1. Report Industry Investment Rating There is no information provided in the report regarding the industry investment rating. 2. Core Viewpoints of the Report - In recent years, the risks of small and medium - sized banks have gradually increased due to economic transformation, regional development differences, and bank risk events. The central government has emphasized the timely disposal of risks in small and medium - sized financial institutions [1][10]. - The business share and profitability of small and medium - sized banks have declined. Their asset quality has also deteriorated during the rapid expansion period, and they are now gradually digesting historical legacy issues [2][33]. - The operations of urban and rural commercial banks across the country have shown differentiation. Underdeveloped regions generally have higher asset - to - total ratios, and there are differences in asset quality, profitability, and business growth rates among different regions [3]. - The core path for resolving the risks of small and medium - sized banks is the reform of the rural credit system, and the reform process of provincial rural credit unions has accelerated significantly in recent years [4]. - In the disposal of major risk events of small and medium - sized banks, a large amount of public funds are often consumed, and the restoration of the subject's qualifications and regional credit usually takes a long time [5]. 3. Summary According to Relevant Catalogs 3.1 Small and Medium - Sized Bank Risk Resolution Background - **Macro - background**: Since 2010, with China's economic transformation, the profitability of the real economy has declined, and the default rate of small and medium - sized enterprises has increased, leading to a rise in the non - performing loan ratio of small and medium - sized banks from 2010 - 2020. After 2020, macro - factors have put pressure on the asset quality and operations of small and medium - sized banks. Regional economic development imbalances and the limited risk - control capabilities of small and medium - sized banks, along with events such as the Baoshang Bank incident in 2019, have attracted more attention to the risk resolution of small and medium - sized banks [1][10]. - **High concentration of rural commercial bank credit risks**: In 2023, rural financial institutions accounted for 95% of the 3936 banking financial institutions rated by the central bank, and high - risk rural financial institutions accounted for 96% of the total high - risk bank institutions [15]. - **Non - redemption of Tier 2 and perpetual bonds concentrated in urban and rural commercial banks**: All cases of non - redemption of Tier 2 and perpetual bonds occurred in urban and rural commercial banks, especially in small and medium - sized banks in Liaoning, Tianjin, Shandong and other places. Since 2023, the non - redemption ratio has continued to decline, which may indicate an improvement in the capital adequacy of small and medium - sized banks in recent years [17]. 3.2 Operating Conditions of Urban and Rural Commercial Banks - **Overview of the fundamentals of urban and rural commercial banks**: Before 2016, small and medium - sized banks rapidly expanded their scale, but since 2019, their market share has continued to decline. During the rapid expansion period, their asset quality deteriorated, and since 2020, they have gradually digested historical legacy issues. Their profitability has also decreased significantly, and there are differences in capital adequacy among different types of banks [28][33][35]. - **Operating conditions of urban and rural commercial banks in different regions**: The market status of urban and rural commercial banks shows a two - tiered differentiation. Underdeveloped regions and Jiangsu, Zhejiang, and Anhui have a high asset - to - total ratio, while developed regions have a low ratio. There are also differences in asset quality, profitability, and business growth rates among different regions. For example, in 2024, the asset quality of urban and rural commercial banks in the three northeastern provinces and the northwest was generally poor, while that in Jiangsu, Zhejiang, Anhui, Beijing, and Shanghai was relatively good [3][38][41]. 3.3 Progress and Plans for the Reform of Provincial Rural Credit Unions in Different Regions - **The reform of the rural credit system is the core path for resolving the risks of small and medium - sized banks**: The reform of provincial rural credit unions is an important part of risk resolution for small and medium - sized banks. Currently, there are two main reform models: the joint - bank model and the unified - legal - person model. The reform process has accelerated significantly in recent years [4][59][62]. - **Cases of rural credit system reform**: Examples include the Zhejiang Rural Commercial United Bank (joint - bank model), Liaoning Rural Commercial Bank (unified - legal - person model), and Henan Rural Commercial Bank (a combination of joint - bank and unified - legal - person models) [64][66]. 3.4 Cases of Risk Disposal of Small and Medium - Sized Banks - **Sources of funds for risk disposal of small and medium - sized banks**: The order of fund use in the financial risk disposal process is the shareholders and actual controllers of the disposed financial institution, market - based funds, the deposit insurance fund, local public resources, and the financial stability protection fund. In recent years, the deposit insurance fund has been widely used in major risk resolution of small and medium - sized banks, and as of July 2025, a total of 530 billion yuan of special bonds for risk resolution of small and medium - sized banks have been issued [69][70][72]. - **Cases of risk disposal of small and medium - sized banks**: After the risk exposure of Baoshang Bank in 2019, risks of small and medium - sized banks in various places broke out concentratedly. Taking Liaoning Rural Commercial Bank and Jinzhou Bank as examples, the causes of risks, disposal plans, and related risks are analyzed [76].

