Chinese banks set to face margin pressures in 2015: Fitch

Chinese commercial banks are set to face thinner net interest margins throughout 2015 as loans are repriced gradually, rating agency Fitch said in its latest report.

Data released by the People's Bank of China (PBOC) in its latest monetary policy report confirms that efforts by the central bank to lower borrowing rates are taking effect, it said.

The average corporate borrowing rate fell to 6.77 percent in December 2014, from 6.97 percent in September 2014, according to the PBOC's final-quarter report released last week.

In addition, the proportion of new loans priced at a discount to the PBOC lending rate was at 13 percent, from 8 percent. This follows the decision by the PBOC to cut its one-year lending rate by 40 basis points to 5.6 percent in November 2014.

"This should provide short-term relief for borrowers, while the lower borrowing costs imply thinner net interest margins for banks as deposit competition remains stiff," Fitch said.

Notably, November's rate cut is not yet fully reflected in the borrowing rates as reported in the PBOC report, as loans are only gradually repriced.

In addition, measures by the PBOC to relax bank loan/deposit ratio calculations, cut reserve requirement ratios and lower interest rates should further reduce borrowing costs through 2015, Fitch said.

Fitch expects deposit rates to remain largely unchanged owing to stiff competition among banks and non-bank financial institutions to attract depositors.

The average premium for time deposits rose to 17 percent in December 2014 according to PBOC data, only marginally below the maximum 20 percent cap -- and up from 10 percent in November. This affirms expectation that Chinese banks will continue to price deposits near the maximum allowable level, it said.

The resulting net interest margin squeeze for Chinese banks could be significant, and may encourage banks to shift their balance sheets to higher yielding, riskier assets.

This is also the case as Chinese authorities have been encouraging banks to increase lending to micro and small enterprises. It remains to be seen whether banks will be adequately compensated for this shift, Fitch said.

Lower borrowing costs could also be credit negative for Chinese banks if this leads to further indebtedness and enables existing asset quality problems to be pushed further down the line, it added. Endi