China's city commercial banks must guard against risks: Fitch

After a decade of expansion, China's city commercial banks have grown rapidly and become more important, albeit a growing source of risk, global ratings agency Fitch said Monday.

"Like mid-tier banks, city commercial banks have shifted more assets towards non-loan financial products to enhance yield, but their on-balance-sheet investment exposure is rising more quickly than that of peers," according to a recent Fitch report.

Large holdings in non-loan financial products, mostly from non-bank financial institutions, imply increasing exposure to spillover and contagion risks, it said.

"Their large investment holdings, thinning liquidity, lower profitability and weaker capital buffers render them more vulnerable to disruptions within the financial system than larger banks, with access to timely liquidity support also less certain," noted the report.

Most city commercial banks in China were transformed from city cooperatives during the mid-1990s. There were more than 130 city commercial banks in China as of the end of June 2016, said the agency, adding that sustaining local economic growth and employment is a key priority.

China's city commercial banks have grown rapidly over the past decade. Their assets grew at a compound annual growth rate of 27 percent from 2006 to 2016, higher than the 14-percent and 23-percent growth rates for state and joint stock commercial banks over the same period, respectively, it said. Endi