Chinese banks’ profit growth may fall to single digits in 2013

China’s banks, the world’s second most profitable after Indonesia’s, are expected to see profit growth fall below 10% in 2013.

Analysts said weak credit demand is squeezing net interest incomes, the source of 80% of Chinese banks’ revenues. They expect margins to also be hammered by a continued weakening in demand for credit in the coming months.

China’s industrial profits fell 2.7% during the first seven months of this year, which will likely impact industrial enterprises’ willingness and ability to make capital expenditures and investments in the near term.

The biggest threat to bank profitability, however, remains the government’s insistence on liberalization as a way to free funds for more private sector investment.

Beijing has begun liberalising China’s tightly controlled interest rate regime to pave the way for a market-oriented rate system. The People’s Bank of China, the central bank, in June allowed the country’s commercial banks to set deposit rates 10% above the benchmark level and lending rates 20% below the benchmark.

The move gives banks more freedom but time creates strong competition among lenders.

“The year of 2013 is going to be very challenging for all Chinese banks as the margin will continue to fall,” said Wilson Li, banking analyst at Guotai Junan Securities. “The government’s efforts to curb unreasonable commission charges will also squeeze banks’ earnings.”

State-owned Bank of China has the gloomiest earnings prospects, ehile privately-owned China Minsheng Bank will be the most resilient, according to Barclays

Demand for credit will remain bleak until the economy improves. When it does, however, Chinese banks may not be as ready to serve the economy as before since they have less liquidity than they did in 2009, believes Fitch Ratings.