Rate cut will pressure Chinese banks: Moody's

China's latest round of rate cuts will pressure banks' profitability due to the narrower spread between deposit and lending rates, according to a Moody's report.

China's central bank slashed benchmark deposit and loan interest rates by 25 basis points from last Sunday, a second such cut in three months.

The cut brought the one-year deposit rate to 2.5 percent, and the lending rate to 5.35 percent.

The central bank also adjusted the upper limit of the floating band of deposit rates to 1.3 times the benchmark from the previous 1.2 times.

With this round of rate cuts, benchmark lending rates have decreased by 65 basis points since November, but the effective deposit rates, which takes into account the higher cap, only decreased by five basis points, implying a further narrowing in the interest rate spread, Moody's noted.

The narrowing spreads will exacerbate the pressure that banks are already seeing in their loan pricing and thus their margins, said the report, released on Friday.

According to the People's Bank of China, the weighted average lending rates of newly granted loans decreased in December to 6.92 percent, which was down about 20 basis points from a year ago and 40 points from September, before the rate cut.

Furthermore, the drop in average loan rates partly reflects an increasing percentage of loans made below the benchmark lending rate, which suggests weakening pricing power among banks, Moody's said.