3 factors that will pressure Chinese banks' profits in 2017

Rising credit costs is one.

According to Moody's Investors Service, Chinese banks’ profitability – in terms of net income / average total assets – will deteriorate in the coming 12-18 months to reflect continued pressures on net interest income from slow asset growth, narrowing net interest margins (NIMs) and rising credit costs.

Here's more from Moody's:

We expect the banks’ asset growth will continue to decelerate amid moderating economic growth and the adoption of a more conservative growth strategy. The broad shift towards deleveraging will also constrain the banks’ lending income prospects. This in turn will pressure their profitability, as net interest income still accounted for around 70% of total revenue in the first three quarters of 2016.

There will be further NIM pressure in this outlook despite our expectation that the PBOC will adopt a cautious stance towards further monetary loosening. Coming NIM pressure will reflect increasing competition for deposits, lower investment returns and the gradual shift in the banks’ new loan mix towards loans with lower lending rates, including collateralized mortgage and loans to the low-risk infrastructure and utility sectors.

The exchange of corporate loans to relatively low-risk and low-return local government debt as a result of efforts to ease the debt burden of local governments will also pressure the banks' profitability, despite the positive impact on their asset quality.

Credit costs will continue to rise in the next 12-18 months to reflect ongoing asset quality deterioration, adding to the pressure on the banks' net income. Credit costs increased slightly year-over-year in the first three quarters of 2016, and would have been even higher if the banks had not been running down their reserves to meet some of their loan losses. Loan loss reserves as a percentage of 90+ day delinquencies at the end of June 2016 stood at 164%, down 19 percentage points from a year ago.