Chinese banks' resilience to the growing popularity of Internet finance has been "so far, so good" and sector change will come as the industry catches the trend, analysts in Hong Kong said.
By the end of March, at least 11 banks had posted annual results. They show continued net-profit growth, 13.9 percent on average in 2013, three percentage points lower than the year before. That's in the limelight of Internet finance.
"Because of rising funding costs, the banking sector saw slower profit growth this year. Margins are narrowing," said Grace Wu, Hong Kong-based analyst of Daiwa Securities Group Inc. "The pressure isn't severe. Chinese banks still enjoy a loan price advantage. We maintain a stable outlook on sector margins this year."
Last June, Yu'ebao, a money market fund distributed online by Alibaba Group Holding Ltd, raised the curtain on Internet finance's development. It featured flexible redemption and offered above-deposit returns. Investors arrived amid an inter-bank liquidity squeeze in the second half of 2013.
Other Internet companies followed - including Tencent Inc, Baidu Inc and Sina Corp - with similar products, drawing capital away from bank accounts and causing banks' funding costs to rise. By the end of February, China's money market fund had grown to 1.4 trillion yuan ($226.81 billion), 2.5 times bigger than it was in last May.
"People claim Internet finance is a huge challenge to commercial banks," Victor Wang, China banking analyst at Credit Suisse AG, told a forum in Hong Kong. "But in the short term, its impact will be rather limited."
"Number-wise, the total AUM (asset under management) of money market bonds is around 1 trillion yuan, which is less than 1 percent compared with Chinese banks' deposit base. Online financing activities, including peer-to-peer lending, are at the infant stage. They are small ticket relative to banks' lending size," he said.
Wang pointed out that a tightening regulatory environment means it's "unlikely" online financial activities will take a bigger market slice from banks.
"The dramatic development of Internet finance is challenging the regulatory framework," he said, adding Yu'ebao now manages 500 billion yuan of 80 million users, or 10 percent of China's economic population. "When a financial product is that big, any responsible regulator has to make sure it is safe and the potential risk of such products can be well-contained."
Although Internet finance is considered too young to challenge banks now, it's an alert that will spur interbank competition, analysts said.
"We are going to see meaningful change in the medium to long term," Credit Suisse's Wang said. "Banks have witnessed the trend and realize that Internet finance is a feasible model and a sharp weapon to gain market share. When banks start to compete with each other by leveraging the new technology, the impact created will be much greater than the challenges from external competitors."
"Ten years from now, the value of physical branches will substantially decline because, by then, 99 percent of transactions will be finished online," Wang said. "Banks need to rethink their business model and catch up substantially. This is a great opportunity for the well-run ones to stand out."