Slow deposit growth to hit China bank profits-UBS

BEIJING, June 29 (Reuters) - Slower deposit growth at Chinese banks is more of a worry than their surge in lending and is likely to eat into their profits, a Chinese banking analyst at UBS (UBS.N)(UBSN.VX) said on Monday.

Surging bank loans have led to an increase in bank deposits recently, but this trend is unlikely to continue, UBS analyst Victor Wang told reporters in a media briefing.

"In the medium term, the banking sector's growth is set to come down as three drivers for strong deposit growth have all cooled off," Wang said, referring to economic expansion, high deposit rates and China's trade surplus.

Industry wide deposit growth has increased by around 18 percent on a yearly basis over the past decade, a key factor underpinning the expansion of Chinese banks, Wang said.

China sets a floor on lending rates that is well above its ceiling on deposit rates, giving banks a reliable source of profit which has been magnified by the rapid expansion of the deposit base.

Wang said deposits would grow more slowly because people have more investment options, at the same time as the overall economy is slowing and less money is flowing into China from trade.

But he said that the balance sheet structure at Chinese banks was safer than at their U.S. counterparts, with deposits making up 85 percent of liabilities in China's banking sector.

New lending by Chinese banks in the first five months totalled 5.84 trillion yuan ($855 billion), easily topping the government's full year minimum target of 5 trillion yuan.

Bank regulators last week warned that credit was being channelled to the property sector and even the stock market, creating the risk of an asset bubble instead of supporting small businesses and the broader economy.

Wang said that there would inevitably be bad loans when a country lends about a third more money than a year earlier, but that there would be few problems in the near term.

"Most of them are medium-to-long term loans. As a result, bad loans will probably appear only after these projects are finished," he said. ($1=6.833 Yuan) (Reporting by Michael Wei and Simon Rabinovitch; Editing by Mariam Karouny)