Tighter regulations will put pressure on bank profit margins and credit growth next year according to a new report from Fitch Ratings.
Fitch sees Chinese regulators maintaining its heavy scrutiny of the finance sector in 2018, following the launch of a crackdown on shadow banking and a concerted deleveraging campaign earlier this year.
Analysts expect new regulations that aim to bring shadow banking activity back onto bank balance sheets to impede bank capital by exacerbating risk.
“Credit growth is likely to decelerate next year, given the tighter regulatory stance,” said Fitch.
According to Fitch slower credit growth is expect to have an especially adverse impact upon smaller lenders, who have less access to deposits and remain dependent upon interbank borrowing for funds.
“Funding conditions are likely to remain tight, pointing to continued margin pressure at smaller banks which rely more on non-deposit funding,” said Fitch.
The entire banking sector, however, will be hit by tighter regulation, with Fitch expecting net income growth in the banking sector to remain in the “low single digits” in 2018, as well as faltering profit growth at China’s big state-owned banks.
Fitch maintains a stable outlook for Chinese lenders, due to “very strong” support from the government for the banking sector.