Listed banks are expected to perform better in 2008 following a cut in corporate tax, widening interest spread and rising fee-based income, analysts said.

 

Profit in the banking sector is expected to jump 52 percent next year, BOC International said in a research report. It increased its rating on the banking sector from "move in line with the broad market" to "better than the broad market."

 

The view is shared by analysts at Industrial Securities and Guotai Jun'an Securities.

 

Guotai Jun'an said it maintains its rating on the banking sector as long-term hold. Industrial Securities said big banks like Industrial & Commercial Bank of China are the recommended investment option for the long term.

 

The booming capital market offered opportunities for banks to increase interest spread.

 

Wider rate spread

 

The benchmark Shanghai Composite Index has more than doubled in the first 10 months of this year after rising 130 percent in 2006. The market began to correct from November but it still soared 80 percent this year so far.

 

Cheng Siwei, vice chairman of the Standing Committee of the National People's Congress, said in December that the country's stock market will stage a "slow bull" performance before the Beijing Olympics in August.

 

Cheng is "cautiously positive" over China's stock market and said picking up good listed companies as investment targets are more important than just focusing on the index.

 

Amid a booming stock market, more investors are shifting from fixed deposits to current deposits to invest in stocks. For lenders, it means a cut in deposit rate as current deposit rates are less than that of fixed deposits.

 

Current deposits accounted for about 48 percent of lenders' total deposits, said BOC International.

 

The one-year key deposits rate is 3.87 percent while the one-year benchmark lending rate is 7.29 percent, with a spread of 3.42 percentage points.

 

The expectation of more interest rate increases by the central bank will also help boost the interest spread for listed lenders and results in higher profits.

 

China has already made five interest rate increases this year and more such moves are expected amid a "tight" monetary policy. China will shift its monetary policy from "prudent" to "tight" next year to fight inflation and curb the economy from overheating.

 

China's consumer price index, the main gauge for inflation, rose 6.9 percent in November, a record high in more than a decade.

 

Amid the policy shift, more interest rates and reserve requirement measures are expected.

 

The reserve requirement will eat into profits of banks but the rise won't be big. Each future 0.5-percentage reserve requirement ratio increase will lead to a profit drop of 0.9 percent to three percent.

 

Corporate tax cut

 

China will levy a unified 25 percent tax rate on both domestic and overseas invested companies from January 1. Foreign companies are now facing an average 15 percent tax rate while Chinese firms are facing a 33-percent rate with various deductions.

 

The new corporate tax law unifies the deduction on salary as a cost, which will boost banks' profits.

 

At present, domestic companies can only deduct part of its staff salaries as a cost, which means industries where employees enjoy high salary have the burden of higher human resources costs.

 

The banking sector is a typical high-rolling and high-pressure industry where staff enjoys high salaries.

 

At present, a bank's actual corporate tax levels sit between 36 percent and 40 percent due to the salary burden. The new law will give listed banks a boost in the arm in the area of deductions for salary costs.

 

Fee-based income

 

Banks are seeking more cash cows besides interest income. The booming capital market also offers opportunities.

 

Selling fund products on behalf of fund management companies is one way to diversify and increase income channels.

 

The banking sector is estimated to gain revenue of 20 billion yuan from selling fund products on behalf of fund companies in 2007.

 

Chinese banks are stepping into the high-end private banking sector to attract high net worth clients. Banks, including Bank of China, China Merchants Bank and CITIC Bank, are already tapping the market.

 

The appreciation of the yuan will help banks, whose assets are mainly yuan-backed, see an increase in asset valuation. The appreciation of yuan is expected amid a tighter interest rate spread between the yuan and US dollar, said Zhang Huangrui, a Bank of China foreign currency trader.

 

The Federal Reserve cut its forecast for the US economy in 2008 and the market expects the greenback to weaken more.

 

It is widely expected that the Fed will cut the interest rates but the market here expects the People's Bank of China to raise interest rate to fight inflation, said Zhang.

 

The squeezing of the spread between the yuan and US dollar may lure capital into China.

 

The interest rate differential with the US is set to be further squeezed, limiting the central bank's ability to use higher domestic rates to moderate growth and liquidity, and piling more pressure on the exchange rate, said Standard Chartered Bank.

 

(Shanghai Daily December 20, 2007)