PBOC Deposit Rate Cut Passed On More Keenly as Bank Strains Show

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China’s banks passed on cuts in official deposit rates and even exceeded them, a sign that they lack confidence in the nation’s economic recovery.

Bank of Ningbo Co. lowered its two-year deposit rate to 2.85 percent, 50 basis points more than the 2.35 percent benchmark. It paid a 65 basis point premium before the People’s Bank of China cut rates on Aug. 25. Ping An Bank Co. slashed the premium it pays on three-year time deposits to five basis points from an earlier 25 basis points.

“There are no signs of stabilization of the economy,” said Richard Cao, a Shenzhen-based analyst at Guotai Junan Securities Co. “If you can’t lend the money out, why would you bother to gather deposits, let alone pay a lot for it.”

Weakness in the world’s second-largest economy and a $5 trillion stock-market slump prompted the central bank to cut loan and deposit rates last week, while giving lenders more leeway to diverge from the benchmarks. Five reductions since November have been a mixed blessing for Chinese banks, crimping their profit margins as they struggle to revive earnings and stem a surge in nonperforming loans.

Further easing may be needed to ensure Premier Li Keqiang’s 2015 growth goal of about 7 percent is met. Capital outflows after China devalued its currency on Aug. 11 and a 39 percent stock market plunge since a June 12 peak added to pressure for stimulus.

Adding Flexibility

Over two years, the PBOC has removed a floor on lending rates, allowed banks to pay up to 50 percent more than benchmark savings rates and established a deposit insurance system. The nation’s top legislature passed a bill to remove a two-decade-old rule that capped banks’ lending relative to deposits at 75 percent, the Xinhua News Agency reported Saturday.

The central bank scrapped the ceiling on rates banks can pay for deposits longer than one year on Aug. 25, though shorter-term accounts dominate China’s 134 trillion yuan ($21 trillion) of deposits.

“This will add flexibility to banks’ deposit pricing, although at the expense of their net interest margins,” Moody’s Investors Service analysts led by Frank Wu wrote in a note on Thursday.

While the banks’ more aggressive savings rate cuts will help their profitability, it will also curb returns for households already reeling from the stock market slump.

Interest-Rate Margins

Chinese banks’ net interest margins, a measure of lending profitability, narrowed to 2.51 percent in the second quarter from 2.62 percent a year earlier, according to the China Banking Regulatory Commission.

“Banks see no urgent need to seek deposits because liquidity is ample and there’s weak incentive to lend,” said Zhu Lixu, a Shanghai-based analyst at Xiangcai Securities Co. “They are reluctant to lend because their risk appetite is dropping as the economy continues to slow and the overcapacity problem persists.”

The cut in interest rates will put pressure on profitability, said Liao Qiang, Beijing-based senior director for financial institution ratings at Standard & Poor’s. Offering lower returns for long-term deposits reflects lukewarm demand for long-term credit in the economy and weakened confidence among banks in China’s economic performance, he said.

“Lenders expect China’s economy to remain weak in the long run,” said Liao. “Reductions of short-term deposit rates are small while cuts to long-term ones are large because banks are not keen to attract costlier long-term funds amidst current economic conditions. Yields on their long-term assets are falling.”

Zero Profit Growth

The five biggest lenders may report a 2 percent growth in combined earnings in 2015, the slowest since data became available in 2004, according to analyst surveys by Bloomberg.

Industrial & Commercial Bank of China Ltd. reported a 31 percent jump in soured credit in the first six months and zero profit growth in the second quarter. President Yi Huiman indicated on Thursday the lender may have to abandon a target of keeping its nonperforming loan ratio at 1.45 percent this year.

The cost to insure ICBC’s debt against non-payment surged to a 15-month high of 157 basis points last week, from as low as 119 in May, according to credit-default swap data compiled by CMA.

Chinese banks have sold 42.2 billion yuan of financial bonds in the onshore and offshore markets so far this quarter, less than half of the 89.2 billion yuan in the previous three months, according to data compiled by Bloomberg.

“The pressure that banks face to make money is becoming stronger, as the central bank cuts interest rates and the economy slows,” said Chen Hufei, a Shanghai-based senior analyst at Bank of Communications Co. “They’ll find their bad loans increase and profit growth decline if they don’t improve management and seek assets with stronger returns.”

— With assistance by Jun Luo, and Tian Chen

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