Chinese banks' profits to slip further in 2014: S&P

Tight liquidity and further liberalisation of China's financial sector will continue to squeeze banks' profits besides bad loans hurting their profits, rating agency Standard and Poor's (S&P) said today.
Chinese banks' earnings are likely to decrease this year as they make increased provisions for bad loans, along with a narrowing spread between deposit and lending interest rates and slowing growth in non-interest rate income, S&P said in a report.
The rating agency expects banks' returns on average assets to fall to 0.8 percent -1 percent in 2014, down from the 1.1 percent to 1.2 percent range last year, state-run Xinhua news agency said quoting the report.

Loan quality of Chinese banks will deteriorate this year as they remain heavily exposed to debt-laden local government financing vehicles and manufacturers saddled with overcapacity.
Growth of the world's second-largest economy slowed to 7.7 percent last year as a decade-long construction boom cooled off.
However, the decline in loan quality will not be too bad, S&P said, as a stabilising domestic economy and pragmatic policy responses to deal with emerging risks should limit the rise in non-performing loans.

As a result, S&P said the credit profile of the major banks it rates in China will remain stable.
"Our outlook on the Chinese banking sector remains stable. In our view, banks' business position, capitalisation, risk position, and funding and liquidity should support their stand-alone credit profiles," said Liao Qiang, a senior director with S&P.

Chinese banks are also seeing more depositors move their money out of banks to chase higher returns offered by money market funds from China's leading Internet firms.
This, coupled with tight liquidity in the interbank market, poses a challenge for some banks to comply with a regulator-mandated loan-to-deposit ratio of 75 percent.
Banking regulators have scraped the lending rate floor and asked the country's leading banks to report the rates they offer to their best borrowers to reflect a more market-based gauge of lending rates.
Regulators have also allowed banks to issue negotiable certificates of deposit to each other and are mulling a deposit insurance as a necessary step in fully liberalising deposit rates, the Xinhua report said.