Smaller banks to suffer from China's deleveraging efforts

These banks could be forced to cut dividends.

According to BMI Research, the Chinese government's deleveraging efforts and increased scrutiny on the shadow banking sector are likely to force banks, in particular medium and small-sized ones, to increasingly shift their asset exposure towards those that are safer and of lower returns, and this will therefore weigh on profitability.

Here's more from BMI Research:

Meanwhile, the average capital Tier 1 ratio of the country's joint-stock banks rose to 9.2% in 2016 from 9.0% in 2015, but was below the China Banking Regulatory Commission (CBRC)'s requirement of 9.5%, while the average capital Tier 1 ratio of listed CCBs worsened slightly to 10.2% in 2016 from 10.4% in 2015.

We note that growth in risk-weighted assets for the joint-stock banks and CCBs was slower than overall asset growth in 2016, and tighter regulation (as seen in previous documents issued by the CBRC) may require higher risk weightings on existing shadow banking assets.

At a time when profitability is likely to be weak, these banks could be forced to cut dividends or raise additional capital from the equity markets, in turn undermining their share price.