Despite not a market consensus now, we believe PBoC may consider cutting benchmark deposit rate to offer banks greater incentive to lower lending rate and support the real economy after COVID-19’s outbreak. Our sensitivity analysis indicates 10bp cut in time deposit rate and 5bp cut in demand deposit rate could lift sector’s FY20E NIM and earnings by 5.5bp and 2.0%, respectively.
- Deposit cost is the key determinant for total liability cost. Banks’ lending rate depends on four major variables, including liability cost, operating expense, credit cost, and required margin. The latter three are largely attributable to individual banks’ business nature, hence unlikely to change in short term. Liability cost, consisting of deposit, interbank, and debt funding cost, varies with central bank’s monetary policy. As of 1H19, our covered banks’ average interbank and debt funding costs retreated 33bp and 41bp YoY, but deposit cost climbed 20bp YoY, leading to 9bp YoY hike in total liability cost. The cost of deposit, which amounted to 77% of banks’ total liabilities, appeared to be the swing factor for overall liability cost.
- What could trigger a benchmark deposit rate cut? Given potential economic downturn and government’s intention to boost credit support, there is higher probability for PBoC to cut benchmark deposit rate, which should bring down loan rate in a more direct and effective way (vs MLF/reverse repo rate cut). Possible triggers include: 1) COVID-19’s outbreak turns out to be longer than expected, and overhang in GDP growth lasts into 2Q20; 2) real lending rate stays resilient even after series of LPR cut; and 3) banks suffer from significant NIM contraction and NPL rebound in 1Q20.
- Possible rate cut scenario and earnings sensitivity. We set out two scenarios: 1) 10bp cut in time deposit rate, and 2) 10bp cut in time deposit rate and 5bp cut in demand deposit rate, should PBoC targets for more immediate effect. Based on our analysis, Scenario-1 will lift FY20E sector NIM by 3.9bp and earnings by 1.4%. Scenario-2 will magnify the impact to 5.5bp NIM expansion and 2.0% earnings upside. The big banks would fare better as their deposits accounted for greater proportion of total liabilities. PSBC (1658 HK) is a key beneficiary, while CITICB (998 HK) and MSB (1988 HK) will see least positive impact.
