Many approaching limit regulators placed on loan-to-deposit ratio

SHANGHAI - The banking regulator's loan-to-deposit ratio requirement is increasingly choking the development of the country's small and medium-sized lenders, who generally have more difficulty attracting deposits than their bigger counterparts.

While the lending spree that followed the global financial crisis in 2008 accelerated lenders' growth, its aftermath is starting to show this year, with the loan-to-deposit ratios of many small banks approaching the regulator's limit of 75 percent.

The loan-to-deposit ratio is the amount of a bank's loans divided by the amount of its deposits. To ensure stability in the country's banking sector, the China Banking Regulatory Commission requires a lender's ratio to be lower than 75 percent.

In a move that put more pressure on banks, the regulator said last month that starting in June, the ratio will be assessed monthly instead of quarterly.

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Many small and medium-sized listed banks reported a higher loan-to-deposit ratio this year as their loan growth outstripped that of deposits.

Shanghai-based Pudong Development Bank said its loan-to-deposit ratio increased to 70.33 percent in the first quarter, up from 69.76 percent at the end of 2010.

China Merchants Bank Co said its ratio was 74.59 percent at the end of 2010, up from 73.69 percent in 2009 and 70.75 percent in 2008.

By the end of 2010, the ratios of Shenzhen Development Bank, China CITIC Bank, China Minsheng Banking Corp Ltd and Industrial Bank Co were all above 70 percent.

"The high ratio clearly means they can't extend loans as they wish, putting a barrier on their future growth," said Jin Lin, a senior banking analyst with Shanghai-based Oriental Securities.

Under the current 20.5 percent reserve requirement ratio, if a bank's loan-to-deposit ratio reaches 75 percent, its liquid assets would be less than 5 percent when loans are deducted. That would expose it to a big liquidity risk, Jin said.

He added that the ratio requirement has a bigger impact on small and medium-sized lenders than their bigger counterparts because it's harder for them to absorb deposits due to their smaller branch networks.

"Depositors tend to choose big banks with big branch networks, which make it convenient for them to withdraw their deposits when they want," he said.

The country's "Big Five" banks have on average a much lower loan-to-deposit ratio than smaller lenders, with that of Agricultural Bank of China staying as low as 55.77 percent by the end of 2010.

To inflate their deposits to meet the tougher requirement this year, some small and medium-sized banks are raising their deposit interest rates, with some rolling out products with a return rate of over 100 percent, the Securities Daily reported.

The rate hikes will apparently cut into the lenders' interest margin between loans and deposits, the increase of which helped drive what analysts say was an average net income increase of 30 percent for listed banks in the first quarter.

But Jin said that while the narrowed interest margin will affect banks' performance for the rest of year, the impact will be limited.

"The relative low valuation of bank shares, which gained by an average of 10 percent in the first quarter, will help them outperform the overall market again in the second quarter," said Jin, who rates domestic bank shares a "buy".

"Overall, we are bullish about the banking sector this year."