Chinese banks are likely to see their net profit grow by low-single digit in percentage terms this year due to narrowed interest rate spreads and worsening asset quality, DBS Vickers said on Monday.
Net profit expansion of the lenders will be in the zero to five percent range compared to the level in 2014, with state-owned banks posting relatively weaker growth, said Chen Shujin, assistant vice president and China banking analyst at DBS Vickers.
“Reduction in interest rate will narrow net interest margins. Non-performing loans are still on the rise, so financing cost will keep on increasing,” Chen said.
DBS Vickers expects one more rate cut and a further 300 basis points decline in bank reserve requirement ratio (RRR) this year.
Net profit of the Chinese lenders will also be curbed by the deposit insurance system, which will formally be launched in the second half of the year, she said.
The move will result in insurance cover for deposits of up to 500,000 yuan. Banks will be required to pay a fee according to the size of their deposit base and risk profiles.
Profit growth for the biggest four state-owned banks was between 1 and 2 percent for the first quarter of the year, with their non-performing loans (NPL) rising.
NPL ratio at the Agricultural Bank o f China (01288.HK) has risen by 0.11 percentage points to 1.65 percent in the three months to March – the highest level among the big four.
But earnings are expected to recover in the next two years – to 5 percent in 2016, and 5 to 10 percent in 2017 – with joint-stock banks likely to be the best performers, she said.
The finance ministry has recently issued a 1 trillion yuan quota for local governments to convert maturing high-cost debt – most of which are bank loans – to lower-yielding municipal bonds to be repaid at a future date.
The move is aimed at reducing local governments’ reliance on Chinese banks, besides helping them to repay the debt, Chen said.
“Regarding local government debt, I think the biggest worry is not the non-performing ratio or asset quality. In fact, the central government does not want local governments to depend too much on banks,” she said.
The central government wants bonds to gradually replace bank loans as the main source of funding for local governments. This will help increase the transparency in the local governments’ balance sheet, Chen added.
She said that Chinese banks also favor this as they have a lot of bargaining power when extending loans to corporates but not with local governments.
Bank loans accounted for 57 percent of local governments’ debt by source of funding as of June 2013, while bonds accounted for only 10 percent.
But the proportion of bank loans in the local government debt has been declining and may now be under 50 percent, Chen said.
Local authorities will issue at least 1.6 trillion yuan of notes this year, four times as much as in 2014, according to Ministry of Finance estimates.
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