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Agency predicts profitability pressures for banks
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Chinese banks will face a trade-off between leverage, growth and systemic risks as their profit growth struggles with the pace of asset expansion, Fitch Ratings said yesterday.
The banking institutions’ asset growth still outpaces their profitability, despite a deceleration. And shadow financing is forecast to moderate around half of GDP by the end of 2019, from a peak of 70 percent at the end of 2017, according to the rating agency.
Domestic lenders will be under profitability pressures due to narrowing net interest margins and tighter non-performing classification, said Grace Wu, head of ratings for China banks at Fitch Ratings.
Net interest margin is a key measurement for a bank’s ability to make a profit.
Banks’ required reserve ratio, the amount of money they must set aside in the central bank as reserves, is now lower than the pre-2009 stimulus levels, so the scope for further RRR cuts to ease bank funding costs is limited, Wu added.
She predicted that banks’ near-term profitability will be dragged down by regulatory guidance to lower borrowing costs, which lowers their net interest margin.
In the medium term, their capability to make a profit is likely to be affected by asset quality deterioration as banks are driven to lend more to small and private enterprises by the government, which are more vulnerable to economic shocks.
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