China Banks:Undergoing loosening will trigger trading opportunities

Selected RRR cut: not positive to major listed banks, but points to a loosening monetary policy direction. Only BCQ (1963 HK, Neutral) and CRCB (3618 HK, Outperform) are eligible for the RRR cut. State-owned banks, Minsheng (1988 HK, Outperform), CMB (3968 HK, Neutral) and CITIC Bank (998 HK, Outperform) do not meet the requirements. The new policy benefits city commercial banks and rural financing institutions, including rural commercial bank and rural cooperative banks. We think PBOC’s policy objective is to boost SME and rural lending via city commercial banks and rural financial institutions and not major listed banks. We estimate the selected RRR cut can release interbank liquidity by no more than RMB85b, which is marginal.

PBOC has been more actively using the relending monetary tool, which is not commonly used before. 21st Century Business Heralds reported that PBOC had relented (placed) RMB100b to Postal Savings Bank, Huaxia Bank, and Minsheng Bank to encourage their rural lending. Before that PBOC has also lent RMB30b to China Development Bank for shanty town renovation.

We believe relending is quite efficient in guiding banks to provide facility to policy-favored sectors. Banks have limited loan quota to support SME, rural business and affordable housing. PBOC’s re-lending facility can enhance banks’ capabilities to support lending to the sectors above.

Loosening of LDR regulation underway. CBRC vice chairman Wang Zhaoxing listed three adjustments to loan-deposit-ratio regulations, namely (1) loans funded by SME financial bond will be excluded from LDR; (2) SME and rural loans funded by PBOC’s re-lending facility will be excluded from LDR; (3) some other stable deposits (we interpret as non-settlement interbank deposits) will be recognized in LDR calculation. A loosening LDR could enhance banks’ capabilities to issue more loans.

Banks’ share performance is likely benefit from the macro-economic stabilization efforts. The selected RRR cut, PBOC’s relending facility and loosening of LDR are painting the picture of monetary loosening. Further loosening including broad RRR and rate cuts are likely if there is further slowdown in the economy. Such measures are likely to stabilize banks’ asset quality and benefit their share prices. We prefer BOC (3988 HK, Outperform), ABC (1288 HK, Outperform) and CITIC Bank (998 HK, Outperform).