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Updated: 2007-06-27 11:12

China Minsheng Banking Corp, the mainland's only privately controlled lender, is in talks to buy a majority stake in Changsha City Commercial Bank amid a push by the industry regulator to consolidate smaller lenders, according to a mainland media report.

The deal had received preliminary approval from local government officials, said a report in the 21st Century Business Herald yesterday.

After Hunan-based Changsha City Bank is restructured and Minsheng Bank gains control, it will be combined with four other city banks and a credit co-operative.

Minsheng would then become a strategic investor in the new province-wide lender, to be called Xiaoxiang Bank, said a source cited by the newspaper. The move will help Minsheng develop a footprint in Hunan, where it has no branches.

Since the nation's banking reform began, small city lenders and rural credit unions, which have licences to operate only in limited areas, have had to compete with State-owned and other joint-stock lenders operating nationwide.

Consolidation has become the way for provincial governments to support the development of their own banking sectors. The China Banking Regulatory Commission, the industry watchdog, has also been encouraging the move to reduce risks and strengthen smaller lenders.

The country's larger and medium-sized banks would benefit from acquiring smaller banks, some with only a handful of branches in a single city, to build up branch networks outside their traditional areas and fend off growing foreign competition, market observers said.

Minsheng has been widely regarded as one of the country's healthier financial institutions, thanks in part to its focus on lending to foreign firms that are seen as less likely to have trouble paying off loans.

The Minsheng deal has, at least at this early stage, navigated one of the more troublesome aspects of acquiring a local lender.

Despite the need for consolidation in the industry, acquisitions are often scuppered by local governments opposed to seeing local lenders become part of larger operations.

These governments rely on the banks to lend to the local businesses that the community needs to survive, making it difficult for a city-level lender to grow, as such local concerns are often not the most credit-worthy of operations.

"Banks looking to buy are being very careful and quite selective in looking for commercially driven transactions," said one banker specialising in the financial institutions sector.

The mainland's more than 110 city banks, which mostly limit their operation to certain regions, have been set up starting in 1995 from the nearly bankrupt credit unions in a government orchestrated move to reduce financial risks.

Two city commercial banks are about to launch domestic initial public offering to raise funds for expansion.

Bank of Nanjing, approved last week to sell shares in Shanghai, plans to raise about 5 billion yuan (US$656 million) while Bank of Ningbo, which won approval from the Shenzhen exchange to sell shares last week, will raise four billion yuan.

At least six city banks are eyeing a listing this year while other banks are busy preparing to qualify for listing.

Minsheng's A shares closed yesterday at 11.18 yuan, down 0.62 percent from Friday. The shares have risen 30 percent this year.