Banks-China:New stimulus measures on lending and impact on banks

The State Council introduced new measures on lending.

    The State Council introduced new measures on lending in order to lower borrowers’funding costs. We regard the measures as another stimulus movement to boost theeconomy and to achieve this year’s GDP growth target at ~7.5%. Overall, we thinkthe measures are positive to near-term GDP growth, but neutral on banks (positivein funding costs, but negative in fee income and long-term asset quality). Here areour takeaways from the key measures:1) More support to agriculture sector and SMEs via re-lending: similar toPBOC’s targeted RRR cut and CBRC’s LDR calculation changes, the State Councilstresses on the support to agriculture sector and SMEs. The central governmentrequires financial institutions to increase re-lending to the targeted sectors, whichwe believe PBOC, policy banks and commercial banks would follow. The increasingre-lending size could further loose liquidity and potentially accelerate credit growth.

    2) To control the funding costs of financial institutions.

    3) WMPs should be directly invested in real economy: both terms target toremove current complicated funding tiers in financial institutions and to lower bothfinancial institutions’ and borrowers’ funding costs. This should be positive to theeconomy, but the details of implementation would be in question and the effect isless likely to show in short-term.

    4) To call off improper fee charges on borrowers and other clients: this isanother measure to lower borrowers’ funding costs, however, it is negative to banksas fee income could potential decline, similar to what happened in the past 3 yearswhen NDRC required banks to call off some fee charge items.

    5) To improve SME lending: the State Council requires banks to improve SMElending management, including pre-approval for new lending after maturity,revolving SME loans. And the requirement on SME loans should be different fromother loans. We believe the measure targets to avoid SME default cases in currenteconomy by providing liquidity and regulators would allow higher SME NPL ratios toencourage banks to grant SME loans.

    6) To allow private capital to set up mid/small banks to support SMEs.

    7) To develop direct financing and multi-tier capital market: one major way is toincrease SME bond issuance and size.

    8) To improve commercial banks assessment system and weaken the stresson profit growth and asset size expansion.

    9) To develop government backed guarantee institutions and SME lendingrelated insurance products.

    10) To further push interest rate deregulation.