In 2024, the banking industry in mainland China is facing immense pressure, especially for small and medium-sized banks. So far this year, the downsizing of small and medium-sized banks has accelerated significantly. Statistics show that 171 banks have been absorbed, merged, or directly dissolved within the year, a much higher number compared to previous years.
According to a report by the Shanghai Securities News, as of December 20th this year, 171 banks have been absorbed, merged, or dissolved, with an average of 15.7 banks “disappearing” each month, surpassing the combined total of the past two years.
Industry insiders suggest that the consolidation and restructuring of small and medium-sized banks can be carried out in various ways, with absorption mergers and new establishment mergers being the mainstream methods. Absorption mergers involve larger banks absorbing smaller ones and transforming them into branch institutions.
Cases of mergers and restructuring among village and town banks have been frequent this year.
An analysis article by the influential financial media and personal wealth management service institution “Zhigu Trends” on December 29th indicated that a large number of small and medium-sized banks in mainland China are undergoing mass dissolution. This trend began early in the year and signifies a significant reshuffling within the banking industry, with no apparent signs of stopping.
On December 24th, two banks were dissolved. Three days earlier, on December 21st, the number of dissolved banks was 7.
On June 20th, 36 banks were merged in a single instance – Liaoning Rural Commercial Bank absorbed 36 rural small and medium-sized banks within the province.
The article stated that in 2024, the banks facing dissolution predominantly comprised small and medium-sized banks with relatively small asset sizes. Of the 188 banks deregistered this year, 98 were village and town banks, 65 were rural commercial banks, and the rest were credit cooperatives, rural mutual aid funds, and rural cooperative banks, with one city commercial bank.
These banks did not go bankrupt but went through processes such as absorption mergers, acquisitions, or restructuring. For instance, Zhangjiakou Bank was approved for the acquisition of Qinhuangdao Funing Family Bank, Luolong Family Bank, and Changli Family Bank, establishing corresponding branches. On December 13th, Liaoning Shoushan Village and Town Bank, Liaoning Dengtao Village and Town Bank, and Yingkou Hongcheng Village and Town Bank were dissolved after being acquired by Liaoshen Bank.
After dissolution, many village and town banks were reorganized as branches and sub-branches of initiating banks to continue operations.
The effective assets, total liabilities, business operations, network points, and staff of small and medium-sized banks after clearing assets and capital will be taken over by larger banks post-absorption and merger.
Mainland China has a vast number of small and medium-sized banks. As of the end of June 2024, the total number of legal entities in China’s banking financial institutions was 4,425, with 124 city commercial banks, 1,577 rural commercial banks, 483 rural credit cooperatives, and 1,620 village and town banks, totaling 3,804 institutions, accounting for over 85%.
“Zhigu Trends” pointed out that a widely recognized phenomenon in 2024 is the severe “internal competition” within Chinese banks.
On November 8th, the People’s Bank of China released the “Quarterly Chinese Monetary Policy Implementation Report of 2024,” using the term “internal competition” to describe the current state of the banking industry for the first time.
The report noted that the current banking market is fiercely competitive, showing a trend of rapid decrease in loan interest rates while deposit rates remain stable. By the year-end, to boost performance, many banks even raised deposit rates against the trend, with some small and medium-sized banks offering products with annual rates of over 2%.
On the loan side, with housing mortgage loans plummeting from the clouds, banks have turned towards personal consumption loans and personal business loans. Two years ago, the interest rate for consumption loans was at least 5%, but now it has entered the “3” range. Some banks have further lowered rates into the “2” range through group promotions, issuing coupons, and other tactics.
The article suggests that interest rates are the battleground for banks. Intense price wars are bound to decrease interest differentials, further squeezing banks’ profit margins. Interest differentials refer to the difference between the average loan interest rates banks offer and the average deposit rates they charge, which is the primary source of income for banks.
Internationally, the average interest spread between loans and deposits is usually 1.5% to 2%, with levels below 1.7% considered a warning sign. However, according to the data from the China Banking Regulatory Commission, in the third quarter of 2024, the net interest margin of commercial banks was only 1.53%, which is a historical low, down by one basis point from the second quarter.
The most extreme case is the Yuci Rural Commercial Bank Co., Ltd. in Shanxi. According to the 2024 annual tracking rating report, by the end of 2023, Yuci Rural Commercial Bank’s net interest margin had dropped to a negative level of -0.40%, resulting in a net interest loss of 73 million yuan for the year.
“Zhigu Trends” mentioned that with many industries experiencing profit contractions, perhaps those most severely affected are the “workers” in the banking industry – as industry profits directly impact employees’ salaries and workload. The wave of bank mergers not only reshapes the landscape of the banking industry but also affects the fates of millions of individuals.