MNI EXCLUSIVE: China Banks Want Govt Help To Meet Lending Call

--Chinese Banks Will Struggle To Meet Call To Boost Lending Without Help,

Bankers Say

--Banks Face Falling Into Losses

     BEIJING(MNI) - Chinese commercial banks will need more official help,

including lower funding costs and taxes as well as cuts in transfers to the

state, if they are to comply with calls for them to sacrifice profits to boost

lending to the real economy, bank heads and policy advisors told MNI.

     Banks may see a sharp fall in profit growth and some may even suffer losses

this year, as they face squeezed net interest margins and rising bad loans, said

an advisor on banking policy. At the same time, officials have made a call,

reiterated by PBOC Governor Yi Gang last month, for the financial sector to

forego CNY1.5 trillion in profits by simultaneously boosting lending and cutting

loan rates and fees, particularly in favour of small- and medium-sized

companies.

     While the PBOC provided some relief to banks on Wednesday, with

25-basis-point cuts to its relending and rediscounting rates for loans to small

firms and agriculture-related firms, the pressure on margins is likely to

continue, given that the central bank would prefer to keep its benchmark deposit

rate unchanged, the advisor said.

     A benchmark PBOC reduction might still come, depending on whether second

quarter GDP data due July 16 falls short of expectations and on the outcome of

the next meeting of the Chinese Communist Party's Politburo, normally held at

the end of the month, but the relending and rediscounting cuts will in the

meantime provide cheaper funds to lenders to support specific sectors without

flooding the economy with liquidity, the advisor said.

     --PROFIT TRANSFERS

     Fiscal authorities, who have stakes in most lenders, might also accept

lower transfers of profits to the government, the advisor said.

     Banking sector net profits fell by 4.4 percentage points in the first

quarter versus the same period of 2019, although quarter-on-quarter growth of 5%

compared to a falls of 19% in profits for A-share listed companies and of 37%

for industrial companies as Q1 GDP slid by 6.8%.

     Bank results have been supported by the relatively good performance of

loans to big companies and real estate firms as well as to local government

funding vehicles, which have been less hard hit by the Covid-19 outbreak than

SMEs, said Zhao Junhong, deputy governor of Guangdong Nanyue Bank, a city

commercial bank.

     But banks need high profits to cushion against future risks, he said. Much

of their gains come from rising prices for assets, particularly in bubbly

property markets, said Zhao, noting that financial sector stock prices were

already reflecting concerns that this factor might go into reverse.

     Smaller and medium-sized banks are also having a more difficult time as bad

loans mount, with some already reporting losses, he said. While joint-stock

banks' profits jumped by a quarterly 9.4% in Q1, and big state-owned banks and

rural commercial banks saw gains of 4.7% and 1.9%, profits by city commercial

banks fell by 1.2%, PBOC data show.

     --MARGIN SQUEEZE

     Emergency pandemic measures allowing SMEs to defer payments of both

interest and principle has hit banks hard, Zhao said, adding that any

sustainable profit sacrifice should be tailored to address structural economic

distortions, including over-reliance on the real estate sector. The second half

of the year could bring further sharp falls in profits growth if the global

pandemic resurges, sapping demand for Chinese goods, he said.

     Commercial banks' net interest margin fell to 2.1% in the first quarter,

down seven basis points on a year earlier, according to the PBOC. This was lower

than for counterparts in the U.S. and Europe, though in the mid-range for Asia,

the central bank said.

     The PBOC will have to lower policy rates further if banks are going to be

able to lend more cheaply, said Zong Liang, research chief at Bank of China,

anticipating that the central bank would provide more structured facilities to

direct new loans directly to targeted sectors, such as SMEs.

     But policy rate cuts are likely to be only gradual, Zong and Zhao agreed,

as the PBOC will prefer to preserve policy space in case of a further

deterioration in Sino-U.S. relations. But ample liquidity will be ensured for

the sake of economic recovery, and the PBOC is unlikely to revert to a

tightening bias in 2020, they said.

     The Loan Prime Rate, which sets corporate borrowing costs, should also be

reduced only gradually, due to the large amount of outstanding loans which will

be transferred onto the benchmark next year, said Zong. Otherwise bank profits

could be overly affected, he said. The prime rate has remained unchanged in the

past two months, as the PBOC cracked down on interest rate arbitrage and sought

to deter a rapid rise in leverage, the banking advisor said.

     China should also, according to Zhao, retain a higher interest spread with

international funding markets, in order to support a stable yuan and ensure the

confidence of overseas investors in case of a decoupling from the U.S.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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