Summary. As a further step to merge the duo-track interest rate systems, PBoC aims to adjust the LPR mechanism for greater marketization and guiding effect on banks’ lending rate. Despite a downward trend for LPR ahead, we see limited impact on banks’ NIM and earnings.
- Reform of LPR quotation system. On 17 Aug, the PBoC’s announced to adjust the mechanism of Loan Prime Rate (LPR), so as to improve the efficiency of interest rate transmission and lower the financing cost of real economy. Key measures include: 1) Increase no. of quotation banks to 18 from 10; 2) Reduce the quotation frequency to monthly from daily; 3) Cover more maturities by including >5-year tenor, in addition to current 1-year tenor; and 4) Change LPR’s calculation method to adding certain bps on top of MLF rate, instead of self-determined by banks.
- More market-oriented loan pricing. As the pricing of new loans will be based on LPR onwards, we expect greater flexibility and volatility for banks’ lending rate, better reflecting the movement of market rate. Also, the new LPR would be more representative after expanding the type of quotation banks. In particular, the risk-pricing ability will play a more significant role in banks’ profitability.
- All eyes on the first new LPR quotation. According to the announcement, new LPR will be released for the first time on 20 Aug. Given the short time-span for banks to figure out the reformed mechanism, the first new LPR quotation may not deviate much from previous value. However, we believe PBoC will gradually guide down LPR by lowering MLF rate in coming months.
- Earnings impact is manageable. We believe PBoC’s move was largely in line with market expectation, as interest rate reform has been frequently talked about by authorities in the past months. Different from benchmark interest change, only newly extended rather than outstanding loans will be based on LPR, therefore the impact to banks’ NIM and profit should be mild. Banks with stronger loan pricing ability (retail-focused JSBs) and higher proportion of non-interest income would better withstand the earnings pressure, in our view. Top picks are PAB (000001 CH) and CEB (6818 HK).
