China’s fledging private banks get off to a smooth start in nation run by the Communist Party

China’s growing number of fledging private banks are expected to keep posting higher-than-average net interest margins after enjoying a smooth opening start, according to analysts.

At the same time, however, they are being urged to expand their fundraising channels to trim a heavy reliance on interbank lending, amid tighter regulatory scrutiny.

Average private banking net interest margins sat at 4.86 per cent at the end of June, more than double the industry average of 2.05 per cent, according to quarterly regulatory data, down from 4.95 per cent as the end of March.

Net interest margin is essentially a performance metric that examines how successful a firm’s investment decisions are compared to its debt situation and is considered a crucial measurement to reflect profitability of banks.

It is the difference between interest a bank gains on its assets, or loans and investments, and the interest it pays out on its liabilities, or deposits, as a proportion of its assets.

“It’s a case of ‘so far so good’ for Chinese private banks,” said Zhao Yarui, a senior researcher at Bank of Communications, noting the higher net interest margins could also reflect higher risk appetite than traditional banks.

Rebecca Fu, a partner at consultancy Roland Berger, added that China’s growing community of private banks “are differentiating themselves as a niche to cater to the under-served group of small business and individuals”.

“That’s why they can enjoy a higher margin than traditional banks and that trend may well go on for at least two to three years.”