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.
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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.