Latest rate liberalisation step is good news
Delay in deposit rate liberalisation should lead to positive earnings revisions
NIM impact since June 2012’s rate liberalisation step has also been much less than feared
We look for Chinese banking shares to rebound in 2H13; top picks are ABC (1288.HK) and CCB (939.HK)
New step in rate liberalisation. PBOC took another step in liberalizing China’s interest rates. Latest moves include:
i) Removing the lending rate floors for Rmb loans, which were previously set at 30% below benchmark lending rates. The exception is mortgages, which are still subject to a mortgage rate floor.
ii) Removing maximum lending rate caps for rural cooperatives.
iii) Bill discounting rates will be fully market driven
No change to deposit rates. The market predominantly believed both deposit and lending rates would be liberalized in this step. However, we began to hear more support for leaving the deposit side unchanged in late June, leading us to flag this possibility in our “Approaching inflection point” report on 4 July. We believe policy makers are concerned with potential hot money inflows if the interest rate gap between Rmb vs. HKD/USD is further widened by lifting maximum Rmb deposit rates. We are also not convinced regulators want to hike deposit rates to curb wealth management products. The non-standard products which pose credit and liquidity risks for the banks offer much higher returns than deposits, thus raising deposit rates would not help much.
Upside potential for earnings estimates. Our FY13-14F earnings estimates have factored in another step in deposit rate liberalisation in 2H13. We believe this is also true for consensus estimates. Our estimates now factor in 12bps NIM compression in 2013 and 11bps in 2014, which seem overly steep without deposit rate changes. We look for 3-4% upside for consensus estimates as NIM outlook continues to be better than forecast.
Very few loans are made at or near lending rate floor. Taking away the lending rate floor theoretically sounds bad for banks. However, only 11% of loans are made below the benchmark rate. Moreover, very few of those loans were made at or close to the floor rate of 4.2%. The 1 year China sovereign bond rate is 3.5%, and very few companies can command such a small credit spread over the sovereign rate. Those that can are encouraged to tap the growing bond market.
Last year’s liberalisation impact is less than feared. When deposit rates and lending rates were liberalized in a bigger step back in June 2012, the market feared the NIM impact would be substantial. So far, the NIM impact has been muted at 4bps, if we compare the sector’s 1Q13 NIM vs. 2Q12. This is excluding Minsheng Bank, which had abnormal NIM dilution from growing its interbank business rapidly. Thus banks seem to be weathering liberalisation much better than anticipated, and concerns about structural NIM and ROE declines in the longer run should lessen. Higher NIMs also help the banks’ pre-provision operating margins, which currently equal to 3.0-4.4% of the banks’ loan books. This implies the banks can write off 300 to 440bps in NPL per year before becoming loss making.
Looking for a sector rebound in 2H13. We believe Chinese banks are at an inflection point again, similar to September 2012. Bank exposures to various concerned areas are not as large as feared, and we do not see a severe decline in bank profitability in the near term. Dilution risk is very minimal given ample buffers against NPLs from excess provisions and high pre-provision operating profit margins. We look for an increase in better news flow for the sector in 2H13, starting with this slower pace of deposit rate liberalisation. We also expect 2Q13 NIM and NPL trends, due in late August, to be reassuring for the market. Lastly, we expect domestic consumption growth levels will be higher towards the end of this year to lift confidence for China’s macro outlook. The distortion from the anti-corruption campaign will be less on year on year growth levels by year end. We favor large banks as safer picks, with ABC and CCB as our top picks.
Source/Extract/Excerpts/来源/转贴/摘录: DBS Vickers Research
Publish date: 22/07/13