Lenders to face margin pressures: experts

A clerk checks banknotes at an outlet of China Construction Bank Corp in Hai'an, Jiangsu province. The asymmetric interest rate cut could put pressure on lenders' profitability. [Xu Jiabao / China Daily]

The latest round of interest rate cuts will add more pressure to the already shrinking interest margins of Chinese lenders and trigger fierce competition among them for deposits, industry experts said on Monday.

Effective Saturday, the People's Bank of China cut the one-year benchmark lending rate by 40 basis points to 5.6 percent and the one-year benchmark deposit rate by 25 basis points to 2.75 percent. Other benchmark deposit and lending rates were lowered accordingly, with a simplified term structure. The central bank also raised China's deposit rate ceiling from 1.1 times the benchmark to 1.2 times.

"The asymmetric interest rate cut could put significant pressure on the profitability of lenders. If banks offer 20 percent deposit rate premium and new benchmark lending rates (using one-year benchmark rates), the interest margin could be narrowed by 40 basis points," said Zhu Haibin, chief China economist at JPMorgan Chase & Co.

According to China International Capital Corp, lenders' profit growth may slide next year by 10 percentage points to zero or turn negative as net interest margins contract.

To keep net interest margins at the current level or even increase the margins, commercial lenders must change the structure of their clients by extending loans to small and medium-sized businesses, said Li Shanshan, an analyst at Bocom International Holdings Co Ltd.

She said variations in deposit rates by different lenders will increase after the central bank decided to raise the deposit rate ceiling, potentially leaving the effective deposit rate unchanged.

By Monday morning, six of the 16 listed banks, such as China CITIC Bank Corp and Ping An Bank Co, offered deposit rates at the ceiling for terms ranging from three months to one year, according to their websites.

Other listed banks, including the five largest State-owned commercial banks, set their deposit rates as high as 110 percent of the benchmark.

Li from Bocom said: "Competition for deposits is going to intensify. It will force banks to speed up the pace of restructuring and innovation."

Wang Tao, chief China economist at UBS AG, said the main effect of the rate cut will be to reduce the debt servicing burden and improve corporate cash flow and balance sheets, which will help reduce the overall financial risk.

Nonperforming loans by commercial banks rose by 72.5 billion yuan ($11.8 billion) from the previous quarter to 766.9 billion yuan at the end of the third quarter.

The average NPL ratio went up by 9 basis points to 1.16 percent, according to the China Banking Regulatory Commission.

Wang said: "Although the asymmetric nature of the rate cut will hurt banks' net interest margin, to the extent that the cut will help strengthen borrowers' balance sheets and slow the pace of nonperforming loan formation, it should also benefit the banks."

Share prices of 10 of the listed banks, especially joint-equity banks and city commercial banks, rose on Monday with Bank of Ningbo Co Ltd being the top gainer. The stock was traded at 11.57 yuan per share, up 2.39 percent from the previous close.