Highly-profitable Chinese banks face challenges (2)

CHALLENGES AHEAD

The main concern is the banks' heavy reliance on net interest income and stagnating revenues generated from other lines of business, as a gradual path toward interest liberalization has become clearer.

Net interest income, or revenues from borrowers minus interest paid to depositors, is generally four times the income made on commission charges across the four major state banks (ICBC, ABC, BOC and CCB).

ICBC brought in 311.37 billion yuan in net interest in the first three quarters, while income from fee-based services and commissions amounted to 79.69 billion yuan.

At China Everbright Bank, net interest accounted for 85.47 percent of its nine-month business revenues.

In addition, net interest income has been climbing fast, while non-interest income has increased slowly or even declined in some cases.

ICBC saw its net interest income for the first three quarters rise 16.6 percent year on year, while fees were up just 1.8 percent. At BOC, net interest growth was 13.2 percent, versus a drop of 1.8 percent in commission charges.

The People's Bank of China, the central bank, has twice widened the range against which Chinese banks can benchmark their lending rates this year, which many have taken as a sign of a liberalized interest regime.

"It was a very significant step toward the marketization of interest rates," said David Daokui Li, a prominent Chinese economist and former member of the central bank's Monetary Policy Committee.

"Allowing banks greater flexibility in setting rates will narrow their net interest margin, as they will need to offer more competitive rates on their broad deposits and loans," said Bin Hu, vice president in charge of financial institutions at Hong Kong-based rating agency Moody's.

"In addition, challenges will emerge in liquidity management, as the broad liberalization of interest rates could encourage depositors to seek greater yields and permanently introduce market-driven volatility into the entire funding structure," Hu said.

Banks have reacted by looking to new channels for revenue.

"The reason we have put so much emphasis on private banking, wealth management and other services is the emerging outlook of interest liberalization," said Ding Wei, vice president of China Merchants Bank.

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