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Lower lending target may affect small banks

(China Daily)
Updated: 2010-12-08 11:11

BEIJING - China will not greatly increase, or probably slash, the target for new lending next year over concerns of excessive liquidity, financial analysts said, a neutral move that will ultimately hit hard on smaller lenders that rely heavily on loan growth for a profit.

Tang Shuangning, chairman of China Everbright Bank, the country's sixth largest commercial bank by assets, said the government is expected to set a lower target for new lending for 2011 from this year's mark of 7.5 trillion yuan ($1.13 trillion).

Tang's prediction was in line with the general expectations of analysts that China will slow credit growth next year. The annual loan target is normally announced in March.

"The government would not allow the same amount of money or more money to be pumped into the market as excessive liquidity has fueled fears of inflation," said Shao Yu, chief analyst of Hong Yuan Securities Co Ltd.

"The central bank has switched back from a loose monetary policy after an unprecedented lending spree last year," said Li Xunlei, chief economist with Guotai Junan Securities.

China loosened the valve on credit to help stimulate the economy amid the global financial crisis but excess liquidity resulted in growing inflation. China's consumer prices grew to a 25-month high of 4.4 percent in October.

The scenario has prompted the government to increase interest rates, raise required reserve ratios and clamp down on bank loans.

The tightening will bring a hard time to Chinese lenders, bankers and analysts said.

"Since the bank loan constitutes the major channel for a bank's revenue, if the lending quota is cut, the banks will risk less revenue," said Sun Dongsheng, an associate professor of finance at the University of International Business and Economics in Beijing.

Interest incomes, which are mainly profits gained from loans, accounts for 80 percent of Chinese banks' total profits, said Wu Yonggang, an analyst with Guotai Junan Securities.

Xu Yiming, director of the department of liability management at China Construction Bank, said profit growth for Chinese banks will slow down.

"Credit tightening will definitely take its toll on lenders next year," Xu said.

Li expect Chinese banks to register a growth of 17 percent in profits next year, compared with this year's 25 percent.

Small- and medium-sized banks will suffer more from the credit measures, Shao said.

"Smaller banks are not as resourceful as big ones. If they want to gain the same profits when the loan scale becomes smaller, they have to raise the lending rate. However, most of their clients are small- and medium-sized companies that are sensitive to the rate changes," Shao said.

But some bankers believed the credit curb will be good for lenders in the long run.

"Making easy profits by generously lending to enterprises in a fast-growing market, Chinese banks are not keen to innovate on other financial products," Shao said. "They must search for new growth engines."

China Daily