Margin-Squeezed China Banks Poised to Pass on Higher Loan Costs

(Bloomberg) -- Chinese banks are poised to pass on higher funding costs to customers as they seek to prevent interest margins from contracting further amid rising short-term borrowing rates.

With profit growth slowing to the weakest in more than a decade, the firms have no choice but to push their lending rates higher, according to brokerages including China Merchants Securities Co. Smaller banks, in particular, are under more pressure as they are increasingly reliant on wholesale funding, said Ma Kunpeng, a Shanghai-based analyst at China Merchants.

The nation’s central bank has been sending signals this year that it’s tightening monetary policy to reduce financial-system risks and Chinese lenders have few options but to absorb much of the higher costs. The gap between the three-month Shanghai Interbank Offered Rate and the one-year lending rate has narrowed to 7 basis points, the least since July 2011.

“The result of rising financing costs is inevitable,” said Ma at China Merchants. “Higher short-term borrowing costs are driving overall lending rates higher because banks for sure hope to pass on the costs.”

The squeeze comes at an especially painful time for Chinese banks, with lower interest margins and an increasingly larger pile of bad debt amid slowing economic growth. The average net interest margin, a measure of lending profitability, dropped to 2.22 percent as of December, the lowest in more than five years, according to data compiled by the China Banking Regulatory Commission.

Haitong Securities Co. cited higher home-loan rates in some cities as an example of banks trying to limit the margin squeeze. Some branches in Beijing, Guangzhou and Chongqing raised mortgage rates for first-home buyers, people with knowledge of the matter said earlier this month.

“Lenders have started to raise rates in the mortgage market and are expected to continue,” Haitong analysts led by Jiang Chao wrote in a note this month. “Similarly, corporate loans will follow such a trend.”

To contact Bloomberg News staff for this story: Ling Zeng in Shanghai at lzeng30@bloomberg.net, Alfred Liu in Hong Kong at aliu226@bloomberg.net, Heng Xie in Beijing at hxie34@bloomberg.net.

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Darren Boey, Russell Ward

With assistance from Ling Zeng, Alfred Liu, Heng Xie