New loans expected to drop further
New loans extended by banks on the mainland are expected to fall to between 6.5 trillion yuan (HK$7.76 trillion) and 7 trillion yuan next year, a further slowdown from this year, according to brokerage CLSA.
The credit cut from the 7.5 trillion yuan loan budget of this year would be a result of Beijing's monetary 'normalisation' after a lending spree in the past two years, said Kevin Chan, the head of Hong Kong and China Financial Research at the brokerage, yesterday.
'This would translate into a loan growth of roughly 14 to 15 per cent. While the market may see this as a 'deceleration', we would prefer to use the term 'normalisation',' said Chan at a forum in Beijing.
Banks have issued about 17.6 trillion yuan in loans in the past two years to help stimulate the economy in the face of the global financial crisis.
To control risks for banks and rein in inflation, Beijing has reduced their credit budget, raised the capital adequacy ratio, ordered them to set aside more reserves and increased interest rates.
Lenders are expected to fare well as they stand to benefit from widened interest spreads and new strategies that focus more on the fee business that consumes less capital than loans, according to analysts with CLSA and Credit Suisse.
CLSA said earnings prospects for H-share banks remained bright, with a 20 per cent growth in net profit projected for next year on moderate expansion in net interest margin and robust fee incomes from cards, agency and investment banking businesses.
Credit Suisse maintains an 'overweight' on mainland banks in a report released yesterday, citing 'new strategies' adopted by the lenders.
'Loan quota under the discretionary required reserve ratio mechanism constrained loan growth this year and guided M2 growth target of 16 per cent set by the regulator this year as a key reference for loan growth next year,' said analysts Sanjay Jain and Daisy Wu in the research note.
Most banks are shifting their strategy towards higher-yielding assets such as loans to small and medium-sized enterprises and more fee-based businesses which consume less capital, according to the analysts.
'It was very clear that capital management is a top priority this year for these banks, not only for the mid-sized but also the large banks,' Credit Suisse said.
'So far, higher risk weight for weak local government financing vehicle loans has trimmed tier-one capital adequacy ratio. Most joint stock banks were of the opinion they would need to raise fresh equity under the new regulatory framework.'
Average capital adequacy ratio of mainland banks dropped 0.4 percentage point over the first quarter to 11.8 per cent, according to the China Banking Regulatory Commission, after lenders factored in more risks for problematic local government loans.
Under the new regulatory framework effective from 2013, the adequacy ratio should be no lower than 11.5 per cent for 'systemically important banks' and 10.5 per cent for other lenders.
The amount of loans, in yuan, mainland banks provided to stimulate the economy because of the global financial crisis