Banks face challenge after rate cut
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E-mail CRI, June 10, 2012
The days of enjoying easy profits are likely numbered for China's commercial banks, as the central bank's latest move to cut interest rates will remarkably slash their profit margins, analysts have warned.
The People's Bank of China (PBOC), the central bank, said Thursday it will cut the benchmark interest rate for deposits and loans by 25 basis points beginning Friday in order to tackle slower-than-expected growth in the world's second-largest economy.
After the cut, the one-year deposit interest rate will fall to 3.25 percent, while the loan interest rate will be lowered to 6.31 percent.
However, since the PBOC has already adjusted the upper limit of the floating band for deposit rates to 1.1 times the benchmark rate, actual deposit rates could be as high as 3.57 percent. With lower lending rates, the gap between deposit and lending rates, a major profit source for China's banks, will be significantly narrowed, said Lu Zhengwei, chief economist at Industrial Bank.
Lu's view was echoed by E. Yongjian, a senior researcher at the Bank of Communications who estimated that the gap between deposit and lending rates could be narrowed by about 25 basis points. "Banks will feel prominent adverse effects," he said.
China's commercial banks are the world's largest in terms of asset scale and safety, but they are often criticized domestically for their privileged access to state-controlled financial resources.
China's central bank regulates the floating band for benchmark interest rates. The gap between lending and deposit rates reached 3.25 percentage points before Thursday's cut, much higher than levels in other countries.
According to the China Banking Regulatory Commission (CBRC), China's commercial banks reaped 1.04 trillion yuan (165.08 billion U.S. dollars) in profits in 2011, of which 80 percent came from rate gaps.
The government has promised to allow market mechanics to play a bigger role in determining interest rates. Thursday's move to adjust the upper limit of the floating band for deposit rates and allow banks to offer a 20 percent discount to borrowers are two of the reforms being made in this area.
Xia Bin, a counselor for the State Council and former member of the monetary policy committee of the PBOC, warned that small banks could suffer losses or even go bankrupt during the process of reform. Although hardships are expected, the road to market-based interest rate reform should be reversed, Xia said.
Since banks are subject to tougher conditions, the government has made greater efforts to enhance risk oversight.
China on Wednesday decided to put its lenders under regulatory supervision within the Basel III framework -- a set of tough capital rules for banks agreed upon by G20 leaders in 2011 -- starting from Jan.1, 2013.
The new regulations allow commercial banks to take in reserves for excess loan losses as capital and define a series of "qualified standards" for capital tools, such as subordinated bonds.
Banks will also be required to expand the scope of their risk supervision framework, adding operational risks into the current framework that highlight credit and market risks, according to the statement.
Systematically important banks will be subject to a capital adequacy ratio (CAR) of 11.5 percent, while other banks will be subject to a CAR of 10.5 percent. Both requirements remain unchanged from the country's existing regulatory rules.
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