Asymmetric rate cuts likely to put further pressure on banks

BEIJING - China's asymmetric interest rate cuts are set to add difficulties to its commercial banks, which are already facing less profit, increased bad loans and pressures on asset quality, analysts warned.

Starting on Nov 22, Chinese commercial banks adjusted their deposit and lending rates, the People's Bank of China (PBOC) announced on Friday.

The central bank lowered the one-year benchmark lending rate by 40 basis points to 5.6 percent and the one-year deposit rate by 25 basis points to 2.75 percent.

Meanwhile, the deposit rate ceiling will be raised to 120 percent of benchmark from the previous 110 percent announced in June 2012, the PBOC said.

The asymmetric nature of the rate cuts -- big for lending and small for deposit -- is unusual, HSBC chief China economist Qu Hongbin said in a note.

The smaller cut to the deposit rate will be offset by the upward adjustment to the deposit rate ceiling, Qu said. That means actual deposit rates offered by commercial banks could remain unchanged, at 3.3 percent.

Qu was right. Banks' statements and announcements analyzed by Xinhua showed most commercial banks, especially smaller ones, are using higher deposit rates to attract deposits.

"This will likely further squeeze banks' margins. We believe that the PBOC wants banks to give more support to the corporate sector of the real economy, even at the cost of lower margins," Qu said.

Owing to weakening economic activity, most Chinese commercial banks earned less profit this year. In the first three quarters of 2014, total profit of China's 16 listed banks rose 9.7 percent year on year, compared to the often double-digit growth in previous years, data from the banks' quarterly-business reports showed.

In the third quarter, profit growth of these banks decelerated to 7.8 percent, from the 10.7-percent increase in the first half of this year.

However, Zhao Qingming, chief analyst of the Beijing-based CFFEX Institute for Financial Derivatives, said profits of Chinese commercial banks are still much higher than average profits in the real economy.

The asymmetric cut could narrow banks' profit margins, which could be interpreted as an attempt to shift part of the banks' profits to enterprises, Zhao said.

"In the perspective of China's long-term economic development, banks must portion part of their profits to the real economy and find new ways of generating profits," Zhao said.

Helen Qiao, Morgan Stanley's chief China economist, also said the asymmetric loan and deposit adjustments imply some margin pressure and higher rates of non-performing loans among banks.

As of the end of September this year, the 16 listed Chinese banks reported non-performing loans (NPL) totaling 604.65 billion yuan, up 31.7 percent from a year ago, data from quarterly-business reports showed.

The NPL ratio of the Chinese commercial banks climbed to 1.16 percent by the end of September, up 0.09 percentage points from the end of June, data from the Chinese banking watchdog CBRC showed.

UBS chief China economist Wang Tao, however, saw it differently.

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 NPL formation, it should also benefit the banks, she argued.

"The main effects of the rate cuts will be to reduce the debt servicing burden and improve corporate cash flow and balance sheets. This should help slow the pace of non-performing loan formation and reduce overall financial risk," Wang added.