Pressure rises on banks' earnings

A rural commercial bank in Ganyu county, Jiangsu province, on Thursday. Analysts believe the latest interest rate cut will herald liberalization of China's rate regime.[Photo / China Daily]

In the worst-case scenario, a narrowed deposit-loan rate spread will cut listed banks' profits by 4 percent this year and 9 percent next year, China International Capital Corp Ltd, the nation's biggest investment bank, said in a research note.

Earnings growth next year will be single-digit, or even stagnant, if the central bank cuts the rate twice in the second half of this year, according to CICC.

All A-share lenders' stocks dropped on Friday amid a 0.51-percent fall in the major Shanghai Composite Index.

China Minsheng Banking Corp Ltd led the decline, retreating 3.65 percent to 6.08 yuan ($0.96). Industrial and Commercial Bank of China Ltd, China's biggest bank by assets, fell 0.72 percent to 4.16 yuan.

The central bank cut the benchmark interest rate by 25 basis points on Thursday, the first reduction since 2008. As a result, the benchmark one-year lending rate stands at 6.31 percent, and the deposit rate is 3.25 percent.

More importantly, the discount lenders can offer on the key lending rate was increased from 10 percent to 20 percent.

And, for the first time, banks can offer savers' deposit rates up to 10 percent higher than the benchmark, marking a breakthrough in China's interest-rate liberalization.

The widened rate range could intensify competition among lenders and push the deposit rate to its ceiling of 3.575 percent. That means the deposit rate could end up higher after the rate cut, according to a research note from Singaporean bank DBS.

In terms of lending, businesses have become less willing to borrow at a time when economic growth is slowing and insufficient demand will drag loan rates to the lower end of the benchmark rate.

In extreme cases, the deposit-loan rate spread, the main source of income for Chinese banks, will be narrowed by 100 basis points, according to Australia and New Zealand Banking Group Ltd.

"It's bad news for banks. But squeezing banks' rate spread seems one of the best options under current economic environment," the bank said in a research note.

A 25-basis-point cut would save borrowers at least 145 billion yuan in interest costs, which is positive news for the economy, whose growth slowed to a three-year low in the first quarter.

Banking is one of the most profitable sectors in China. The 16 public lenders raked in 272.6 billion yuan in the first quarter, more than half of the profit of all the public companies combined.

In comparison, banks in the US earned $35.3 billion in the first quarter.

gaochangxin@chinadaily.com.cn