Interest rate liberalization

Interest rate liberalization caused banks' net interest margins to contract and thus put banks to the test in terms of their direction of development and competitiveness.

Bank of Communications CoLtd's net interest margin dropped 15 basis points from a year earlier to 2.21 percent in the first three quarters of 2014.During the same period, China Merchants Bank Co Ltd's net interest margin fell 36 bps to 2.30 percent.

"Such changes will have a big impact on bank profitability. Most banks' profit growth will drop to single-digit levels in 2015, while the majority of listed joint-equity banks still had double-digit growth from January to September last year," said Wen of China Minsheng Bank.

To make sure that the scale of lending and returns on loans remain at an adequate level, banks will inevitably adjust their customer structure by increasing the number of small and medium-sized clients, he said.

Previously, banks focused on large companies, but now they are being forced by interest rate liberalization to increase their lending to small companies, which had to borrow from private sources at high interest rates when they could not obtain bank loans.

The pressure of reduced earnings also forces banks to increase revenues from intermediary businesses such as financial derivative transactions. Intermediary businesses have huge growth potential and challenge each bank's risk management capability, especially in terms of talent reserves, Wen said.

The non-interest income of China Minsheng Banking Corp Ltd grew 28 percent year-on-year in the first three quarters of 2014. It accounted for 32.5 percent of the bank's operating revenues, up 3.01 percentage points from the previous year.

In the meantime, China Merchants Bank's income from fees and commissions rose nearly 58 percent, accounting for 27.4 percent of its operating income.

Banks are building a platform across diversified financial sectors including the securities, insurance and trust sectors. In the future, banks may cooperate with licensed non-bank financial institutions and regulators are expected to allow capable banks to develop mixed operations, Wen said.