Banks set to reveal a slowdown in profits

A stockmarket rout is set to add to the losses of China’s banks, already grappling with slowing profit growth from a surge in bad loans and a series of interest rate cuts, by curbing robust growth in their fee-generating business.

The nation’s five biggest lenders are expected to report higher non-performing loans and smaller profit growth from their core lending business when they announce interim results this week, led by Industrial & Commercial Bank of China today.

China cut interest rates and reduced the amount of reserves banks must hold for the second time in two months on Tuesday, lowering the one-year benchmark lending rate by 25 basis points to 4.6%.

That cut may reduce bank net interest margins, or the difference that lenders make on their borrowing and lending, by up to four basis points next year, according to a research note from CITIC Securities.

As lending has become less profitable and more risky, Chinese banks have hastened their switch to fee and commission income, which makes up 20% to 30% of income for domestic lenders. “Bank managers said they are targeting 40% to 50%,” said Xingyu Chen, analyst at Phillip Securities in Hong Kong.

Banks’ non-interest income comes from investment banking revenues and custodian, clearing and wealth management product fees, among other things.

A loan officer at a top-five Chinese bank said his branch is focusing on products to be bought and sold between financial institutions. “It’s not a question of supply, we have money, but there is no demand,” he said.

“There is no sign of a turning point,” said Ma Kunpeng, a Shanghai-based analyst at Sinolink Securities.

Reuters