China’s Rate Hike to Boost Banks’ Interest Margins, Profits

China’s decision to raise interest rates for the first time since 2007 will boost earnings at banks as their margins on lending widen, according to Morgan Stanley and Deutsche Bank AG analysts.

Profit at 11 publicly traded Chinese banks may increase between 3.9 percent and 7.4 percent after the central bank yesterday unexpectedly lifted benchmark lending and deposit rates, according to Morgan Stanley. The move will raise large banks’ net income by 1.2 percent and mid-sized banks’ by 2.2 percent, Deutsche Bank said.

“It seems to us that the policy tide has turned in favor of the banks after battering them for about a year,” Credit Suisse Group AG analysts Sanjay Jain and Daisy Wu said in a note today. “Chinese banks are extremely attractive on valuations.”

China’s policy makers are trying to curb lending and prevent an asset bubble in a country that overtook Japan in the second quarter as the world’s second-largest economy. While the central bank raised rates on longer-term deposits more than those on loans with the same maturity, it left the cost of demand deposits unchanged.

Demand deposits account for 47 percent to 56 percent of Hong Kong-listed Chinese banks’ funding.

Shares of Chinese lenders rose in early trading in Shanghai before being dragged down by the broader market. The benchmark Shanghai Composite Index dropped 1.2 percent as of 10:14 a.m., while the Hang Seng Index lost 1.7 percent in Hong Kong.

The central bank’s move “to a less accommodating stance for monetary policy and further increases in rates in coming months could trigger concerns over slower growth, slower asset price appreciation and potentially rising impaired loans,” UBS AG analysts led by Sarah Wu wrote in another note.

The 11 listed Chinese banks may next week report combined net income of 500.8 billion yuan ($75 billion) for the first nine months of the year, up 33 percent from a year earlier, Deutsche Bank forecast.

--Luo Jun. Editors: James Gunsalus, Chitra Somayaji

To contact Bloomberg News staff of this story: Luo Jun in Shanghai at +8621-6104-7021 or jluo6@bloomberg.net

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net

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