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Recession to erode profits of Chinese banks

CHINESE banking industry will grow by single-digit in net profits this year amid an economy slowdown, squeezed interest spread yet less provision need, analysts said.

Chinese banks are expected to slow their net profits growth to single-digit in 2009, said Victor Wang, a UBS banking analyst, today in Shanghai.

Chinese banks are confronted with squeezed interest spread, a main income channel, as the People's Bank of China cut interest rates five times last year.

The central bank's moderately easing monetary policy also means more rate cut is possible. A wider discount on individual mortgage lending also added pressure.

Wang said Chinese banks had already raised provision against bad assets in the fourth quarter of last year, leaving them less space and need to further increase the provision.

Wang said he is still upbeat about Chinese banks, whose valuation is relatively low now. However, he said the best time to invest in listed banks is yet to come.

"Investors may want to wait until the middle of the first half when banks report their first-quarter performance, then it will be clear to see the trend of economy," Wang said.

Fitch Ratings said in a report today that asset quality of Chinese banks will inevitably come under pressure from the considerably worsened economic environment and mounting stress among borrowers.

Fitch noted that credit risk continued to represent the single largest threat to the safety and soundness of Chinese banks, and the extent to which banks' exposure to future credit losses may be underestimated.

The rating body also noted that the financial strength of China's largest banks has improved noticeably in recent years, in tandem with falling non-performing loan ratios, rising loan loss provisioning, and substantial capital raising.

"As we look into 2009 and 2010, it is clear that Chinese banks' exposure to credit losses is rising, but exactly when and how this will manifest itself clearly in financial data is less certain," said Charlene Chu, senior director in Fitch's Financial Institutions team.


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