China’s latest round of interest rate cuts is expected to result in a 2 percent drop in the banking sector’s net profit for this year, according to a report by Credit Suisse.
Net interest margin is expected to go down by 4 basis points after the People’s Bank of China (PBoC) announced on Sunday evening that the one-year benchmark deposit rate and lending rate will be cut by 25 basis points each to 2.25 percent and 5.1 percent respectively.
The latest rate cuts will also reduce net profit by 5 percent and net interest margin by 8 basis points for the subsequent year, the report said.
China’s banking sector is already under pressure from the interest rate cuts, with the four biggest state-owned banks reporting net profits of only 1 to 2 percent for the first quarter of the year.
In another step towards interest rate liberalization, the PBoC also widened the upward floating limit of the deposit rate to 1.5 times from 1.3 times, which means that the deposit rate is now capped at 3.375 percent instead of the previous 3.25 percent.
But banks are unlikely to bring the deposit rate up significantly in the short term as banks did not fully utilize the upper bound in the previous widening adjustment from 1.2 times to 1.3 times in February, Credit Suisse said.
Moreover, the economy has ample liquidity while inflation has been stagnant at 1.5 percent – well below the official target of 3 percent for this year – implying that there is no enormous need for banks to compete for deposits, the report said.
With loosening loan-to-deposit ratio calculation and higher lending quota, more differentiated deposit pricing among banks is expected, it said.
Banks with strong retail franchise are likely to stop lifting deposit pricing relative to benchmark rates, it added.
Credit Suisse expects the PBoC to cut the benchmark interest rate by another 25 basis points in the summer, following one more cut of 50 basis points in the reserve requirement ratio (RRR), as the real interest rate still stands much higher than the historical moving average.
Bank of America Merrill Lynch also expects the rate to be cut by another 25 basis points, while RRR cuts will total 150 basis points by year-end.
This is the third rate cut by the Chinese central bank in six months. The benchmark deposit rate and lending rate have been lowered by 75 basis points and 90 basis points respectively since November last year.
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