Banks will face a narrowing interest spread after the Chinese central bank announced a cut in the minimum down payment for first-time home purchases in an attempt to breathe life into the country's sluggish property market, analysts said yesterday.

The People's Bank of China said on Wednesday night it will cut the current 30-percent minimum down payment requirement to 20 percent from Monday. It will also allow a maximum discount of 30 percent on the benchmark interest rate from Monday, up from the existing 15 percent.

The policy is likely to be welcomed by property developers to boost their weak sales and cut the risks for banks regarding worsening assets quality. However the immediate impact on banks is that they will see their interest spread squeezed, analysts pointed out.

"The widening discount rate and lower mortgage down payment will alleviate home buyers' burden and give purchases a boost, which will improve the cash flow of real estate companies," said Chen Shuixiang, a China Jianyin Investment Securities analyst. "The move will also trim the risk of deteriorating loans quality for banks in the long run."

Lu Zhengwei, chief economist at Industrial Bank, said the policy's focus on the real estate sector aims to ensure stability in the Chinese economy, too.

"The capital-intensive real estate doesn't stand alone and disruption to the capital flow of property developers may translate into asset deterioration for banks, whose problems may spill over to the wider economy," Lu said. "That's a situation we should definitely avoid."

However, banks are expected to suffer a short-term blow from the mortgage policy.

China International Capital Corp. expects banks to post an average of a 3 to 15-percent drop in profitability next year. The view is also backed by other securities research houses. "The impact of an interest income cut is more direct and swift to banks," said Li Shanshan, a China Merchants Securities Co. analyst. "By contrast, the (cut's) boost to property demand and stable property prices will take a much longer time to be realized."

The benchmark rate for a loan of more than five years is 7.47 percent, with a preferential rate of 6.35 percent after a 15-percent discount. The new discount policy means the minimum rate will be 5.25 percent while the five-year term deposit rate is 5.58 percent. Banks can earn interest income when the loan rate is higher than the deposit rate.

(Shanghai Daily October 24, 2008)