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S&P: China takes big leap with relaxed deposit rate controls
By Hu Xiaocen |
June 15, 2012, Friday
|
Online Edition
Online Edition
CHINA'S recent cut in interest rates and relaxation of deposit rate controls is a giant leap for the nation's financial reforms, and will have far-reaching effects on the banking sector, Standard & Poor's Ratings Services said yesterday.
The People's Bank of China lowered borrowing and lending rates effective on June 8, and allowed lenders to set deposit rates at a maximum of 10 percent above the benchmark rate.
The ratings agency said the relaxation is a big step in the country's drive toward liberalizing interest rates and reforming the financial sector, while banking profitability is expected to erode over the next two to three years.
"We believe that the long-term benefits of a more efficient system of allocating credit and a more diversified loan portfolio could outweigh the short-term strain on Chinese banks' net interest income and profitability," the agency said in the latest report.
S&P estimated that lenders' return on average assets would reduce by 10 basis points or US$17 billion in 2012, and further down by 20 to 25 basis points or US$42 billion in 2013.
Meanwhile, loan growth would spur on lower rates from a current weakened position, but not as intensive as the credit expansion in 2009, as the government is still dealing with the aftermath of the boom.
Lenders will be encouraged to take more risks to maintain net interest margins by extending more loans to small- and medium-sized enterprises, as well as individuals.
"We expect the strain on small banks' businesses to increase within the next two to three years, when large banks raise exposure to small companies," the agency said.
The People's Bank of China lowered borrowing and lending rates effective on June 8, and allowed lenders to set deposit rates at a maximum of 10 percent above the benchmark rate.
The ratings agency said the relaxation is a big step in the country's drive toward liberalizing interest rates and reforming the financial sector, while banking profitability is expected to erode over the next two to three years.
"We believe that the long-term benefits of a more efficient system of allocating credit and a more diversified loan portfolio could outweigh the short-term strain on Chinese banks' net interest income and profitability," the agency said in the latest report.
S&P estimated that lenders' return on average assets would reduce by 10 basis points or US$17 billion in 2012, and further down by 20 to 25 basis points or US$42 billion in 2013.
Meanwhile, loan growth would spur on lower rates from a current weakened position, but not as intensive as the credit expansion in 2009, as the government is still dealing with the aftermath of the boom.
Lenders will be encouraged to take more risks to maintain net interest margins by extending more loans to small- and medium-sized enterprises, as well as individuals.
"We expect the strain on small banks' businesses to increase within the next two to three years, when large banks raise exposure to small companies," the agency said.
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