On September 17, China Minsheng Banking Corp.'s Puer branch was approved for operation.

The restructuring of this branch marks the banking industry's first joint-stock bank branch evolved from a rural bank.

Puer Minsheng Rural Bank, originally established by China Minsheng Banking Corp., has finally succeeded in being "officially incorporated" into the Minsheng Bank branch system after 14 years of operation.

Rural banks once pointed toward the vast and fertile county-level sinking markets.

In recent years, amid narrowing interest margins and weak intermediate income, county markets have grown from "saline-alkali land" into new blue oceans, thanks to their differentiated industrial foundations and underdeveloped consumption potential.

However, undercurrents still persist beneath the calm surface of this blue ocean:

With the emergence of a "return-to-hometown trend" from first-tier cities and growing wealth management demand in sinking markets, county finance has formed an ecosystem where state-owned banks cherry-pick the best opportunities, city commercial banks move to rural areas, rural commercial banks defend their territories, and rural banks fill gaps. The competitive landscape continues to deteriorate.

The advance and retreat of joint-stock banks represented by China Minsheng Banking Corp. in sinking markets is a difficult story to tell.

**The Past of Market Penetration**

China Minsheng Banking Corp.'s sinking market layout once led far ahead among joint-stock banks.

In 2008, Pengzhou Minsheng Rural Bank, established by China Minsheng Banking Corp., opened for business. It was the first financial institution to support "agriculture, rural areas, and farmers" and post-disaster reconstruction in the severely affected areas after the Wenchuan earthquake, and also the first rural bank established by a joint-stock bank.

Seventeen years later today, China Minsheng Banking Corp.'s acquisition of Puer Minsheng Rural Bank is also the first case of "rural bank to branch conversion" among joint-stock banks.

Since 2008, Minsheng has continuously established rural banks, with the number stabilizing at 29 after 2013.

This figure leads far ahead among joint-stock banks.

As of the end of 2024, the total number of rural banks established by joint-stock banks in China was only over 60, with China Minsheng Banking Corp. accounting for nearly half at 29 banks, operating 81 business outlets.

Among other joint-stock banks, only Shanghai Pudong Development Bank has more than 20 rural banks, while other banks have rural banks in single digits.

The more proactive expansion into sinking markets compared to peers stems from China Minsheng Banking Corp.'s 2008 positioning of rural banks as "forming corporate private and micro-finance strategic extensions, expanding the company's market share in county and township markets."

As of the end of the first half of 2024, the overall scale of 29 rural banks was only 420 billion yuan, which is not significant for China Minsheng Banking Corp., whose total scale has reached 7.7 trillion yuan.

Excluding rural banks, China Minsheng Banking Corp.'s offensive in county markets has also been less than smooth.

Examining the branch network layout over the past decade from 2015 to the first half of 2024, Minsheng's investment in third- and fourth-tier cities and more sinking regions has been substantial.

Between 2015-2020, China Minsheng Banking Corp. established two new branches in Xining and Yinchuan. The top 10 first-level branches with the fastest expansion were mostly distributed in western and northeastern regions, as well as some southern cities.

From 2020 to the first half of 2024, the regions with the fastest expansion of Minsheng's branch network remained concentrated in western and northeastern regions, plus a few southern cities.

Overall, Minsheng has invested considerable resources in western and northeastern regions over the past decade.

Such a strategy showed certain foresight: when financial institutions in economically developed regions tend toward saturation, lacking business advantages to dig deeper, shifting focus to western and northeastern regions with limited coverage to expand breadth could achieve differentiated competition.

China Minsheng Banking Corp., which has always excelled in micro-finance, may also be better equipped to open up sinking markets.

Moreover, in recent years of housing price adjustments, declining household assets, and significantly reduced consumption willingness, sinking markets have shown stronger resilience:

For example, many county residents prioritize safety in deposits and are insensitive to deposit rates, resulting in lower liability costs in counties.

Scattered farmers and micro-enterprises contribute small credit amounts with dispersed risks, providing good asset quality assurance.

Even the "return-to-hometown trend" under the squeeze effect of first-tier cities in recent years has catalyzed the rise of county economies.

Among state-owned major banks, Agricultural Bank of China's main battlefield—county markets—has become its safety cushion against economic downturn volatility.

However, from current financial reports, China Minsheng Banking Corp.'s early investment in sinking markets has not provided performance support during the downturn:

From 2023 to the first half of 2024, the bank's operating income and profit contributions in northeastern, central, and western regions were all in the middle-to-lower or even bottom levels among various regions.

In the first half of 2024, although profit proportions in northeastern and western regions increased significantly, this was mainly due to negative profits in the Bohai Rim region.

