Bank shares tumble after freeing of lending rates
Investors exit from sector on worries the central bank's deregulation move will intensify competition and lead to drop in interest income
Mainland bank stocks fell in Hong Kong yesterday, reflecting the potential drag on profitability after the People's Bank of China abolished on Saturday the floor for lending rates.
Banks are now free to set their lending rates, but the intensified competition is likely to drive down interest income and cause them to lower credit standards, raising risk, analysts say.
The PBOC's action is credit-negative for banks because it is another move towards interest rate deregulation that will narrow their net interest margin
"The PBOC's action is credit-negative for banks because it is another move towards interest rate deregulation that will narrow their net interest margin," Bin Hu, a senior analyst at Moody's Investors Service, wrote in a report.
Net interest margin is a measure of loan profitability and declines if interest earned on loans falls while interest paid on deposits remains unchanged.
Until Saturday, the floor for lending rates was 70 per cent of the central bank's benchmark rates. The PBOC still caps deposit rates at 110 per cent of the benchmark.
Targeting a market-based interest rate as the main monetary policy tool could lower the profitability of banks, especially the smaller ones, Standard & Poor's Ratings Services said in a report.
Banks that focused on small and medium-sized enterprises, such as China Minsheng Bank and China Merchants Bank - the stocks of both fell 0.77 per cent - face more competition for high-quality borrowers, Moody's said.