The Impact on Banking by New Quantitative Easing Monetary Policy of China

Date: 2015-10-30

The central bank of China lowered its benchmark interest rate 25 basis points, this was the sixth rate cut in the past 12 months (the first interest rate cut circulation since November 24th 2014). At the same time they also cancelled deposit interest rate cap between commercial banks and rural financial cooperatives. Now the interest rate deregulation in China has been basically completed.

We studied the impact on the banking by Quantitative Easing Monetary Policy, along with worries about asset quality risk and valuation of discount rate, our point of view becomes somewhat cautious that H shares Banks remain further going upward, targets of the sector is still valued at 0.85 times of price to book ratio, currently, they are traded in 0.76 times of price to book ratio. 

There are still some concerns:

One. The quality of asset will be little improvements. Even though the benchmark interest rate was cut several times already, the quality of asset would be deteriorating continually. 

Two. After the benchmark interest rates are applicable to the loan pricing, in 2016, the net interest margin will be slightly lower than market expectations. Meanwhile, the more difficult in low cost financing of banking will occur. 
Estimated in the first half year of 2016 the net interest margin is expected to drop to 2.26 from 2.51% in the first half of the year in 2015.

Three. Limitation of further interest rate cut. There is a possibility of lowering RRR (Reserve Requirement Ratio), but mainly in order to against capital outflows. The tools of spurring the economy growth are getting less in the future, if the economy will not recover, the risk of premium shares of bank are likely to rise.

Four. Over last two months, the shares of bank bounce back 16% from the 0.65 times of price to book ratio, which was the lowest price. Currently, the long term price to book ratio was 0.76 times, though the price to book ratio reached one times in April, whereas the economy growth was weaker than expectation, there have a suspicion that the upbeat valuation may not occur again. 

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