China banks:Easing again

The PBOC announced another round of easing, cutting the benchmarkinterest rate by 25bps and RRR by 50bps. The need for monetary supportdoes seem high as Chinese bank 3Q15 results show. ABC, the first of ourcoverage to report, saw its NPL ratio exceed 2%. While lower rates helprefinancing and reduce default risk, they hurt NIM. It is easy to getexcited about trading on more liquidity yet the loosening rationale isanything but exciting.

More monetary easing.

Effective 24 October, the 1-year benchmark deposit rate was lowered by 25bps to1.5% along with the 1-year lending rate, by 25bps to 4.35%.

The PBOC has taken rates down 150bps and 165bps this easing cycle.

RRR also got a cut, by 50bps. Those which have more exposure to agriculture andmicro-lending will enjoy another 50bp reduction. At least Rmb680bn in reserves willbe released.

In response to rising NPL.

China does need more monetary support as the economy continues to slow and badassets continue to build up.

ABC saw its NPL ratio surge above 2% in 3Q, the first listed bank exceeding suchlevel. More banks will report next week and the results are unlikely to look good.

Lower rates do help borrowers to refinance, giving Chinese banks more time todigest the NPL recognition and to reduce the capital burden.

Negative for NIM.

However, they add more pressure on NIM. Alongside the rate cut decision the PBOCalso removed all deposit pricing ceilings (earlier 1Y deposit or below at a 1.5x cap).

Deposit competition will keep funding costs high, while preference for safety maylead to lower asset yields.

We can argue for multiple re-rating on more liquidity. Yet this overlooks the realityof a weak underlying economy (hence the need for liquidity) and declining margins.

Reiterate Underperform.

We rate Chinese financials as Underperform. Both banking and life insurance arespread businesses. Low rates are bad for everyone.

For banks, the NIM impact is immediate as most repricing for loans and depositstakes place within a year.

We have two BUYs, CCB and ICBC, as they are in stronger capital positions. CMB,Bocom, and Minsheng are rated SELL. ABC and BOC are rated Underperform.