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Tighter spreads hurt bank profit

By Yang Zhen (China Daily)
Updated: 2009-05-05 07:51

The record 4.58-trillion-yuan lending surge seen in the first quarter of this year has failed to lift bank earnings, which have been depressed largely due to thinning profit margin.

Bank analysts said the narrowing spread between deposit and lending rates, which dictate bank profitability, will continue well into the second quarter and probably even the third.

Related readings:  Lending surge contains potential risks  Banks can gain from small business lending  China central bank calls for 'more rational' lending  Lending to Taiwan companies rises

The 14 publicly listed banks extended 2.64 trillion yuan in new loans during the first three months, accounting for 57.7 percent of the 4.58-trillion yuan in fresh loans issued by Chinese banks. But the aggregate profit of the 14 publicly listed Chinese banks dropped 8.88 percent during the first quarter, to 108.75 billion yuan, according to market researcher Wind Info.

Take Industrial and Commercial Bank of China (ICBC), the world's largest bank by market value, as an example. The bank's net interest income in the first quarter fell to 57.7 billion yuan, down 12.88 percent from a year earlier. Its net interest margin was only 2.34 percent in the first quarter, 56 basis points less than the 2.9 percent level seen at the end of 2008.

If not for a 9.66 percent increase in its net fee and commission income, and a 3.2 percent drop in its operating expenses, ICBC would not have been able to post a 6.03 percent profit growth in the first quarter.

"Although ICBC extended 14 percent more new loans in the first quarter, it was not enough to offset the impact of weakening net interest margins," Liu Yinghua, a banking analyst with Ping An Securities, wrote in a report.

Macquarie Securities analyst Sarah Wu also cut her forecast for ICBC's 2009 net profit by 1 percentage point after the bank released its first quarter results last week.

Mid-sized banks such as China Merchants Bank (CMB) and China Citic Bank were facing much tougher challenges. CMB's net profit in the first quarter fell 33.41 percent from a year earlier, while China Citic Bank's first quarter net declined by 23 percent.

CMB's net interest margin fell to 2.47 percent, down 110 basis points from the same period the previous year, making its net interest income drop by 22.5 percent.

The Diversified Bank Index, which covers the shares of the 12 listed banks, rose 2.6 percent to 1883.04 points yesterday.