Take your time, China – it’s only almost April. The 2012 results season for the nation’s biggest banks is finally upon us. China’s second-largest lender kicked things off this week, reporting a 14 per cent increase in net income. This sounds good, but it is China Construction Bank’s lowest income growth in six years. That is what happens when Beijing liberalises interest rates, removing fat interest margins for state banks. Net interest margin fell 5 basis points over the last three months of 2012 at CCB. Other banks will surely have seen similar falls.
China’s banks can do some things to offset this trend. As investors seek higher returns than the measly 3 per cent rate on deposits, the demand for higher-yielding wealth management products increases. In the short term, banks can benefit – selling these investment products to boost fee income. CCB’s fee income jumped 30 per cent year-on-year in its fourth quarter. Bernstein notes that the Rmb8tn in assets under management in these products is now equivalent to a tenth of banks’ deposit base, up from just 2 per cent in early 2010.
But this is not all good news for the banks. Demand for wealth management products also boosts the market for cheaper credit through corporate bonds. Over a quarter of the former are invested in the latter. And funding costs for Chinese state-owned enterprises that issue bonds are 100-150bps lower than yields on bank loans. In turn this hurts demand for bread-and-butter loans. As a result, corporate bonds made up two-fifths of medium and long term credit issuance in the second half of last year, while commercial banks made up just 13 per cent – a record high and low. In the long term this could be bad for the banks as buyers of corporate bonds as they swap loans yielding 6.5 per cent, for bonds yielding 5 per cent. Going are the days of easy profits for China’s banks.