Chinese banks, the nouveau riche of global banking, reported better-than-expected earnings in the last quarter, even beating the performance of foreign peers.
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However, analysts caution that the profit bonanza will begin to abate as China speeds up the deregulation of interest rates.
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"The push toward financial liberalization has been subtly but decisively redefining the operating landscape and could undermine banks' net interest margins," Standard & Poor's said in its latest banking report. The sector's profitability could drop up to 10 basis points this year, the ratings agency said.
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"Interest margins will not be fully affected until all loans are re-priced," S&P said. "The full impact of lending rate cuts will take hold in 2013. At the same time, a margin squeeze from the relaxation of the lending rate floor and deposit rate ceiling will also hit home."Â
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China's "Big Five" banks - the Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of China and the Bank of Communications - reported an aggregate net profit of 202 billion yuan (USD 32 billion) in the three months ended September 30. That was a 14.3 percent increase from the same period a year earlier.Â
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In the third quarter, the "Big Five" earned 2.2 billion yuan a day, while their foreign peers - JP Morgan Chase, Wells Fargo, HSBC, Mitsubishi UFJ and Citigroup, the most profitable non-Chinese banks ranked by The Banker - made about 60 percent of that amount, according to calculation based on their quarterly results.
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Industrial and Commercial Bank of China (ICBC), China Construction Bank and the Bank of China were the best money-spinners among the top 1,000 banks in the world, according to The Banker, a British magazine.
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ICBC, the most profitable bank in the world, said its net interest margin improved in the third quarter but disclosed no figure. The margin was 2.66 percent at the end of June according to an earlier report.
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Pricing power
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The net interest margin at Bank of China rose 0.02 percentage point to 2.12 percent at the end of September. Agriculture Bank's margin dipped 0.03 percentage point to 2.82 percent, but the bank still has the highest margin among the five lenders due to its pricing power in rural areas, according to Jiang Chaoliang, chairman of AgBank.
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"Currently 40 percent of our deposits and over 30 percent of our loans come from rural business, which keeps our net interest income at a more favorable level than our peers," Jiang told the media last week during the 18th National Congress of the Communist Party of China. "We have benefited from our strength in rural areas."
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The net interest margin at the Bank of Communications slipped to 2.60 percent in the third quarter from 2.61 percent in the second. However, it could have been worse.
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"Thanks to our thriving credit card business, the net interest margin did not contract much," Qian Wenhui, vice president of the bank, said at a conference last month. "Business in the middle and western regions and small business loans were promising, improving our credit structure and stabilizing our net interest margin. Price management is the key."Â
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In addition to deregulation of interest rates, the big lenders also face fiercer competition from other financial institutions that may force them to provide greater discounts to a bigger group of customers, said S&P.
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At the end of 2011, banks priced only 7 percent of new loans below the benchmark rate, but the proportion is expected to rise to 20 percent by the end of 2013, according to the agency.
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For the biggest lenders, aggressive expansion since 2008 was fueled by heavy national investment. That strategy is undergoing changes as the central government is now placing grater emphasis on what it calls "quality growth" over just fast expansion.
