Divergence in the performance of large State-owned lenders and private-sector listed banks in China will increase this year, and liabilities will be in focus as competition among them heats up, analysts said.

“The net interest margin is the most crucial driver of divergence in bank performance in 2018,” said Sophie Jiang, a banking analyst at Nomura. “Compared with large State-owned commercial banks, joint-stock commercial lenders will continuously face greater pressure on liabilities this year. The pressure will have negative impact on NIM figures for joint-stock commercial banks and restrain their credit growth to a certain extent.”

According to a Nomura forecast, as at the end of 2017, the NIM, a performance metric that examines a bank’s profitability, dropped by 32 basis points for small banks. The NIM for large banks, on the contrary, increased by 2 basis points.

This year, Nomura analysts expect the NIM of joint-stock commercial lenders to stay flat while that of large banks to expand by 6 basis points, considering that the cost of deposits will remain relatively stable for large banks, Jiang said.

Agreed Chen Haowu, a banking analyst at Everbright Securities Co Ltd. “Thanks to their advantages in liabilities and their power to increase lending rates in line with market conditions, the NIM for large banks will enlarge by 5 to 10 basis points this year, while that of joint-stock commercial lenders will remain stable in general,” said Chen in a research report on Jan 2.

Fu Yang, an analyst with AVIC Securities Co Ltd, also expects to see bank divergence increasing due to varying degrees of increase in cost of deposits.

“We believe cost of deposits will rise significantly for those joint-stock and city commercial banks, of which interbank liabilities account for a large proportion of their liabilities. But we won’t see a big change in such cost for State-owned and rural commercial banks,” said Fu in a recent report.

China’s banking regulators have tightened control over the risks associated with interbank, wealth management and off-balance-sheet businesses.

Mainly focusing on the deposit and lending business, State-owned banks and rural commercial lenders are less reliant on interbank liabilities, so they will not be much affected by macro-prudential regulation and new rules on the issuance of certificates of deposit in the interbank market. Certain joint-stock and city commercial banks, however, have a large amount of CDs and are more easily affected by regulations, said Fu in the report.

“Next, although the deepening of financial deleveraging and the strengthening of banking regulation will have a certain negative impact on banks’ net profit or their return on equity in the short term, these factors will be favorable for valuation recovery of the banking sector,” said Jiang of Nomura.

Chinese banks are remarkably undervalued, compared with their European and US counterparts, said Jiang.

“China’s efforts to deleverage and step up banking regulation will mitigate future risks, giving investors stronger confidence in the ROE (return on equity) of the Chinese banking sector, which currently stands at 14 percent on average,” she said.

As of Feb 5, 16 listed banks in China had released their preliminary earnings estimates for 2017, and 11 of them said they will likely post double-digit net profit growth year-on-year.

For most of them, the asset quality, it appears, will stabilize, when final figures for 2017 are confirmed. At the end of December, the nonperforming loan ratio of 15 listed banks dropped from the end of 2016 or the beginning of 2017.