Why it's going to be tough for China banks to earn in 2015

NIM and deposit growth nightmares still haunt them.

It has been noted that earnings will be challenging for China banks in 2015.

According to a research note from Barclays, NIM and deposit growth pressures persist.

Further, on a static basis, large banks estimate the Nov-14 rate cut and 10% liberalization could reduce 2015 NIM by 9-12bps.

Asset quality could further deteriorate but is manageable. 2015 profit should grow in the low single digits for large banks. Event risk could be rising.

Barclays noted that, nonetheless, A-share investors are positive on the domestic market.

Here's more from Barclays:

GDP growth likely to trend down in 1H15 but bottom in 3Q15; monetary and fiscal policy to be accommodative; no clear model for SOE reforms so far: Under the "new norm", economic slowdown will continue but those we met with believe 6-7% real GDP growth is achievable in the near to medium term.

Current high real interest rates and low inflation would allow China to cut the benchmark rate further. The PBOC is expected to continue to use new tools (SLO, SLF, MLF, PSL, etc) to smooth liquidity before a permanent RRR cut is used.

Fiscal policy may be accommodative too as the government deficit may expand to 2.2-2.3% of GDP in 2015 and MOF is pondering releasing some fiscal deposits for liquidity. However, too fast an A-share rally may delay monetary loosening. SOE hybrid ownership reform focusing on employee stock incentives is awaiting guidelines, which should be issued soon; but expectations for success are low.

LG debt reform moving fast; LGFV classification needs more clarity: New LG debt statistics were submitted to the MOF in early January and could see big increases (>50%) in some provinces vs. Jun-13's audited results. Definition and classification into three debt categories is confusing and it is almost a consensus among those we met that LGs will not support all existing LGFV debts. As a result, banks are hesitating to give loans to LGFVs in Jan-15.

However, it is believed that the central government could bail out existing LG debts prior to the 31 Dec 2014 cut-off date should local governments stop supporting them. In addition, public-private partnership (PPP) is seen as an approach for future project financing and hybrid ownership reform; but more guidelines are needed to define "private" investors and reduce their concerns.

More financial reforms and regulatory developments: Deposit rate liberalization should move forward. While the PBOC has changed the definition of loans and deposits, the CBRC has not. The good news is that a draft proposal to change the 75% LDR cap from a regulatory requirement into a monitoring tool was submitted and is likely to be passed in 2015.

Regulators in Beijing agree breaking the "implicit guarantee" for shadow banking products is important, but difficult in practice. The roles of approved private-sector banks are set similar to "community banks" in other countries.