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RETAIL BANKING | Cesar Tordesillas, China
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Top 5 Chinese banks face challenges in interest liberalization

Very profitable despite a slowed economy.

China's five largest banks - Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank and Bank of Communications - have combined profits of 614.75 billion yuan in the first three quarters.

All of the banks saw their profits rise between 10 to 20 percent.

However, their heavy reliance on net interest income may prove challenging in a time of gradual interest liberalization.

Eight joint stock banks, all mid-sized lenders, lagged far behind their bigger rivals in absolute numbers, but outperformed them in terms of growth.

The eight banks posted combined profits of 181.7 billion yuan, registering a 29-percent jump year on year.

Professor Zhao Xijun, a finance professor at Renmin University, noted that loan quality may suffer as a result of the slowing economy.

Nine out of sixteen listed banks are now witnessing greater non-performing loans (NPLs), both in value and in proportion.

The most cited case has been Ping'An Bank, a Shenzhen-based lender controlled by Ping'An Insurance. Its NPLs have increased by 2.36 billion yuan, rising 71.69 percent, since the beginning of this year .

"There is increasing evidence of risks passing through the real economy to the virtual economy, although they have largely remained mild," Prof. Zhao said.

The main concern is the banks' heavy reliance on net interest income and stagnating revenues generated from other lines of business, as a gradual path toward interest liberalization has become clearer.

"Allowing banks greater flexibility in setting rates will narrow their net interest margin, as they will need to offer more competitive rates on their broad deposits and loans," said Bin Hu, vice president in charge of financial institutions at Hong Kong-based rating agency Moody's.

"In addition, challenges will emerge in liquidity management, as the broad liberalization of interest rates could encourage depositors to seek greater yields and permanently introduce market-driven volatility into the entire funding structure," Hu said.

Banks have reacted by looking to new channels for revenue.

"The reason we have put so much emphasis on private banking, wealth management and other services is the emerging outlook of interest liberalization," said Ding Wei, vice president of China Merchants Bank.

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