China's smaller banks face tough times after rate cuts

People walk in front of a Chinese bank branch in Beijing, China, on June 25, 2015.
People walk in front of a Chinese bank branch in Beijing, China, on June 25, 2015.PHOTO: EPA

BEIJING • Scrambling to attract funds in a downward market, Chinese mid-sized banks are offering deposit rates above those offered by larger rivals, a tactic that will hit their profits much harder while loan rates continue to fall.

China's central bank announced last Saturday that it was cutting its one-year deposit and lending rates by 0.25 per cent each to 2 per cent and 4.85 per cent respectively.

Hankou Bank, a small lender based in the central city of Wuhan, immediately moved to trim its one-year deposit rate, but set it at 3 per cent, the maximum allowed under the current rules. Bank of Nanjing set its one-year deposit rate at 2.58 per cent, while Huishang Bank set it at 2.66 per cent.

Meanwhile, the big state-owned players such as the Industrial and Commercial Bank of China and China Construction Bank were able to offer just 2.25 per cent as depositors perceive them as being safer.

Barclays analysts observed that with the central bank's one-year benchmark lending rate being set as low as 4.85 per cent, the pressure on profit margins could be twice as much for the smaller banks than for the bigger banks.

Barclays estimates that the most recent rate cut will shrink net profit at the top lender, Bank of China, by 0.9 per cent this year and 3.5 per cent next year.

"The price war - the oldest tactic that banks use to attract deposits - is becoming more difficult," said Mr Lou Lili, the head of strategy at Evergrowing Bank, an emergent lender with 850 billion yuan (S$184 billion) in assets.

Barclays estimates that the most recent rate cut will shrink net profit at the top lender, Bank of China, by 0.9 per cent this year and 3.5 per cent next year.

But mid-sized player China Minsheng will see its net profits shrink 1.8 per cent this year and 8.2 per cent next year, Barclays said.

Narrowing net-interest margins - the difference between interest generated from loans and that paid to depositors - are jeopardising the income earned from lending activities, said Beijing Rural Commercial Bank acting governor Zhang Jianhua. "The golden age of banking of the last 10 years is over," he told a conference last month.

The banks also face tough competition from trust and wealth management companies that offer much higher cash returns.

To counteract this trend, smaller banks have started to lend more to micro enterprises and to the agricultural sector, businesses supported by the government but which also carry greater risk.

Evergrowing Bank increased its pre-provision operating profits by 30 per cent in the first quarter of this year by changing its loan structure, Mr Lou said.

That may not be enough.

"Banks will shrink, especially their deposit-taking and lending businesses," said Mr Gao Jian, a former vice-governor of China Development Bank. "Small and mid-tier banks are facing bigger trouble, and a greater possibility of bankruptcy."

REUTERS

A version of this article appeared in the print edition of The Straits Times on July 02, 2015, with the headline 'China's smaller banks face tough times after rate cuts'. Print Edition | Subscribe