Rising competition and a squeeze on net interest margins will dampen profit prospects for mainland banks over the next 12 to 18 months, according to global credit rating agency Moody's.
Moody's vice-president and senior analyst Hu Bin said yesterday that Beijing's plan to liberalise interest rates would continue to put pressure on mainland banks' net interest margin.
Moody's forecast the banks' net interest margin would fall by between 0.06 percentage point and 0.1 percentage point this year from the previous year if 30 per cent of their total loans were priced at a floor rate - the lowest lending rate allowed by the People's Bank of China.
Hu said mainland banks could no longer rely on net interest income to sustain their strong profit growth.
Haitong Securities forecast that the average profit growth of 16 mainland-listed banks would slow to 16.4 per cent this year and to 4.9 per cent next year after 37.6 per cent growth in 2011. The mainland's financial reforms and structural changes in the economy would take a toll on bank profits, the brokerage said.
Share prices of the Big Four banks lagged yesterday behind the overall market in Hong Kong, which edged up 1.02 per cent. Bank of China and Agricultural Bank of China closed flat, while China Construction Bank closed 0.69 per cent higher at HK$5.88 and Industrial and Commercial Bank of China rose 0.97 per cent to end the day at HK$5.2.
Hu agreed that the era of high profit growth for Chinese banks was over, with competition in the banking industry becoming fiercer. "Besides competition among mainland banks, direct financing tools have also put pressure on the banks' lending business," he said. Direct financing tools, such as issuance of stocks and bonds, allow companies to raise funds in the capital markets without going through commercial banks.
Bank asset quality remains a concern despite a low non-performing loan ratio of 0.97 per cent at the end of September. Analysts have criticised that number as too low to be trusted.
Christine Kuo, Moody's vice-president and senior credit officer, said the agency was concerned about the data but had no solid evidence that the bad loan ratio was being manipulated.
The agency's outlook for Chinese banks' asset quality is negative although Kuo said the bad loan ratio was unlikely to increase significantly.