China's rate reform adds to concerns for bank investors

Mon Jul 22, 2013 12:16am EDT
 
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By Pete Sweeney and Gabriel Wildau

SHANGHAI (Reuters) - Beijing's move to scrap the floor on lending rates is not yet a game-changer for Chinese banks, but it may have just started the countdown to an eventual industry overhaul which will deprive the banks of virtually risk-free profits.

China bank stocks mostly fell on Monday, the first trading session following the rate reform announced late on Friday. An index of banks listed in Shanghai .SSEBKI was down 1.7 percent in late morning trading, compared with a decline of 0.4 percent for the broader Shanghai Composite Index .SSEC.SS.

Any liberalization is seen as positive for China's financial sector and the world's second-largest economy. But many Chinese investors fear the nation's banks, which for years have made easy profits from state-mandated spreads between borrowing and lending rates, will struggle to benefit from more competition.

Reflecting such skepticism, the Shanghai-listed banks trade at a median price-to-earnings ratio of 4.98 based on projected twelve-month earnings and a median price-to-book of 0.97, Thomson Reuters data shows.

Some economists believe nimble banks can reap some benefits after the People's Bank of China (PBOC) announced on Friday that banks could lend at any rate they wanted, enabling them to lure more business by offering lower rates.

However, with few loans extended at or near the previous lending limits, the latest change is seen as having little practical impact.

It could, though, be a prelude to much bigger reform - removing the cap on deposit rates, currently set at 3 percent for one-year deposits - which would dismantle the system that enables lenders to effectively make guaranteed profit margins.

"China has removed almost all controls on lending rates, and rates in the money market and capital market are also effectively free. The next and more important step is, of course, the ceiling on deposit rates," said Wang Tao, head of China research at UBS in Beijing.   Continued...

 
A businessman looks at his mobile phone as he walks in the financial area of Pudong in Shanghai May 30, 2013. REUTERS/Carlos Barria