A STOCK market rout is set to add to the pain of China’s banks, already grappling with slowing profit growth from a surge in bad loans and a series of interest rate cuts, by curbing robust growth in their fee-generating business.

    The nation’s five biggest lenders are expected to report higher non-performing loans (NPLs) and smaller profit growth from their core lending business when they announce interim results this week, led by Industrial & Commercial Bank of China today.

    China cut interest rates and reduced the amount of reserves banks must hold for the second time in two months Tuesday, lowering the one-year benchmark lending rate by 25 basis points to 4.6 percent.

    That cut may reduce bank net interest margins, or the difference that lenders make on their borrowing and lending, by up to 4 basis points next year, according to CITIC Securities.

    As lending has become less profitable and more risky, Chinese banks have hastened their switch to fee and commission income, which currently makes up some 20-30 percent of total income for domestic lenders.

    “Bank managers said that they are targeting 40 to 50 percent,” said Chen Xingyu, analyst at Phillip Securities in Hong Kong.

    Banks’ non-interest income comes from investment banking revenues and custodian, clearing and wealth management product fees, among other things.

    A loan officer at a top-five Chinese bank said his branch is now focused on developing products to be bought and sold between financial institutions.

    Commercial bank NPLs have increased for 15 consecutive quarters, surpassing US$1 trillion for the first time in seven years for the period ended in June, the banking regulator’s data show.

    Analysts warned that fee income growth could slow down in the second half of 2015 as a chunk of the banks’ non-interest income, especially of the smaller lenders, is tied to the stock markets that have tumbled 40 percent since mid-June.(SD-Agencies)