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 The People's Bank of China (PBOC) cut interest rates for the third
time in six months on Sunday in a bid to lower companies' borrowing
costs, whilst giving banks more flexibility over how much they pay
depositors.
That will hit bank earnings as lenders face competitive pressure to
pay more for deposits but charge less for loans, just as China's
economy is growing at its slowest pace in 25 years.
Some analysts estimate that the three rate cuts and the raising of
the deposit rate ceiling could reduce banks' annual profits this
year by up to 22 percent.
"Our lives are going to get a lot harder," said a senior banker at a
Shanghai branch of a top-ten Chinese bank, who added that his team
are already only breaking even on some deals.
The banker declined to be identified as he is not authorized to
speak to the media.
China's five biggest lenders, including Industrial & Commercial Bank
of China Ltd. and Bank of China Ltd, saw their profits grow by less
than 2 percent in the first quarter of 2015 from a year earlier, a
marked slow-down from their rampant double-digit growth of a few
years ago.
Banks are also wrestling with mounting bad loans, even as government
leaders admonish bankers for charging excessive fees, such as those
for arranging loans, another source of income that lenders can ill
afford to lose.
China's commercial bank non-performing loan ratio increased to 1.39
percent at the end of March, as sour lending increased by 139.9
billion yuan ($22.53 billion) to 982.5 billion yuan, representing a
52 percent jump in bad loans from 12 months earlier.
TIGHTER MARGINS
Net interest margins - the difference between a bank's borrowing
rate and interest earned on loans - have been tightening since
November, when the PBOC embarked on the current round of easing.
The latest three cuts and the rise in the deposit ceiling could cut
banks' 2015 net profits by between 6 and 22 percent, according to a
Morgan Stanley research report, which forecast there would be at
least one more interest rate cut this year.
Full interest rate liberalization, meaning banks will be completely
free to decide the rates they charge for deposits and loans, may
come by the end of 2015, PBOC governor Zhou Xiaochuan said in March
at the annual meeting of China's rubberstamp parliament, the
National People's Congress.
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That liberalization is likely to erode margins at China's smaller
lenders more than at their larger counterparts, according to
analysts, as they will probably raise their deposit rates higher to
lure funds.
"Small banks, like Ping An Bank and Hua Xia, and city banks, will
likely be hurt more than peers," said Goldman Sachs in a research
report.
Shares in small and mid-tier banks China Minsheng Banking Corp and
Bank of Beijing Co dropped more than two percent in early morning
trading on Monday.
Smaller banks Hua Xia Bank Co, Ping An Bank Co, China Merchants Bank
Co and Shanghai Pudong Development Bank Co also saw their
shares decline more than one percent, while China's biggest four
state-owned lenders only dipped slightly.There may be one positive
impact from the rate cut though - cheaper lending rates will lower
companies' financing costs, making them less likely to default on
loans.
"To the extent that the rate cuts help to support the growth
outlook, we consider them as credit positive as both stronger
economic growth and lower borrowing costs will help borrowers to
service their debts," said Thomas Byrne, senior vice president at
Moody's Investors Service in a press statement.
(Editing by Matthew Miller and Rachel Armstrong)
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