start":444.3,"text":"So, it’s no wonder these two banks’ shares have fallen out of favor with investors, losing close to 80% of their value in the past five years. Bank of Gansu shares trade at a paltry price-to-book (P/B) ratio of 0.11 and Jiangxi Bank is even worse at 0.08. This basically means for every $1 of equity on their balance sheets, investors are willing to pay only around 10 cents, suggesting that they are extremely skeptical about the true values of their assets and believe NPLs will eventually erode their book values."}],[{"start":481.58000000000004,"text":"The figure for many large banks in China is also below 1, such as the 0.47 for ICBC’s (1398.HK; 601398.SH) Hong Kong-listed shares, reflecting investor concerns about this group in the current weak economic climate. But if life is hard for big banks, it looks even more miserable for smaller ones, especially in China’s less developed regions."}],[{"start":517.97,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1775178577_3007.mp3"}