Analysts stay positive on Chinese banks amid tightened scrutiny

The outlook in 2018 for China's banking industry on profit growth set to be decent with improving net interest margin. 

The Chinese banking industry expects outlook for profit growth to be decent and net interest margin to improve this year even as the sector continues to deleverage, according to industry analysts.

A series of tighter rules issued recently by the China Banking Regulatory Commission and other regulators together with implementing the policy on asset management products should lead to “continued unwinding” of financial sector leverage and slower credit growth,  a UBS report said today.

Wang Tao, UBS’s chief China economist, said in the report that although regulatory tightening will remain a key focus of the banking sector this year, the Swiss bank is positive on China’s banks due to a stable macro environment outlook.

Wang said that as shadow banking activities continue to diminish, the Swiss bank sees potential upside to lenders’ loan growth in 2018.

UBS expects bank loans to grow around 12.5 percent this year, similar to 2017, even as shadow bank credit slows more sharply.

The Switzerland-based bank noted that if the slowing credit poses meaningful risk to the economy, bank loans may be allowed to rise more than currently envisaged, which should be potentially positive for banks’ net interest margin and profit growth.

Sophie Jiang, a banking analyst at Nomura, said in a recent telephone interview that banks achieved good loan growth in 2017, with joint-stock commercial lenders posting a double-digit increase.

She said the trend will continue this year and more money will flow into retail sectors away from mortgages.

Jiang predicted that the banking sector's net interest margin will improve in 2018, with major players likely to see a 6 basis points year-on-year increase and mid-cap commercial lenders neck-on-neck with last year.

Wang believes the tighter regulation could help ease investor concerns over the long-term sustainability of China’s banking sector.

Wang says UBS continues to prefer China Construction Bank, the Industrial and Commercial Bank of China and Chongqing Rural Commercial Bank because they have strong funding, stable asset quality, manageable exposure to shadow banking, and lower re-capitalization risks.

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