China's foreign ownership cap change may stir interest in smaller banks: Fitch

BEIJING (Reuters) - Beijing’s landmark move to ease or remove limits on foreign ownership in China’s financial sector will likely stoke acquisition interest in smaller banks, Fitch Ratings said.

A Chinese national flag flutters at the headquarters of a commercial bank on a financial street near the headquarters of the People's Bank of China, China's central bank, in central Beijing November 24, 2014. REUTERS/Kim Kyung-Hoon/File Photo

China’s life insurance industry could also be attractive to foreign acquirers due to the sector’s low penetration rate and growth potential, Fitch said in a report on Tuesday.

Vice Finance Minister Zhu Guangyao on Friday said China had raised the foreign ownership cap on futures firms, securities companies and fund managers to more than 50 percent with immediate effect, and that the cap would be removed altogether in three years.

China will also drop foreign ownership restrictions on local banks and asset management companies, Zhu said.

The announcement came hours after U.S. President Donald Trump left Beijing after a state visit where he reiterated calls for improved access to Chinese markets.

“The scale of China’s larger banks could be a constraint for potential acquirers, and it is not yet clear how the strategic benefits would compare against the costs,” Fitch said. “The more likely acquisition targets in the banking sector would be the relatively smaller city commercial banks or rural banks.”

But such banks tend to have higher risks due to their narrower geographical presence, and profitability pressures are also stronger than in the broader banking sector, Fitch said.

In the non-bank sector, pricing competition is intense, especially in the brokerage and underwriting segments, where brokerage commission rates have fallen to less than 3 basis points, according to Fitch.

Business relationships also tend to be important to winning institutional business, which could be a hurdle for potential foreign entrants.

The life insurance sector could be more alluring, but the small life insurers that are the most likely acquisition targets usually focus on low-margin products amid tough market competition, Fitch warned.

Shares in New China Life Insurance 601336.SS have surged more than 10 percent since Friday, leading gains in the broader financial index .CSI300FS in Shanghai.

Reporting by Ryan Woo; Editing by Himani Sarkar