Rate may fall 50% this year as net interest margin earnings shrink

Chinese lenders may see a drop of 50 percent in profit growth this year as earnings generated from their net interest margin shrink and fee income growth slows, a Barclays Capital analyst said on Friday

Net interest margin is a measure of the difference between interest income and the amount of interest paid to depositors.

"Last year commercial banks registered an average profit growth of somewhere between 33 to 34 percent. This year the rate will fall to a range of 11 to 15 percent," said May Yan, director of Barclays Capital Asia Ltd, in Beijing.

Most Chinese banks reported a quarter-on-quarter decline in their net interest margin, five basis points lower than Yan's estimates.

This came despite upward repricing of mortgages - 75 basis points for existing mortgages - on Jan 1, highlighting high funding cost pressures. Banks engaged more in narrow margin inter-bank activities, and took on more expensive wealth management-related and inter-bank deposits, Yan said.

"What's more, there was a faster-than-expected migration to time-deposits," she said, adding that she expected the pressure to continue.

And fee income growth will continue to moderate throughout the year given the regulator's closer scrutiny of fee and off-balance sheet activities, according to Yan.

Average net fee growth among lenders slowed to 26 percent year-on-year in the first quarter, from 30 percent in the fourth quarter of last year, excluding rural commercial banks.

Considering the profit growth slowdown, Barclays Capital changed its stance on Chinese banks to "neutral" in February from the "bullish" it adopted last November.

Lenders' net income in China rose 39 percent last year to 1.25 trillion yuan ($178.4 billion), the fastest growth in at least four years, according to the China Banking Regulatory Commission.

Interest income accounted for 66.2 percent of the total income of those institutions, which include policy banks, commercial banks, foreign lenders and rural credit cooperatives.

"Non-performing loan risks and credit charges, however, could be lower than expected in 2012, leading to some upside in our 2012 forecasts," Yan said.

"Now moving beyond the results season, we expect macro and global liquidity factors to drive Chinese bank share prices in the next few months."

In the first quarter, some banks, including China Minsheng Banking Corp, China Merchants Bank Co Ltd, and Bank of China Ltd, reported increases in non-performing loans, while credit charges were generally lower than expected.

China's banks are at the beginning of a rising non-performing loan cycle, but data from the CBRC indicates that banks have also built up strong buffers to absorb increased credit costs, said Hu Bin, a Moody's vice-president and senior analyst.

Foreign investors showed their concerns over asset quality among Chinese lenders after the government spurred economic growth during the global financial crisis by boosting lending to infrastructure construction projects, "a considerable part of which cannot be profitable", said Yan.

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