China Rate Cut to Hurt Bank Profit, ICBC’s Jiang Says

China’s cut in interest rates will squeeze banks’ margins, says the head of the world’s most profitable lender.

People’s Bank of China raised the cap on what banks can pay customers for deposits to 120 percent of the benchmark from 110 percent, as it announced a 0.4 percentage point reduction in the one-year lending rate and a 0.25 percentage point cut in the 12-month deposit rate. This will mean depositors’ returns will be unchanged if lenders raise rates to the new ceiling.

The PBOC move will “inevitably squeeze the profit margins of banks, and the narrower margin is a long-term trend,” said Jiang Jianqing, chairman of Industrial & Commercial Bank of China Ltd., China’s biggest lender, at a forum today in Beijing.

The increased premium banks are allowed to pay depositors is “another important measure in deposit rate liberalization,” the central bank said in a statement yesterday.

The erosion of profit margins will hurt banks’ ability to grow and capability to expand assets, Jiang said at the forum.

“The asymmetric interest rate cut could put significant pressure on bank profitability,” Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong, wrote in a note yesterday. “This may raise the question whether banks will maintain the distribution of lending rates around the benchmark rates, or will choose to float up the range.”

— With assistance by Yuling Yang

(Corrects Jiang Jianqing’s title in third paragraph.)
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