Don’t bank on China’s policy tweaks
Originally published at the South China Morning Post on March 7, 2016.
Chinese banks will benefit from increased deposit spreads as a result of the central bank’s decision to further cut their reserve requirement ratio, but analysts say the impact of such moves is diminishing.
The People’s Bank of China last week lowered the reserve requirement ratio, or the amount of cash banks are required to hold in reserves, by 0.5 percentage point. This was the fifth time the PBOC cut RRR since February 2015 as it seeks to shore up credit growth and kick-start the slowing economy. The move is expected to pump about 680 billion yuan (HK$808 billion) into the economy.
Since deposits with the PBOC garner a 1.62 per cent yield while the average cost of deposit funding is about 2.4 per cent, banks stand to benefit from an increased spread in deposits, according to a March report by UBS analysts Lucy Feng, David Chung and Ben Huang. Despite this, analysts say that RRR cuts are having a “diminishing” impact on bank lending because the 75 per cent limit for loan-to-deposit ratio has been taken away.
“The problems therefore remain sluggish corporate loan demand and banks’ own risk selection in a slowing economy. That said, banks should at least benefit from increased deposit spreads,” the analysts said. “For example, reallocating deposits to the seven-day interbank rate would currently yield about 2.3 per cent.”
In January, bank lending rose rapidly on the mainland, and PBOC data suggested that the market share of net new loans for China’s big four banks – Bank of China, China Construction Bank, Agricultural Bank of China and Industrial and Commercial Bank of China – was 22 per cent, the report said. Since net bond issuance by policy banks as well as corporate and long-term retail lending increased in January, policy banks possibly could take on more project or infrastructure related loans.
“We believe this is a positive development for the Big Four banks as there could be a shift away from old economy (or) overcapacity exposure,” the report said. “We expect banks to use the new liquidity arising from the RRR cuts to provide more value-adding loans rather than replacing existing loans, as investors become increasingly concerned about asset quality.”
Consumer lending is a new bright spot for banks, according to an HSBC report released in March. As the Chinese economy undergoes restructuring on the supply side, corporate banks face low credit demand and asset quality deterioration, which places pressure on banks’ margins as they de-risk their loan books.
In mainland China’s A-share market, HSBC analysts gave Shanghai Pudong Development Bank, Industrial Bank and Ping An Bank “hold” ratings, the report observed.
“Credit card asset quality has remained robust relative to overall banking NPL (non-performing loan) trends compared with the overdue loan ratio,” the report said. “This could be because consumer loans are more sensitive to unemployment and bankruptcy, which might be less affected by the overcapacity-driven slowdown and problems with high leverage faced by corporates.”
Retail loans have better pricing than other loan classes and is not sensitive to rate cuts, and China’s non-mortgage consumer credit penetration to gross domestic product was about 11 per cent in 2015 – lower than that of other economies – the report added.