Banking & Finance

Margins squeeze at China banks in 2016, Fitch says

PUBLISHED : Monday, 07 December, 2015, 11:21pm
UPDATED : Monday, 07 December, 2015, 11:25pm

If 2015 seemed like a tough year for lending profitability at Chinese banks then 2016 won’t be pretty.

Fitch Ratings flagged the pressure on net income margin (NIM), a gauge on lending profitability , as one of several key factors keeping a negative rating on the sector this year.

China has cut interest rates by 1.25 per cent over the past year, pushing down the rate banks make on loans.

Over the same period, the Chinese government has overseen the transformation in 3.2 trillion yuan in local government bank debt into bonds. While the move has prevented some asset-quality deterioration, it has also taken many higher-interest loans from banks and exchanged them for lower-yielding, longer-maturity bonds. Fitch called the debt swap and the low interest rates a “double whammy to profitability” for 2016.

READ MORE: New deposit products add margin pressure to China’s banks

Compared to global peers, Chinese banks have maintained decent margins through what has been a tough period of reform for the industry. Many of China’s biggest banks have NIMs above 2.5 per cent, an envious level for lenders in an environment awash with capital and mired in low interest rates.

But they have not help up well in the second half of the year.

For the period between July and September, China’s biggest banks showed an across-the-board squeeze on the spread between what they paid for deposits and what they made on loans.

Industrial and Commercial Bank of China, for example, lost 32 basis points in the third quarter with NIM hitting 2.42 per cent, according to a calculation from Barclays.

Mid-sized banks have held up better.

China Merchants Bank, the mainland’s biggest joint-stock bank, notched expansion during the period. The bank’s NIM rose to 2.7 per cent during the three months, an increase of 0.03 per cent on the quarter before and a 0.31 per cent increase from the same time a year ago.

Joint-stock lender China Everbright Bank also likely marked an improvement in the third quarter. The bank did not report NIM but showed strong growth in net interest income, something that Barclays analysts said indicated an expansion in lending profitability.

Mounting bad debt was another reason for the continued negative outlook. However, Fitch noted that state support for bank sector was the main factor keeping the rating stable. It is widely believed that the Chinese government would come to the rescue of bank on the verge of crisis.