China’s use of stronger language in its latest pledge for banks to cut mortgage rates may lead to more pressure on margins, according to Citigroup Inc. analysts.
(Bloomberg) — China’s use of stronger language in its latest pledge for banks to cut mortgage rates may lead to more pressure on margins, according to Citigroup Inc. analysts.
The nation’s central bank seems to have adopted “harsher-than-expected” wording that could be interpreted as requiring large and commercial banks to reduce existing home lending rates, Citigroup analysts led by Judy Zhang wrote in a report Tuesday. It may spark concerns over their burden of performing a “national service” and lower margins, they wrote.
Chinese policy is under scrutiny after Goldman Sachs Group Inc. warned last month of an impact on lenders’ earnings growth and dividends. Banks are playing a vital role during the current downturn in boosting lending to businesses and financing troubled developers as well as cash-strapped local governments to avert a credit crunch.
“This may trigger further national service concern on large banks,” the Citigroup analysts wrote, adding repricing of existing high-yielding mortgages would further hurt banks’ net interest margins, profitability and lending capability.
Still, the impact on margins will be offset partly by the potential for a cut in bank’s reserve requirements in the third quarter of this year and any possible upcoming deposit rate reductions, they said.
Big lenders and China Merchants Bank, which have a higher exposure to mortgages, could see a bigger impact, Citigroup said.
While a key rationale for lower rates on existing mortgages is to help restore confidence in the property market, it’s unlikely to lead to much of a boost to home sales and new mortgage demand, the analysts wrote. An indicator for early mortgage repayments also peaked in late May, suggesting most borrowers who were able to repay had done so, they added.
Chinese banks’ net interest margin slid to a record low of 1.74% in March, according to the latest data from the National Financial Regulatory Commission. That’s below the 1.8% threshold that’s regarded in the industry as necessary to maintain reasonable profitability.
A benchmark of Chinese lenders has dropped as much as 14% from a May high, wiping out $78 billion of market capitalization and leaving the shares trading near record low valuations.
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