China Banks Drop as Rate Cut, Looser Loan Rules Hurt Profit

Chinese banking shares tumbled in Hong Kong and Shanghai after the central bank cut interest rates for the second time in a month and allowed a deeper discount on the lending rate, squeezing margins.

Industrial & Commercial Bank of China Ltd., the nation’s largest, dropped 1.4 percent to HK$4.23 as of 12:00 p.m. break in Hong Kong, and lost 1 percent in Shanghai. China Construction Bank Corp. (939), the second biggest, fell 2.3 percent in Hong Kong and Bank of Communications Co., the fifth largest, declined 3.1 percent after losing as much as 4.6 percent.

Shares of Chinese banks have underperformed the benchmark Hang Seng Index this year and are trading close to record-low valuations as an economic slowdown, an increase in bad loans and interest-rate liberalization threaten to curb profitability. The central bank yesterday reduced the benchmark one-year lending and deposit rates and allowed banks to widen the discount on borrowing costs to 30 percent from 20 percent.

“The regulators are increasingly relying on banks to indirectly spur corporate profitability by reducing financing costs,” Sheng Nan, a Hong Kong-based analyst at CCB International Securities Ltd., said in a phone interview today. “The banking industry will need to play a greater role in helping bolster economic growth, which may come at the expense of the sector’s profitability.”

The People’s Bank of China yesterday lowered the one-year deposit rate by 0.25 percentage point and the one-year lending rate by 31 basis points.

Weaker Growth

China’s economy may grow at 7.8 percent in the second quarter, the weakest in three years, according to consensus forecast in a Bloomberg survey.

Yesterday’s move may cut listed banks’ net interest margins by 10.4 basis points and their pretax profits by 6.1 percent, Deutsche Bank AG forecasts. About two-thirds of the impact comes from the interest rate cut, with the rest resulting from deregulation, analysts Tracy Yu and Judy Zhang said in a note.

China’s four biggest banks today set their one-year deposit rate at 3.25 percent, compared with the 3 percent benchmark, according to their websites. Lenders are allowed to pay a maximum of 1.1 times the rate set by the central bank.

The People’s Bank of China in June cut interest rates for the first time since 2008. The two reductions may lower banks’ average net income by 5 percent to 8 percent this year and by 24 percent to 34 percent in 2013, Barclays Capital said.

Economic growth has slowed for five straight quarters, with gross domestic product expanding 8.1 percent in the three months ended March 31. That’s the weakest in almost three years. The government is accelerating approvals for investment projects even as it has refrained from introducing stimulus on the scale unleashed during the global financial crisis.

New loans this year may be as low as 7.3 trillion yuan to 7.5 trillion yuan, short of a target of 8 trillion yuan to 8.5 trillion yuan, according to an estimate by Mizuho Securities Asia this week.

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net; Stephanie Tong in Hong Kong at stong17@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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