More than 56% of bankers in poll say liberalization policies are adversely affecting their bottom lines

Chinese banks expect to see much slower business growth from 2012 to 2014, and about 70 percent of bankers predict they will see a less than 20 percent increase in their profitability over the three-year period, according to a survey jointly conducted by PricewaterhouseCoopers and the China Banking Association.

The latest survey on Chinese bankers released in Hong Kong on Monday also said bankers' sobering estimate on growth came after the country's landmark decision to liberalize interest rates, which has allowed lenders to widen the interest rate bandwidth for loans and deposits since mid-2012.

More than 56 percent of respondents indicated that the removal of the deposit interest rates' ceiling has a negative effect on banks' profit margins, while more than 60 percent of bankers in the survey said interest rate liberalization poses challenges to their business in the coming three to five years.

The interest rate liberalization took bankers by surprise, said the report, which noted that less than 3 percent of bankers had expected the start of interest rate liberalization last year.

The less than 20 percent profit estimation for the period between 2012 and 2014 is in sharp contrast with statistics released by the China Banking Regulatory Commission, which showed that commercial banks in China raked in total net profits of 1.04 trillion yuan ($166.9 billion) in 2011, a surge of 36.3 percent from the previous year.

Jimmy Leung, a partner on China banking and capital markets with PwC, said the rapid profit gains among Chinese banks over the past few years are unlikely to be repeated in the future given the huge base today, the stricter constraints on lender's intermediary business and the country's slower economic growth.

"Liberalization on interest rates since June last year has pushed up deposit rates in Chinese banks, which in turn has squeezed banks' net interest incomes. A flat quarter-on-quarter profit growth has been noticed among Chinese banks in 2012 and the (weakening) momentum is likely to continue," Leung told a media briefing in Hong Kong.

An earlier PwC report released in October noted the net profits of the top-10 listed Chinese banks climbed a "tepid" 17 percent year-on-year during the first half of 2012, only half of the 34-percent growth rate seen in the same period in 2011.

Grace Wu, Hong Kong-based chief banking analyst at Daiwa Securities Group, said the interest rate liberalization placed greater pressure on Chinese banks, as deposit interest rates within one year have basically reached the adjusted ceiling amid fierce competition for savings in the market.

At the same time, profit margins among major lenders in China are expected to further contract by 10 percent in 2013 after the government cut interests rates twice last year, affecting loans this year, according to Wu.

The slowdown of macro-economic growth has reduced the demand for loans, as well as the pricing power of domestic banks in China, said Hu Bin, a Moody's vice-president and senior analyst in Hong Kong.

"The increasing funding channels for Chinese corporations have also weakened demand for bank loans these days, as many large companies will choose to issue bonds instead of borrowing from banks, eroding the bargaining powers of lenders," Hu said.

In a report dated October 16, 2012, Hu wrote that the increased flexibility in setting interest rates alone - not to mention the effects of the reduction in benchmark rates - could depress Chinese lenders' net interest margin by 4 to 6 basis points in 2012 and reduce their net profit by 28.5 billion yuan, accounting for nearly 3 percent of the system's total net profit in 2011.

"Bankers are developing a series of measures in response to the challenges," said Raymond Yung, PwC Financial Services Leader for China.

He added that banks had expressed an interest in issuing more high-margin loans to small and micro-sized enterprises, which have generally had a hard time raising money from banks amid the tight liquidity conditions that were common in the past.

More than 40 percent of the bankers surveyed said they will choose to diversify their business into other types of financial services, according to the survey.

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