Big banks may see smaller lending margin squeeze

Wider lending margins will mark a difference between the largest Chinese banks and their smaller rivals as the industry begins reporting third-quarter earnings, according to investment bankers Keefe, Bruyette & Woods Inc.

"Net interest margin is the critical issue to review in these results," Bill Stacey, a Hong Kong-based analyst, wrote in a note published on Tuesday.

"Excessive interbank lending looked like it might emerge as a problem for the sector. We believe that margin pressure from that source is likely to be concentrated among smaller banks."

Net interest margins, a measure of lending profitability, are being squeezed by China's deregulation of interest rates, which limits banks' pricing power on loans.

The nation's four biggest banks may have seen their third-quarter margins narrow by as much as 3 basis points from the previous quarter, while declines at smaller rivals may have reached 7 basis points, Stacey wrote.