RETAIL BANKING | Staff Reporter, China

Here's why Chinese banks' net interest margins are likely to expand

Loans are gradually repriced whilst deposit rates will likely remain unchanged.

The NIM of Chinese banks seemed to have stabilised since Q416, and in analysts' view, it will likely expand slightly over the coming quarters. According to data from the CBRC, the NIM stood at 2.05% in Q217, compared to 2.03% in Q117 and 2.22% in Q416.

BMI Research reported that following six benchmark interest rate cuts in 2014 and 2015 totalling 1.4%, the NIM has fallen sharply. Since Q416, Chinese policymakers have prioritised reducing leverage in the financial sector as one of their key policy objectives, leading to a surge in money market rates and tightened liquidity conditions.

Here's more from BMI Research:

Against this backdrop, the NIM will likely increase as loans are gradually repriced while deposit rates will likely remain largely unchanged owing to stiff competition among banks to attract depositors.

The banking regulator's ongoing efforts to reduce interbank lending will have the potential to reduce high cost liabilities as banks compete for more deposits, which bodes well for NIM expansion.

We believe that monetary conditions will remain tight as Chinese policymakers will continue to curb financial risks as well as reduce the economy's reliance on easy credit.

Meanwhile, we expect the continued demand for corporate loans (which accounted for an average of 65% of the loan book among mainland-listed banks at the end of 2016) to result in an increase in lending rates over the coming quarters.

According to the People's Bank of China (PBoC), the monthly average of new yuan-denominated loans to non-financial corporations over the medium-to-long term surged to CNY890bn (US$136b) in Q117 and CNY513bn in Q217, from CNY690bn in Q116 and CNY183bn in Q216.

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