Core Viewpoint - The operational difficulties faced by Shanxi Yuci Rural Commercial Bank have become a typical example of risk resolution among small and medium-sized banks, highlighted by continuous losses and deteriorating asset quality [1][3][5]. Financial Performance - In 2024, Yuci Rural Commercial Bank reported an operating income of -22.32 million yuan and a net profit of -206 million yuan, marking two consecutive years of negative operating income and net profit [1][4]. - The bank's interest income and interest expenses for 2024 were 458 million yuan and 553 million yuan, respectively, resulting in a negative net interest margin of -0.53% and a net interest income of -95.57 million yuan [5]. - As of March 2025, the bank's total assets were 23.195 billion yuan, total liabilities were 22.484 billion yuan, with loan balances at 11.21 billion yuan and deposit balances at 20.799 billion yuan [5]. Asset Quality - By the end of 2024, the non-performing loan balance reached 3.756 billion yuan, an increase of 1.097 billion yuan (over 41%) from the previous year, with a non-performing loan ratio climbing to 34.43%, up 11.51 percentage points [1][7]. - The bank's loan impairment provision balance was only 14 million yuan, resulting in a provision coverage ratio of just 0.38%, significantly below industry standards and regulatory requirements [7][8]. Capital Adequacy - The bank's core Tier 1 capital adequacy ratio and total capital adequacy ratio were -23.87% and -21.26%, respectively, indicating severe capital deficiency due to ongoing losses and an expanding loan loss provision gap [1][8]. - As of the end of 2024, the bank's core Tier 1 capital net amount and total capital net amount were -4.209 billion yuan and -3.749 billion yuan, respectively [8]. Credit Rating - The bank's credit rating was downgraded by China Chengxin International from BB to BB-, with a stable outlook, reflecting its deteriorating asset quality and ongoing profitability pressures [5][6]. Recent Developments - In the first quarter of 2025, the bank unexpectedly achieved profitability with an operating income of 43.58 million yuan and a net profit of 10.59 million yuan, primarily driven by a significant increase in investment income [2][8].

Core Viewpoint - The pace of mergers and restructuring among small and medium-sized banks is accelerating, with regulatory approval granted for 26 banks to acquire or dissolve their rural banks as of May 18 this year [1] Group 1: Regulatory Focus - As of the end of 2024, there are 4,295 banking institutions in China, a decrease of 195 from 4,490 at the end of 2023, with rural commercial banks, rural credit cooperatives, and village banks seeing reductions of 44, 41, and 98 respectively [1] - The focus of financial regulation has shifted towards risk management and transformation of local small and medium-sized financial institutions, particularly targeting high-risk urban commercial banks and smaller, less competitive rural banks [1] Group 2: Strategies for Risk Management - The strategy for addressing high-risk small and medium-sized financial institutions includes a "classified treatment" approach, where village banks are primarily merged with their main initiating banks, and rural credit cooperatives are integrated into provincial rural commercial banks [2] - In 2022 alone, over a hundred village banks were merged or restructured by larger banks, indicating a trend of "big fish eating small fish" to enhance resource complementarity and overall development [2] Group 3: Capital Supplementation and Internal Management - To enhance risk resistance, local financial institutions are actively seeking to supplement their capital through various channels, as the non-performing loan ratio of small banks is significantly higher than the industry average [2] - Newly established small banks post-merger must improve their comprehensive risk management systems and optimize their credit structures while conducting dynamic monitoring and early warning of risks [3] - The restructuring of the banking sector is seen as a necessary response to the transition towards high-quality economic development, with risk resolution in small banks becoming a strategic priority [3]

Core Viewpoint - The overall asset quality of the banking industry in most regions remains stable by the end of 2024, but specific data shows widespread fluctuations across different areas [1][2]. Summary by Sections National Overview - By the end of 2024, 16 out of 26 regions reported an increase in non-performing loan (NPL) ratios compared to the beginning of the year, indicating slight declines in asset quality in several major economic provinces [1][2]. - The national commercial bank NPL ratio decreased from 1.59% at the end of 2023 to 1.50% at the end of 2024, a reduction of 0.09 percentage points [3]. Regional Performance - Regions like Gansu, Hebei, and Guangxi achieved a "double decline" in both NPL ratios and NPL scales, with Gansu's NPL ratio dropping by 0.62 percentage points to 2.56% [5][6]. - Economic provinces such as Guangdong, Zhejiang, and Jiangsu experienced slight fluctuations in NPL ratios, with Guangdong's ratio increasing by 0.17 percentage points to 1.52% [7][8]. Specific Regional Data - Black龙江's NPL ratio rose by 0.40 percentage points to 2.60%, indicating a significant increase in asset quality concerns [4][7]. - In contrast, regions like Beijing, Shanghai, and Shenzhen saw minor increases in their NPL ratios, with Beijing's ratio rising by 0.02 percentage points to 0.79% [8][9]. Institutional Disparities - Nationally, large banks maintained stable asset quality, with 10 out of 16 listed banks reporting a decrease in NPL ratios by the end of 2024 [10]. - However, local small and medium-sized banks faced higher risk levels, with rural commercial banks reporting an NPL ratio of 2.8%, despite a decrease of 0.54 percentage points [11][12]. Future Outlook - The government plans to enhance risk resolution efforts for small banks, particularly rural financial institutions, through various measures including capital supplementation and restructuring [12].