Analysts said there would be little impact on the earnings of mainland banks after the People's Bank of China (PBoC) on Tuesday raised interest rates for the third time since mid-October.

Effective Feb 9, the benchmark one-year lending rate was raised 25 basis points (bps) to 6.06 percent. One-year deposit rates, meanwhile, were also raised 25 bps to 3 percent.

However, overall deposit rates were raised by an average 34.2 bps compared with the 23.6 bps hike in loan rates, as the central bank this time lifted the deposit rates of longer maturities by 30 to 45 bps in comparison with the 20 to 25 bps hike seen in longer-term loan rates. The bank also lifted current deposit rates by only 4 bps.

And unlike the previous two rate hikes, which were generally favorable to banks, the bigger increase in deposit rates this time compared with that in loan rates will inevitably eat into banks' earnings, said Paul Lee, an analyst with Taifook Securities.

"Moreover, with the disparity between current deposits and time deposits widening, more people are expected to shift their current deposits to time deposits for better income, which will also eat into banks' profit margins," said Lee.

A Goldman Sachs report released Wednesday also held a neutral viewpoint on the impact of the rate hike on banks, particularly big lenders such as Industrial and Commercial Bank of China, China Construction Bank Corp and Agricultural Bank of China due to their low loan/deposit ratio and higher proportion of current deposits.

Nevertheless, Goldman reckons that shareholding banks such as China Minsheng Banking Corp could see a modest increase in their net interest margin due to the latest rate hike, given their higher loan/deposit ratios and a higher proportion of short-term loans or larger inter-bank lending exposure.

Deposit migration will be modest rather than sharp, as five-year deposit rates of 5 percent versus the estimated 5.1 percent year-on-year inflation hike is still not attractive, the report said.

Lee added that mainland insurers will reap the benefits from the third rate hike - just as it has done before.

"Rate hikes are always good news to the insurers," said Lee. "Their major investments are in time deposits and short-term bonds, and lifting interest rates will help the insurers earn higher reinvestment yields," Lee added.

A JPMorgan report released the same day also commented that the latest rate hike should help alleviate some of the selling pressures in the insurance sector driven by concerns of a potential slowdown of bancassurance sales following the introduction of new regulations last year.

China Daily

(HK Edition 02/10/2011 page2)