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News Analysis: China's banks face challenge after rate cut

(Xinhua)

15:07, June 09, 2012

BEIJING, June 8 (Xinhua) -- The days of enjoying easy profits are likely numbered for China's commercial banks, as the central bank's latest move to cut interest rates will remarkably slash their profit margins, analysts have warned.

The People's Bank of China (PBOC), the central bank, said Thursday it will cut the benchmark interest rate for deposits and loans by 25 basis points beginning Friday in order to tackle slower-than-expected growth in the world's second-largest economy.

After the cut, the one-year deposit interest rate will fall to 3.25 percent, while the loan interest rate will be lowered to 6.31 percent.

However, since the PBOC has already adjusted the upper limit of the floating band for deposit rates to 1.1 times the benchmark rate, actual deposit rates could be as high as 3.57 percent. With lower lending rates, the gap between deposit and lending rates, a major profit source for China's banks, will be significantly narrowed, said Lu Zhengwei, chief economist at Industrial Bank.

Lu's view was echoed by E. Yongjian, a senior researcher at the Bank of Communications who estimated that the gap between deposit and lending rates could be narrowed by about 25 basis points. "Banks will feel prominent adverse effects," he said.

China's commercial banks are the world's largest in terms of asset scale and safety, but they are often criticized domestically for their privileged access to state-controlled financial resources.

China's central bank regulates the floating band for benchmark interest rates. The gap between lending and deposit rates reached 3.25 percentage points before Thursday's cut, much higher than levels in other countries.

According to the China Banking Regulatory Commission (CBRC), China's commercial banks reaped 1.04 trillion yuan (165.08 billion U.S. dollars) in profits in 2011, of which 80 percent came from rate gaps.

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