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After a stellar run, banks find their spreads cut to shreds
By Zhang Fengming |
January 12, 2009, Monday
|
Print Edition
Print Edition
THE 2008 year was a watershed for Chinese banks - the good times when banks enjoyed record spreads came to an end and lenders were confronted with the easing of domestic monetary policy and the global financial crisis.
2008's 1st half
Record profits
The first six months of 2008 was a golden age for Chinese banks in terms of interest income. The People's Bank of China raised interest rates nine times since 2002, six times in 2007 alone, in a tight monetary policy to curb lending, and Chinese banks plucked the fruits of the widening interest spread.
Chinese banks posted glimmering interim reports - including the Industrial and Commercial Bank of China, which was crowned the world's most profitable bank, and China Citic Bank posting profit increases of 160 percent.
Increasing interest income, widening fee-based revenue and a tax rate cut all meant satisfactory growth in the first half of 2008.
China's 14 publicly traded banks posted combined net profits of 232.72 billion yuan (US$34.1 billion) in the first half of last year. Average profits were over 16.62 billion yuan.
Analysts from Guotai Jun'an Securities Co said the average profits growth of 64.4 percent was even faster than their previous estimates of 60.6 percent.
Meanwhile, the central bank's window guidelines to limit credit by granting lending quota also gave banks more bargaining power. The limited lending resources meant banks had more ability to increase interest spreads.
While western banks can rake in half of their total income from fee-based services such as commissions, traditional interest income still dominated Chinese banks' profit pools.
With the exception of Bank of China, which was dragged down by the United States' subprime mortgage exposure, the other 13 listed Chinese banks all posted increasing interest margins ?? the amount they could earn from the money they lent to borrowers. Among them, Shenzhen-based China Merchants Bank reported the biggest margin ?? 3.66 percent, meaning the bank could earn 3.66 yuan on each 100 yuan lent to borrowers.
2008's 2nd half
Back-to-back rate cuts
Bankers said the record-high spread was not sustainable. What surprised them was how fast the end came. As the scope and effects of the financial crisis became clear, the spread spree came to an end, as the central bank moved fast to ease monetary policy, chopping the interest rates five times since September.
In mid-September, Lehman Brother's failure triggered a domino effect as big-name financial institutions lined up for government capital. As more American financial institutions sought help, the crisis spread to other parts of the world, driving the world economy into a downturn.
China's central bank took a pro-active policy to cushion the impact of ailing overseas demand.
A lower interest rate means businesses can enjoy lower lending costs and find it easier to find capital.
The central bank cut the one-year benchmark lending rate by 1.89 percentage points to 5.31 percent. The cut on loans of longer than five years was 1.8 percentage points.
The interest rate on current account deposits was halved to 0.36 percent.
The cuts meant banks were facing a squeezed interest spread, their main generator of profits.
2009's prospect
The gloom descends
The five rate cuts in the second half of 2008 mean banks will face a rate-cut hangover in 2009.
"The 2008 whole-year performance report will still be rosy, based on the strong momentum of the first half of the year," said an unnamed banker from a listed lender. "However, 2009 will really be a tough year as the smaller spread will have its impact."
The sluggish capital market also means banks face shrinking fee-based income as once red-hot individual wealth management products are shunned by the market.
The economic slowdown also means banks are exposed to potentially worsening assets as more companies default on their loans.
The one-off gains of 2008's tax-cut cannot be repeated, either. China cut the corporate income tax rate to 25 percent last year from 33 percent for domestic and overseas companies.
The big state-owned banks that attracted overseas investors years ago are also exposed if their foreign strategic partners choose to sell out. Such sell-offs will add pressure to listed banks' shares.
After investing in the big Chinese banks a few years ago, Bank of America and Royal Bank of Scotland are sitting on pots of gold. But recessions in the US and United Kingdom mean more bad debts loom for the foreign banks, which could force them to sell out their Chinese holdings.
BoA already sold US$2.8 billion of China Construction Bank H shares, while RBS is considering joining UBS AG and Hong Kong billionaire Li Ka-shing in selling its H shares in Bank of China after a three-year lock-up ends.
