Chongqing Rural Commercial Bank Ltd (CRCB) sees further downward pressure on its net interest margin in the second-half as it offers higher interest rates to attract depositors after the central bank allowed lenders bigger flexibility in pricing their deposit interest rates.

Since the People's Bank of China (PBOC) cut the benchmark lending and deposit rates by 0.25 percentage point in June and said it would allow deposit rates to float higher, CRCB has hiked its one-year deposit rate by 10 percent, the bank's president Tan Yuansheng said at its interim results press conference in Hong Kong on Monday. He said the move will increase the bank's deposits cost and squeeze its net interest margin (NIM).

"Our NIM was narrowed in the second quarter from the level of first quarter (3.57 percent), and the trend is likely to continue into the second half and the next year," Tan said, but he stressed that the bank's NIM by the end of this year will remain wider than it was in 2011.

In the first half of 2012, the bank's NIM was 3.5 percent, which is wider than 3.36 percent - its NIM in 2011.

Merrill Lynch (Hong Kong) research analyst Michael Li said in a research report that unlike other H-share listed Chinese mainland banks with 20-25 percent revenue from non-interest income, 95 percent of CRCB's revenue is from net interest income.

"It could be the bank's advantage when margin was strong, but in the rate cut cycle, the lack of diversification could lead to faster revenue decline," said Li.

Merrill Lynch cut its price objective for the bank to HK$3.3 and reiterates the "Underperform" rating.

BOCOM International analyst Yang Qingli also sees CRCB's NIM continuing to fall in the second-half amid lower rates, but she believes a narrowed NIM had already been expected by the market and it is not a unique problem for Chongqing Rural Commercial Bank.

"Since China has entered into the rate cut cycle, the NIM of all banks' will be squeezed," Yang told China Daily, adding that it should not have a significant impact on banks' profitability.

CRCB reported first half-results with net profit of 2.8 billion yuan - up by 25 percent from the same period a year ago.

During the first half of this year, the bank's total loans increased by 13.4 percent, Tan said, adding that he expects the loan growth for the full year to reach 20 percent.

Meanwhile, the bank's asset quality was improving, with its outstanding non-performing loans having decreased 6.33 percent from a year ago.

sophiehe@chinadailyhk.com

(HK Edition 08/21/2012 page2)