Banks face decelerating profits

The profitability of China's banking industry is slowing, a development which may prompt banks to improve risk management and create new business models to retain growth, according to a report released Thursday by PricewaterhouseCoopers (PwC).

Growth in the earnings of Chinese banks is expected to slide as pressure from slowing economic expansion both at home and overseas raises the possibility that domestic regulators will make additional cuts to interest rates, further closing the already tight interest rate gap, and force banks to scale back their fees, the report stated.

Regulatory moves aimed at slashing rates and keeping customer charges at a minimum have already had an impact on the profits of China's top 10 listed banks, the PwC report said. These banks together posted 513.2 billion yuan ($81.46 billion) in the first half of 2012, up 17 percent year-on-year, a much slower pace than the 34 percent annual growth rate recorded during the same period in 2011, PwC data show. At the same time, the year-on-year growth in the service commissions and fees collected by these banks dropped from 56 percent in 2011 to 19 percent in the first quarter of this year.

An asymmetric rate cut in deposit and lending rates in June along with another round of rate cuts in July will take effect in the near future and China's banks will face greater challenges from the contracting net interest rate spread in the second half and the following six to 12 months, said Jimmy Leung, PwC's China banking and capital market leader. Also, banks' non-interest income will continue to drop in the next six to 18 months, Leung added.

"Facing such threats, it is crucial for banks to improve their asset and liability management by creating new business models," Lu Qianjin, an international finance professor at Fudan University, told the Global Times. "Banks can no longer rely on traditional lending and deposit business to maintain a quick growth rate. They should offer more new products and services, such as private banking service and wealth management products."