Credit crunch in China to have longer impact on smaller banks: Bernstein

Blame it on larger exposure on interbank market.

According to Bernstein Research, it comes as no surprise that the smaller banks have seen their share prices decline more than the large banks in June as they are to be more negatively impacted by the recent tightness in the interbank market.

Here's more:

The smaller banks are much more exposed to the interbank market from a balance sheet perspective and, from an income statement perspective, rely more on the revenues generated from interbank activities than the large banks.

Over the past three years, the small banks have seen interbank exposures climb from 14% of their total balance sheet to 25%. Meanwhile the large banks have seen their interbank exposures increase from 7% to 8% over the same period.

With the recent spike in SHIBOR, we anticipate that the small banks will be forced to reduce exposure to their interbank activities as operating this business has become more expensive in the current environment.

Therefore, the joint-stock banks will be forced to reduce their interbank activities which will weaken their net interest income.

While we expect the joint-stock banks will see moderate earnings headwinds as a result of the recent liquidity tightness in their Q2 2013 results, we believe the consequences of the recent interbank tightness will have a longer-term impact on the smaller bank.

Unlike the larger banks, we expect the joint-stock banks will be forced to reduce their interbank activities which will weaken their net interest income.