Banks’ profit growth above expectations

China's listed banks will see a better-than-expected profit growth rate of 17 percent for the first three quarters year-on-year, despite a trend of narrowing interest margins and rising bad loans, according to a report released by an investment bank Tuesday.

The banks saw their interest income outweigh interest paid to depositors, because they have lowered the current deposit interest rates, and tightened liquidity also pushed the banks to raise loan pricing, the China International Capital Corporation Limited (CICC) said in the report.

"This prediction is in accordance with our expectations," Jin Lin, a senior researcher at Orient Securities, told the Global Times Tuesday.

"Given that the banks started to reduce credit supplies deliberately since May, a dramatic decline in interest rate margins is unlikely," Jin noted.

New loans in September increased by 623.2 billion yuan ($99.46 billion), 80.7 billion yuan less compared with the previous month, according to the central bank. The figure is also lower than market expectations of at least 650 billion yuan.

But Jin warned that banks' non-performing loan rate will keep on increasing due to the sluggish economy.

The CICC also predicted that the new non-performing loans in the third quarter of this year will reach 30 billion yuan, with the quarter-on-quarter growth rate for non-performing loans rising to 6.6 percent, compared with 4.2 percent and 2.4 percent in the second and first quarter, respectively.

Chinese banks' interest rate margin will decline next year, due to intensified competition to attract deposits and greater flexibility in setting rates, according to a report e-mailed to the Global Times Tuesday by ratings agency Moody's Investors Service.

"We estimate that after carving out the effects of cuts in benchmark rates, the increased flexibility with which the banks can set their own rates will depress Chinese commercial banks' interest rate margin by 4-6 basis points in 2012 and reduce their net profits by around 28.5 billion yuan, or 3 percent of the system's net profit for 2011," Moody's said.

Moody's predicted that the negative impact on interest rate margins could be as much as 10-13 basis points and could reduce net profit by 79.6 billion yuan for 2013.

The People's Bank of China decided in June to widen the range in which the banks can fix their lending and deposit rates so as to accelerate interest rate liberalization, although this measure could lead to narrowing profit margins from lending.

Moody's also said the banks might possibly increase lending to higher-risk borrowers because of pressure from declining interest margins.

"In particular, we note that Chinese banks have been stepping up lending to small and medium-sized enterprises, a segment that has allowed them to maintain loan returns close to or above benchmark loan rates, but which can be highly prone to asset quality issues, as shown in the latest round of bank results," said Hu Bin, a senior analyst at Moody's.