Even in terms of asset quality, northeastern and western regions performed mediocrely, with non-performing loan rates in the first half of 2024 being 0.29 and 0.16 percentage points higher than China Minsheng Banking Corp.'s average level, respectively.

As of September 15, over the past year, 33 new branch institutions were established while 85 were closed, showing an overall net outflow trend.

Chongqing closed 13 branch institutions and Jilin Province closed 8, becoming the two regions with the most severe shrinkage of China Minsheng Banking Corp.'s branch network, belonging to western and northeastern regions respectively.

This perhaps also indicates that under profit pressure, China Minsheng Banking Corp. is retracting some of the tentacles it previously extended toward sinking markets.

**Why the Disappointment**

China Minsheng Banking Corp.'s disappointment also reflects the difficulties some joint-stock banks face in business penetration—

While Agricultural Bank of China's resource endowment in county markets became its safety cushion during the downturn, and local city and rural commercial banks could "carve out territories" with local resources, joint-stock banks represented by China Minsheng Banking Corp. found it difficult to effectively share the pie despite their advantages in micro-finance.

This may also be related to failures in their larger home field.

Going back to 2013, China Minsheng Banking Corp. made it onto the Fortune Global 500 list for the first time, becoming the first private bank to be listed.

The bank proposed a "second takeoff" that same year, implementing strategic transformation with process banking as the main line.

Chairman Dong Wenbiao proposed at the time "not to deposit for the sake of deposits, lend for the sake of loans, or make money for the sake of making money," but to serve small and micro enterprises and develop community finance, completely changing the traditional commercial banking model.

It was in this year that the number of rural banks established by the bank reached its peak of 29.

China Minsheng Banking Corp. wrote in its annual report at the time: "Rural banks actively explore small, micro and rural financial service models with local characteristics, extend private and micro-finance strategies, expand physical service scope, and effectively spread Minsheng's brand in broader regions and markets."

However, subsequent data proved that China Minsheng Banking Corp.'s sinking business in counties was not outstanding.

On one hand, shareholder disputes and management turnover inevitably affected strategic continuity.

China Minsheng Banking Corp.'s shareholding has always been extremely dispersed. In the year and a half before listing, over 20 equity transfers occurred intensively, with final winners concentrated among "New Hope Group," "Oceanwide Group," and "Orient Group."

After listing, insurance capital such as Anbang and Huaxia Life entered, and the equity dispute triggered by Anbang lasted four years.

In recent years, the fortunes of Anbang, "Oceanwide Group," and "Orient Group" have taken sharp turns for the worse, deeply affecting China Minsheng Banking Corp. The bank even filed a lawsuit against shareholder "Oceanwide Group" in 2023.

In 2024, China Minsheng Banking Corp. Vice President Huang Hongri confirmed that "Oceanwide Group," "Orient Group," and Evergrande still have loans of 18.484 billion yuan, 7.694 billion yuan, and 9.1 billion yuan respectively at China Minsheng Banking Corp.

On the other hand, there's the impact of economic cycles on China Minsheng Banking Corp.'s profits.

In recent years, as the real estate and infrastructure booms receded and interest rate centers declined, after the industry entered a downturn cycle, many bad debts accumulated during the leveraging cycle in manufacturing and real estate were exposed.

In 2020, China Minsheng Banking Corp.'s non-performing risks exploded intensively. With massive provisions, net profit shrank by 36.25% year-over-year, creating the largest decline since A-share joint-stock banks went public. The following year, it launched "shock therapy" and rarely mentioned scale targets again.

The bank's 2021-2025 strategic plan, once highly anticipated, quietly disappeared from the 2024 annual report.

Against the backdrop of difficulty maintaining overall scale, China Minsheng Banking Corp.'s offensive in sinking markets was also shelved.

Beyond the above reasons, the complexity and fierce competition of sinking markets may have exceeded China Minsheng Banking Corp.'s imagination.

Among them, state-owned banks can "cherry-pick" downward, sweeping county markets with lower funding costs and broader network coverage, while leveraging credit endorsements to cooperate closely with governments and participate in large, high-quality projects.

City and rural commercial banks strengthen defensive systems with geographical advantages, obtaining project resources through shareholder advantages while fully leveraging the flexibility of small and medium institutions, deeply embedding into county economic ecosystems through localized innovations like "whole village credit granting."

Under multiple pressures, joint-stock banks with awkward positioning showed obvious strategic maladjustment symptoms, with branch expansion relying more on private enterprises and credit sinking.

The most typical private enterprise and credit sinking concentrated after 2023 in debt-heavy urban investment companies and deeply adjusting real estate sectors.

Almost simultaneously, more sinking rural banks began exposing problems such as weak risk resistance, insufficient innovation capabilities, and complex shareholder relationships.

