Chinese banks look ahead to easing of credit card market

Country’s central bank will introduce deregulation measures to the cost of borrowing money on January 1.

PUBLISHED : Wednesday, 27 April, 2016, 12:58pm
UPDATED : Wednesday, 27 April, 2016, 12:58pm

China’s banks will have mixed results from central bank deregulation next year that will allow them more freedom in their credit card business, analysts said.

The People’s Bank of China, the central bank for the world’s second-largest economy, said on April 15 a partial interest rate liberalisation and the removal of certain requirements on credit card operations will take effect from the new year.

The PBOC said the moves were aimed at improving services offered by credit card issuers, to encourage market competition, and develop a healthy credit card market.

Yuan Lin, an analyst at Bank of China International said the gaps between banks’ credit-card business market shares should continue to widen after the new policy is implemented on January 1.

The policy allow banks to offer an up to a 30 per cent discount on the credit-card lending rate — currently 0.05 per cent a day — and raise daily cash withdraw limits to 10,000 yuan(HK$11,994 ) from a previous 2,000 yuan (HK$2,398).

The central bank will also remove certain requirements on credit card business.

Chinese banks will now be able to set their own periods when customers can use their cards interest-free and set their own minimum monthly repayment fees. Banks will also be given more leeway to let lenders decide whether and how much they will charge if clients fail to repay their bills on time.

Currently banks only offer up to 60 days interest-free period for credit-card holders, whose minimum repayment is 10 per cent of their monthly bills.

Analysts said the new policy will be positive for banks.

“Banks with stronger customer services, product innovation and marketing capabilities should benefit more from the new policy since they can use the differential pricing strategy based on client tiers,” said Bank of China International’s Yuan. “We favour banks with established competitive advantages and a persistent strategic focus on the retail segment.”

Among China’s banks, China Merchants Bank is their top pick, BOC International said. They have a ‘buy’ rating for CMB and increased their target price to HK$17. It said it expects a possible volume growth and client enhancement in longer time.

CMB traded at HK$16.84 as of 10.35 am in Hong Kong.

“CMB’s credit card business performs well and is growing quickly,” she said. “CMB could price differently based on different client risks.”

However, banks following a ‘price war’ strategy or being stubborn under new rules will lose market shares, Yuan said.

She said loosening controls on the credit card business is an urgent and necessary measure following rapid development in China’s credit card market and domestic interest rate liberalisation.

Yuan said the reduction of the credit loan rate is necessary to maintain a reasonable pricing level to borrow money, relative to other loans after China’s cut its base rate by almost 100 basis points over the past year.

“The overly-specific restrictions on banks’ credit card business, against the market trend, have been impeding the diversification and development of the business,” Yuan said in a report. “Especially, the higher interest rates on credit card loans have limited the balance growth of these loans.”

The new policy change,overall, will accelerate the growth in the balance of credit card loans, said Polar Zhang, an analyst at BOC International. “The reduction of credit card loan rate can also increase its competitive advantages against some third-party financing services,” he added.

Zhang said there would be risks with the new policy.

“The impact on net interest margin (NIM) should be negative,” he said. “But the impact on net profit depends on incremental volume growth.”

Banks should also factor in the potential rises in credit card spending and overdraft demand as spurred by the interest rate reduction when calculating the total impact on the net interest income, he said.