A tight monetary policy could see the average annual profit growth of banks dip to around 45 percent by the end of next year, analysts said yesterday.

Aggressive measures to curb loan growth - including interest rate hikes, raising the reserve requirement ratio, intense "window guidance" and open market operations - will make it much harder for banks to sustain this year's exuberant growth, said analysts.

Going on the results for the first three quarters, the 14 Shanghai-listed banks are likely to post year-on-year net profit growth of 60 percent this year, analysts said, given sound performances in both interest and non-interest income.

"But it's going to be hard for banks who still rely on interest as their major income source to retain the same net profit growth next year, given total loan growth is expected to slow to 13 to 14 percent in 2008," said Wu Yonggang, an analyst with Guotai Jun'an Securities.

Wu predicted net profit growth of 45 percent for Chinese banks in 2008, provided the reserve requirement ratio is raised to 16 percent by the end of next year. "But if the central bank raises the ratio to 18 percent next year, that net profit growth will be squeezed even more - to 43 percent," he said.

But he said banks' interest margin would remain stable next year as pressure for rate hikes is likely to ease significantly next year. Many analysts are expecting one to two more rate rises from now until the end of next year, compared with five in the past 11 months.

She Minhua, an analyst with CITIC China Securities, forecasted net profit growth of 40 percent year-on-year in 2008. But She said the central bank is unlikely to use the reserve requirement ratio as a credit control measure in 2008, as it is already at a record high of 14.5 percent after the latest hike on the weekend.

"I believe the central bank will take other measures, such as raising the interest rate by two to three times and speeding up the appreciation of the yuan, rather than raising the reserve requirement ratio to draw excess liquidity," She said.

Smaller banks are more likely to be hit by the government measures, as their loan growth is comparatively faster than the larger lenders', She said.

He added that the measures would have little impact on foreign lenders, as their loan growth is comparatively stable in China.

Both analysts said that despite slower net profit growth next year, Chinese banks are still expected to perform well due to the booming stock market, which has boosted commercial banks' intermediary businesses.

(China Daily December 11, 2007)