China may see an increasing number of mergers and acquisitions among small and medium-sized commercial banks, as the country ramps up efforts to mitigate financial risk while divergence in banks' asset quality and financial performance has intensified, experts said.

Sichuan-based Panzhihua City Commercial Bank Co Ltd said on June 26 that it plans to set up a commercial lender jointly with Liangshan Prefectural Commercial Bank Co Ltd through a merger.

Earlier last month, the Sichuan provincial government said it will promote the development of financial services by taking a series of measures including setting up Bank of Sichuan, a joint-equity commercial lender.

By the end of September, total assets of Panzhihua City Commercial Bank were 74.91 billion yuan ($10.7 billion), and its outstanding balance of various loans reached 42.16 billion yuan.

According to the last annual report posted on the website of Liangshan Prefectural Commercial Bank, the lender based in Sichuan province realized a net profit of 18.72 million yuan in 2017, falling from 100.09 million yuan in 2016. Its nonperforming loan ratio was 3.57 percent at the end of 2017, rising sharply from 1.93 percent at the end of the previous year.

A verdict posted on China Judgments Online shows that Zhu Hao, an unemployed person, was sentenced to 10 years in prison on May 8 for collaborating with several others, including a former risk management director of Liangshan Prefectural Commercial Bank, on multiple loan frauds totaling 93 million yuan. The criminals had not yet returned 87.72 million yuan of the principal to the bank.

"The next three to five years will mark a watershed for the banking sector. Those banks with poor financial performance will be certainly eliminated. In our view, Chinese banks will see a large round of opportunities for mergers and acquisitions by 2025," said John Qu, senior partner at McKinsey, while launching a quarterly report on the banking sector last year.

China has more than 4,000 small and medium-sized banks, with total assets of about 77 trillion yuan. These banks have limitations in management capacity, and their targeted clients are usually micro, small and medium-sized enterprises. During the novel coronavirus outbreak this year, small and medium-sized banks were noticeably affected by the pandemic, said Cao Yu, vice-chairman of the China Banking and Insurance Regulatory Commission, at a news conference on April 22.

"Everyone will see strong efforts pushing for reforms and restructuring, especially market-oriented restructuring, of small and medium-sized banks this year," Cao said.

Recently, several banks announced their external investment plans. Jiangsu Changshu Rural Commercial Bank Co held a general meeting of shareholders on June 24, approving the proposal of investing 1.05 billion yuan in Jiangsu Zhenjiang Rural Commercial Bank Co to become its largest shareholder.

Also in June, Hebei Dingzhou Rural Commercial Bank Co received regulatory approval for transferring part of its shares to Hebei Zhuozhou Rural Commercial Bank Co and Hebei Gaobeidian Rural Commercial Bank Co, which will hold 8.14 percent and 8.23 percent of its shares, after the transfer.

In the meantime, regulators will continue to conduct clearance of some of the equities, which were held by rule-violating shareholders of high-risk financial institutions, in a prudent manner.

"A number of mergers and acquisitions will be carried out inevitably while we are deepening reforms of small and medium-sized financial institutions, but it will not change the pattern that private capital will take the dominant position in ownerships of these financial institutions," said Guo Shuqing, chairman of the CBIRC, in an opinion piece published in the Economic Daily on Friday.