Taking the operations of 29 rural banks as an example, China Minsheng Banking Corp. has always maintained follow-up governance of its rural banks.

For instance, in 2010, it clarified scaled development ideas, then spent five years from 2013 continuously improving risk control, advancing shareholder selection and senior management nomination work, launching new technology systems, and strengthening support and service guarantees.

However, this oversight couldn't prevent problems from emerging at multiple Minsheng rural banks.

Starting in 2019, two rural banks under Minsheng had capital shortfalls of 32 million yuan.

By 2023, one rural bank still had regulatory capital supplementation gaps, with the specific amount expanding to 352 million yuan.

Some rural banks faced dual difficulties in internal and external capital supplementation:

First, insufficient self-generating capability, possibly related to their single product structure or increased non-performing provisions.

Second, shareholders' lack of capital injection capacity and willingness, possibly stemming from other shareholders' own profitability and capital utilization difficulties.

In comparison, the time when Minsheng rural banks' capital supplementation gaps were exposed highly coincided with China Minsheng Banking Corp.'s performance pressure period—this may confirm that under profit pressure, the bank's investment in some rural banks became hesitant.

**What Path Forward?**

Today's China Minsheng Banking Corp. is still struggling in the deep waters of transformation.

In the first half of 2024, its revenue grew 7.83% year-over-year while net profit attributable to shareholders fell 4.87%, maintaining a balance sheet contraction trend with assets and liabilities decreasing 0.59% and 1.28% respectively from the beginning of the year.

Compared horizontally with joint-stock bank peers, China Minsheng Banking Corp.'s most direct pressure currently lies in stabilizing and recovering net interest margins:

Although the entire banking industry remains under margin pressure, since 2015, China Minsheng Banking Corp.'s net interest margin has consistently been at the lower end among peers.

Especially in the first half of this year, the bank's net interest margin remained at 1.39%, only 0.07 percentage points higher than Bohai Bank, which ranks last among peers.

The persistent difficulty in recovering net interest margins is largely related to China Minsheng Banking Corp.'s asset-liability structure:

In the first half of 2024, the bank's total deposits were 4.31 trillion yuan, accounting for only 60% of total liabilities, meaning the bank still allocated high proportions of bonds, interbank liabilities and other market-based high-cost funds.

The cost rate of interest-bearing liabilities in the same period was 1.93%, though optimized by 45 basis points year-over-year, it remained higher than peers including China Merchants Bank, CITIC Bank, Ping An Bank, Huaxia Bank, and Shanghai Pudong Development Bank.

In combating deposit-gathering difficulties, rural banks may have different potential.

In 2024, when China Minsheng Banking Corp.'s deposits fell sharply by over 30 billion yuan, the deposit balance of 29 rural banks increased by 200 million yuan, showing deposit-gathering capabilities higher than the overall level.

This means rural banks still play a positive role in the current Minsheng system, although the 200 million yuan increase ultimately couldn't offset the 30 billion yuan decline.

Now, its Puer Minsheng Rural Bank has been absorbed as Minsheng Puer Branch.

Earlier, Meihekou Minsheng Rural Bank was absorbed as China Minsheng Banking Corp.'s Meihekou Sub-branch.

After reforms and reorganizations like "rural bank to branch" and "rural bank to sub-branch" conversions, rural banks will be incorporated into the main sponsor bank's more mature and standardized governance framework.

This is beneficial for fundamental improvements in rural banks' risk management, governance efficiency, and operational efficiency, and also represents their potential to obtain more resources from headquarters, form synergies, and ultimately help headquarters quickly sink service networks and expand county markets.

However, it also means more capital investment.

Currently, although China Minsheng Banking Corp. has achieved controlling stakes in the remaining 27 rural banks, full acquisition still requires communication and negotiation with numerous small and medium shareholders.

After acquisition, China Minsheng Banking Corp. must also directly face rural banks' historical burdens, which may erode profits and consume capital if involving risky assets.

From Chairman Gao Yingxin's strategic statements at the beginning of the year, deepening small and micro business remains China Minsheng Banking Corp.'s future focus:

This includes promoting integrated development of large, medium, small, micro and individual businesses, providing comprehensive services around entrepreneurs, employees and other individual customers including payroll, wealth management, and consumer loans throughout the entire chain.

Through "industry + region + life cycle + scenario" models, serving small and micro enterprises in all aspects of production and transaction.

Emphasizing community finance, building "one-kilometer" financial ecosystem circles with community sub-branches as fulcrums.

Regarding sinking market layout, China Minsheng Banking Corp.'s management has not made more public statements in financial reports and earnings calls.

In the future, what adjustment actions the bank will take regarding the remaining 27 rural banks remains worth watching.