An increasingly liberalized interest rate environment in China will reduce profitability and lead to an increase in risky loans at banks, an industry report said yesterday.
"These concerns underpin our current low stand-alone ratings on Chinese banks," Moody's Investors Services said in the report yesterday. "While they can still boast reasonably strong financial metrics, their ability to adapt to a fully market-driven pricing environment remains untested, and may be subject to additional uncertainties, such as how policy makers will choose to sequence coming measures."
Listed Chinese banks are scheduled to release third quarter earnings by the end of this month.
The People's Bank of China gave lenders more flexibility on interest rates in June. Lenders were allowed to set deposit rates at a maximum of 10 percent above the benchmark rate for the first time in history.
Moody's said it sees an acceleration towards a fully liberalized interest rate environment in China, and banks could be challenged in a wide range of areas, including business strategy, risk control and governance.
"This development in rate deregulation is credit negative and promises to play an increasingly important role in our assessment of Chinese banks, as it means potential challenges for them on multiple levels," said Bin Hu, senior analyst at Moody's.
The agency estimated net interest margins at Chinese commercial banks will be reduced by up to 6 basis points this year, which will result in total net profit dropping around 28.5 billion yuan (US$4.5 billion), or 3 percent of the system's net profit for 2011.
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