The authorities' efforts to liberalize interest rates will take a toll - as much as 79.6 billion yuan ($12.7 billion) in bank profits next year, according to a report by Moody's Investors Service released on Oct 16.

Ruling out effects of the recent reduction in benchmark rates, the current increased flexibility in setting interest rates alone could depress Chinese banks' net interest margin (NIM) by 4 to 6 basis points in 2012, and reduce their net profit by 28.5 billion yuan, or nearly 3 percent of the system's 2011 net profit, it said.

The potential effect could be as much as 17 to 23 basis points on the NIM in 2013, dragging net profit down by 79.6 billion yuan.

An increasingly liberal interest-rate environment in China could challenge the banks' current management capacities in a wide range of areas, including business strategy, risk control and governance, according to the report.

"These concerns underpin our current low stand-alone ratings on Chinese banks," said Hu Bin, a Moody's vice president and senior analyst, author of the report.

"While they can still boast reasonably strong financial metrics, their abilities to adapt to a fully market-driven pricing environment remain untested, and may be subject to additional uncertainties, such as how policy makers will choose to sequence coming measures.

"These issues come on top of the current risks posed by rising asset quality pressures and a slowing economy," he added.

Moody's rates a total of 13 Chinese commercial banks, which together account for 60.5 percent of the banking system's loans and 63.6 percent of its deposits. Its stand-alone credit profiles range from D+/ba1 to D-/ba3.

China's central bank in June and July widened the range against which Chinese banks can benchmark their lending and deposit rates.

"This development is credit-negative and promises to play an increasingly important role in our assessment of Chinese banks, as it means potential challenges for them on multiple levels," Hu said.

In addition, challenges will emerge in liquidity management, as the broad liberalization of interest rates could encourage depositors to seek greater yields and permanently introduce market-driven volatility into the entire funding structure, the report said.