A Retrospective of China's Monetary Policy Since 1993
1993-1996 Anti-inflation, moderately tight monetary policy
1997 Slightly eased monetary policy
1998-2003 Anti-inflation, stable monetary policy
2004-2007 A nominally stable monetary policy while behind the scenes the central bank showed a tendency to slightly tighten policy
2007-October 2008 A tight monetary policy to curb inflation and credit supply by raising interest rates, the reserve-requirement ratio and offering credit quotas
From November 2008 Easing monetary policy including scrapping credit quotas and cutting interest rates and reserve requirement ratios
Source: China Citic Securities Co research
2008's 1st half
Record profits
The first six months of 2008 was a golden age for Chinese banks in terms of interest income. The People's Bank of China raised interest rates nine times since 2002, six times in 2007 alone, in a tight monetary policy to curb lending, and Chinese banks plucked the fruits of the widening interest spread.
Chinese banks posted glimmering interim reports - including the Industrial and Commercial Bank of China, which was crowned the world's most profitable bank, and China Citic Bank posting profit increases of 160 percent.
Increasing interest income, widening fee-based revenue and a tax rate cut all meant satisfactory growth in the first half of 2008.
China's 14 publicly traded banks posted combined net profits of 232.72 billion yuan (US$34.1 billion) in the first half of last year. Average profits were over 16.62 billion yuan.
Analysts from Guotai Jun'an Securities Co said the average profits growth of 64.4 percent was even faster than their previous estimates of 60.6 percent.
Meanwhile, the central bank's window guidelines to limit credit by granting lending quota also gave banks more bargaining power. The limited lending resources meant banks had more ability to increase interest spreads.
While western banks can rake in half of their total income from fee-based services such as commissions, traditional interest income still dominated Chinese banks' profit pools.
With the exception of Bank of China, which was dragged down by the United States' subprime mortgage exposure, the other 13 listed Chinese banks all posted increasing interest margins ?? the amount they could earn from the money they lent to borrowers. Among them, Shenzhen-based China Merchants Bank reported the biggest margin ?? 3.66 percent, meaning the bank could earn 3.66 yuan on each 100 yuan lent to borrowers.
2008's 2nd half
Back-to-back rate cuts
Bankers said the record-high spread was not sustainable. What surprised them was how fast the end came. As the scope and effects of the financial crisis became clear, the spread spree came to an end, as the central bank moved fast to ease monetary policy, chopping the interest rates five times since September.
In mid-September, Lehman Brother's failure triggered a domino effect as big-name financial institutions lined up for government capital. As more American financial institutions sought help, the crisis spread to other parts of the world, driving the world economy into a downturn.
China's central bank took a pro-active policy to cushion the impact of ailing overseas demand.
A lower interest rate means businesses can enjoy lower lending costs and find it easier to find capital.
The central bank cut the one-year benchmark lending rate by 1.89 percentage points to 5.31 percent. The cut on loans of longer than five years was 1.8 percentage points.
The interest rate on current account deposits was halved to 0.36 percent.
The cuts meant banks were facing a squeezed interest spread, their main generator of profits.
2009's prospect
The gloom descends
The five rate cuts in the second half of 2008 mean banks will face a rate-cut hangover in 2009.
"The 2008 whole-year performance report will still be rosy, based on the strong momentum of the first half of the year," said an unnamed banker from a listed lender. "However, 2009 will really be a tough year as the smaller spread will have its impact."
The sluggish capital market also means banks face shrinking fee-based income as once red-hot individual wealth management products are shunned by the market.
The economic slowdown also means banks are exposed to potentially worsening assets as more companies default on their loans.
The one-off gains of 2008's tax-cut cannot be repeated, either. China cut the corporate income tax rate to 25 percent last year from 33 percent for domestic and overseas companies.
The big state-owned banks that attracted overseas investors years ago are also exposed if their foreign strategic partners choose to sell out. Such sell-offs will add pressure to listed banks' shares.
After investing in the big Chinese banks a few years ago, Bank of America and Royal Bank of Scotland are sitting on pots of gold. But recessions in the US and United Kingdom mean more bad debts loom for the foreign banks, which could force them to sell out their Chinese holdings.
BoA already sold US$2.8 billion of China Construction Bank H shares, while RBS is considering joining UBS AG and Hong Kong billionaire Li Ka-shing in selling its H shares in Bank of China after a three-year lock-up ends.
A Retrospective of China's Monetary Policy Since 1993
1993-1996 Anti-inflation, moderately tight monetary policy
1997 Slightly eased monetary policy
1998-2003 Anti-inflation, stable monetary policy
2004-2007 A nominally stable monetary policy while behind the scenes the central bank showed a tendency to slightly tighten policy
2007-October 2008 A tight monetary policy to curb inflation and credit supply by raising interest rates, the reserve-requirement ratio and offering credit quotas
From November 2008 Easing monetary policy including scrapping credit quotas and cutting interest rates and reserve requirement ratios
Source: China Citic Securities Co research
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