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China Rate Deregulation to Hurt Banks’ Margins, Moody’s Says

China’s interest rate deregulation may cut banks’ 2012 profits by 28.5 billion yuan ($4.5 billion), or 3 percent of last year’s figure, by squeezing loan profitability, according to Moody’s Investors Service.

Banks’ net interest margins may contract by 4 to 6 basis points this year, followed by a further 10 to 13 basis points, and a profit reduction of 79.6 billion yuan, in 2013, the ratings company said in a statement today.

The central bank in June allowed lenders to widen the discount on official borrowing rates to 20 percent, and then broadened the limit to 30 percent the following month, accelerating the liberalization of interest rates. The banks were permitted to offer deposit rates at 10 percent above the benchmark, the first time a premium has been permitted.

“Their abilities to adapt to a fully market-driven pricing environment remain untested,” Moody’s analysts led by Bin Hu and Yi Zhang wrote in a report today. “These issues come on top of the current risks posed by rising asset quality pressures and a slowing economy.”

Shares of Chinese banks fell in Hong Kong today, extending their average decline this year to 1.6 percent. That compares with a 14.9 percent gain in the Hang Seng Index.

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