The profitable Chinese banks are not immune to the country’s slowing economic growth and their profit growth will drop below 10% in 2013, analysts estimate.
Weighing on their earnings will be a further weakening in credit demand from struggling Chinese companies and the government’s push on interest-rate liberalisation, which will lead to a narrowing of interest margins. At the same time, the efforts by China’s banking regulator to clamp down on excessive commission charges will reduce fee income.
“The year of 2013 is going to be very challenging for all Chinese banks as the margin will continue to fall,” said Wilson Li, a banking analyst at Guotai Junan Securities. “The government’s efforts to curb unreasonable commission charges will also squeeze banks’ earnings.”
Unlike their Western counterparts, Chinese banks get about 80% of operating revenue from net interest income and recent economic data suggest the demand for credit will remain weak in the coming months. China’s industrial profits fell 2.7% during the first seven months of this year, which will likely impact industrial enterprises’ willingness and ability to make capital expenditures and investments in the near term, J.P. Morgan said in a report.
Although some observers note that the demand for credit is mainly dampened by high borrowing costs, Yan argued that companies would pay less attention to the costs when the economy is good and business expansion is needed.
Moreover, profits don't come as easily as before even when the banks are able to lend. The authorities have started liberalising the nation’s tightly controlled interest rate regime to pave the way for a market-oriented rate system. The People’s Bank of China in June allowed the country’s commercial banks to set deposit rates 10% above the benchmark level and lending rates 20% below the benchmark. The move gives banks more freedom, but at the same time creates strong competition among lenders.
As recently as last year, a profit growth rate below 10% would be unthinkable for all listed Chinese banks, which have routinely posted explosive earnings growth since their public listings.
Despite the economic slowdown, the listed Chinese banks generated an average of more than 20% profit growth in 2011, a year when most listed companies recorded disappointing earnings. And bank results for the first half of 2012 still look decent. China Construction Bank said its net profit rose 15% during the period to Rmb106 billion ($16.8 billion) and China Minsheng Bank posted a net profit of Rmb19 billion, an increase of 36.9% from the first half 2011.
For the year 2012, Guotai Junan has estimated that leading state-owned banks and smaller lenders will record net profit growth of 10% and 20%, respectively.
Demand for credit will remain bleak until the economy improves. And when it does, Chinese banks may not be as ready to serve the economy as before, as they have less liquidity than they did in 2009, warned Charlene Chu, senior director of financial institutions at Fitch Ratings. So more RRR (reserve requirement ratio) cuts are needed for banks to have enough liquidity to issue loans.