BEIJING (Reuters) – Annual profit growth of China’s banks could slow to 9 percent in 2014 as they face increased liquidity and lending risks due to slower economic growth and Beijing’s battle on excessive factory capacity, the banking industry body said a report.

Concern about huge growth in Chinese corporate debt since the global financial crisis and the risk of defaults has intensified this year as growth slows and authorities allow markets to play a bigger role in deciding winners and losers.

“Banking financial institutions face challenges from increased volatility of short-term liquidity and rising credit risks due to the impact from economic slowdown, structural adjustment and efforts to reduce overcapacity,” the China Banking Association said in the report.

“Market risks will rise along with interest rate liberalisation, increased exchange rate flexibility and more frequent capital flows, but there will be no large-scale outbreak of liquidity risks.”

Commercial banks made a combined 1.42 trillion yuan (134.53 billion pounds) in net profit in 2013, up 14.5 percent from 2012, the association said. But the growth rate could slow to around 9 percent this year.

Banks may see a rise in non-performing loans (NPLs) this year from small firms in the export sector and companies gripped by excessive capacity, it said.

But commercial banks have set aside sufficient provisions to write off possible bad loans, it added.

Average NPL ratios for commercial banks were at a three-year high of 1.04 percent at the end of March, above the 1 percent red line for China’s banking regulators. Given the opacity of the banking system, many analysts believe the real levels are much higher.

Banks should closely check on loans for the property sector and local government financing vehicles, the association said.

The chances for the central bank to loosen monetary policy aggressively remain small this year, even as the central bank uses targeted easing to support the economy, it said.

The government has unveiled a series of modest stimulus measures in recent months to give a lift to economic growth, which dipped to an 18-month low in the first quarter.

Such measures have included targeted reserve requirement cuts for some banks to encourage more lending, quicker fiscal disbursements and hastening construction of railways and public housing projects.

The world’s second-largest economy is showing signs of stabilisation, but the recovery looks patchy given a downturn in the property sector, which could spill-over into a wide range of industries, analysts say.

(Reporting by Kevin Yao; Editing by Christopher Cushing)

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