China's first interest rate increase in 34 months will boost profits at banks in the short term but earnings may come under pressure if authorities allow spreads to narrow, analysts said.
The People's Bank of China unexpectedly raised interest rates to fight asset price bubbles and inflation concerns from yesterday.
The one-year benchmark deposit rate now is at 2.5 percent from 2.25 percent while the one-year benchmark lending rate rose by the same 25 basis points to 5.56 percent. The current deposits rate is unchanged at 0.36 percent. The rate increase was asymmetric above the one-year tenor.
"The lion's share of banks' deposits consists of less than one-year tenor, while most of their loans are long term," said Qiu Guanhua, a Guotai Jun'an Securities Co researcher. "So, the asymmetric rate increase will help banks increase interest spread as interest income outgrows the cost of deposits."
Citibank shared the same view and in a report said that more than 90 percent of deposits are of less than one-year tenor.
But in the long run, the latest rate increase may not be a blessing for banks.
"If the rate increase is an indication of a willingness to allow guaranteed spreads to narrow, the banking sector may be under a cloud for some time," said Shen Minggao, a Citibank economist.
After the rate increase, deposits rose 46 to 60 basis points for two to five year tenors, while lending rates rose 20 basis points for tenors above one year. A basis point is 0.01 percentage point.
Experts, including Zhong De Securities Co's She Minhua, China Galaxy Securities Co's Zuo Xiaolei and Deutsche Bank's Ma Jun, said they deemed the rate increase as a beginning of a cycle of rate increases.
Listed banks yesterday under-performed the broad stock market.
