By TOM ORLIK
China's banks are strange beasts. The government is their main shareholder; regulators set a ceiling on deposit rates and a floor on lending rates; and loans can be dictated as much by political as financial logic.
But as Western governments also are up to their elbows in the banking sector, the Chinese model no longer looks quite as strange as it once did.
And, for now at least, China's banks are delivering growth for the economy and a return for investors.
Bank of China was the first big Chinese financial firm to deliver results Thursday, showing profit for 2010 up 28% for the year. Its nonperforming loan ratio dipped to 1.10% from 1.52% a year earlier and the absolute level of nonperforming loans also fell.
The forecasts for rivals are similarly positive.
Unlike some big international banks, the Chinese model is fairly straightforward: Take in deposits and make loans. With the ceiling for deposit rates and the floor for lending rates set by the government, the net interest margin is currently 3.06 percentage points.
In 2011, with policy in tightening mode, the banks won't be able to push as many loans out the door as they are used to. But constraints on the availability of credit mean that banks may have more pricing power, allowing them to charge higher rates above the floor set by regulators, while deposit rates currently remain constrained by the regulatory ceiling.
The hope is that this margin is enough to offset weaker loan growth and the possibility of rising delinquencies as the economy settles into a lower rate of growth.
The caveat is that a receding economic tide could expose weakness.
In the last two years, the loan book for the sector as a whole has expanded by more than 50%. That can't have come without compromising credit standards. Exposure to real estate developers accounts for 19% of banks' loan book, and estimates suggest loans to local government investment entities account for another 20%.
These are correlated risks. A sharp correction in the property sector would hit real-estate developers and knock down the value of land which local governments rely on to repay their loans.
In an economy that is still expected to grow at more than 9% this year, bad loans may rise, but they aren't likely to skyrocket. The banks have made some provision in an anticipation of tougher times ahead. Another year of strong results will give them an opportunity to do more.
After two years of frenzied lending, they would do well to seize that opportunity.
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