2 biggest factors that could alarm small banks in China

Concerns over new regulations still linger.

According to Bernstein Research, it expects the smaller banks in China will be negatively impacted by 1) concerns about further regulations to clamp down on certain businesses at the banks (e.g., the interbank business) and 2) a widening of the band on deposit interest rates to 20% above the benchmark level, from 10%.

Here's more:

Chinese banks continued to show divergence in share price performance within the group. Over the past 5 months, the large banks have outperformed the smaller banks by 1300bp.

We expect this outperformance by the larger banks to continue through the remainder of the year as the large banks will report better fundamentals. 

We prefer CCB, ICBC and BOC (rated Outperform) to China Merchants Bank and China Minsheng Bank (rated Underperform) over the next 12-18 months.