China banks predicted to contend with margin pressures in 2015

Meanwhile, borrowing rates efforts are taking effect.

Data released in the People's Bank of China's (PBOC) latest monetary policy report confirm that efforts by the central bank to lower borrowing rates are taking effect.

According to a release from Fitch Ratings, this should provide short-term relief for borrowers, while the lower borrowing costs imply thinner net interest margins (NIMs) for banks as deposit competition remains stiff.

Meanwhile, NIM pressures are likely to continue through 2015 as loans are repriced gradually.

Further, the average corporate borrowing rate fell to 6.77% in December 2014, from 6.97% in September 2014, according to the PBOC's 4Q14 report released last week.

In addition, the proportion of new loans that are priced at a discount to the PBOC lending rate were up to 13%, from 8%. This follows the decision by the PBOC to cut its one-year lending rate by 40bp, to 5.6%, in November.

Here's more from Fitch Ratings:

Notably, November's rate cut is not yet fully reflected in the borrowing rates as reported in the PBOC report, as loans are only gradually repriced. In addition, measures by the PBOC to relax bank loan/deposit ratio calculations, cut reserve requirement ratios and lower interest rates should further reduce borrowing costs through 2015.

Fitch expects deposit rates to remain largely unchanged owing to stiff competition among banks and non-bank financial institutions to attract depositors.

The average premium for time deposits rose to 17% in December 2014 according to PBOC data, only marginally below the maximum 20% cap - and up from 10% in November.

This affirms Fitch's expectation that banks would continue to price deposits near the maximum allowable level (see "China Rate Cut Negative for Banks", 25 November 2014).

The resulting NIM squeeze for Chinese banks could be significant, and may encourage banks to shift their balance sheets to higher yielding, riskier assets.

This is also the case as Chinese authorities have been encouraging banks to increase lending to micro and small enterprises. It remains to be seen whether banks will be adequately compensated for this shift.

Lower borrowing costs could also be credit negative for Chinese banks if this leads to further indebtedness and enables existing asset-quality problems to be pushed further down the line. Fitch maintains a negative outlook on the Chinese banking sector's performance.