We see enhanced credit support in a more precise manner through PBoC’s 1ppt targeted RRR cut for mid & small banks and lower interest rate for ER (excess reserve) for all financial institutions.
- RRR cut of 1ppt for mid & small banks. PBoC will lower RRR by 1.0ppt (0.5ppt each on 15 Apr and 15 May) to 6% for rural commercial banks, rural credit cooperatives, and village banks etc. According to the central bank’s statement, this will release RMB400bn long-term funding and reduce bank’s annual interest expenses by RMB6bn. Lower RRR will improve smaller banks’ funding strength and lending capacity, especially to MSEs and industries affected by COVID-19. It will also facilitate LPR decline, despite less likelihood for benchmark deposit rate cut in near term (PBoC’s deputy governor indicated on 3 Apr multiple factors still need to be assessed before cutting benchmark deposit rate).
- Why target at rural banks? 1) Rural banks have extensive and direct reach to MSEs, which are vulnerable to macro downturn and have imminent financing needs; 2) Regional small banks tend to face greater difficulties in deposit growth and bear higher funding cost vs large peers; 3) RRR cut will reduce potential liquidity and credit risks for smaller banks. We note that the spread of NCD issuance rates between large and small banks have widened in 1Q20.
- Interest rate cut for ER will facilitate govt bond financing. China banks’ ERR (excess reserve ratio) has been declining since 2000, mainly due to improving efficiency in payment and settlement systems, and enhanced liquidity management ability of banks. However, 2.4% ERR as of 4Q19 was the peak in recent four years, implying banks’ reluctance to extend credit in full force. Together with RRR cut, PBoC plans to lower interest rate on ER to 0.35% from current 0.72% on 7 Apr, aiming to promote the efficiency of funding usage. Recall that the last ER rate cut was in late 2008 during GFC, and banks’ ERR fell to 1.55% in 2Q09 from 5.11% in 4Q08. This time around, we believe banks would deploy parts of ER to govt bonds, which have decent liquidity and little credit risk. It echoes authorities’ initiative to kick off special treasury issuance and expand the scale for local govt special bond. Based on our estimate, reducing ERR to 1% and investing freed-up capital in govt bonds would boost FY20E NIM by 1bp and lift earrings by 0.8% for banks under our coverage.
