Chinese Banks Raise Rates, Expect Strong First Quarter


Major Chinese banks expect sharply higher first-quarter earnings due to higher interest on consumer lending as Beijing grants lenders more flexibility in pricing loans, executives from three banks said on Thursday.

The Industrial and Commercial Bank of China, China Construction Bank and Bank of Communications jacked up interest rates on consumer loans in the first three months, they told Reuters, widening the spread between lending and deposit rates.

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Chinese banks now enjoy much greater leeway in setting interest rates, especially on loans to individuals, a consequence of Beijing's campaign to tighten lending, spruce up risk management and slow a galloping economy.

"Our banks' interest rate spread jumped sharply in the first quarter, and we expect a sustained expansion of that margin to have a direct impact on our bottom line," one of the three senior bankers told Reuters, speaking on condition of anonymity. "Our own bank's spread increased at least 0.3 percentage point from the end of 2007."

The country's commercial lenders enjoy spreads between 250 and 300 basis points, according to their latest available data.

Chinese banks derive about four-fifths of their revenue from plain-vanilla lending, earning the difference between rates charged on loans and interest paid on deposits. But many in past years have explored new avenues from insurance to asset management to diversify their revenue base.

They face a tougher 2008 because of a slowing Chinese economy and exposure to subprime-related securities, as Bank of China and others write off billions of dollars on holdings of asset-backed securities.

ICBC, the largest of the nation's commercial lenders, estimated its net profit leapt more than 50 percent in the first three months of 2008, driven especially by net interest income and fees on intermediary services.