LDR loosening to benefit China's smaller banks

Meanwhile, two major adjustments are entailed.

The announcement of the CBRC regarding the loosening of LDR calculation has been seen to have a more positive impact on the liability side to the smaller banks.

According to a release from CCB International, loan quota regulations will limit the impact of LDR loosening, and that new rules will ease banks’ funding pressures and costs. Meanwhile, smaller banks like BoCom, CMB, CITIC and Minsheng, with higher LDRs, will benefit more.

The report also said that in line with the LDR loosening, two major adjustments are entailed: (1) loans supported by bonds with a tenor above 1 year are to be excluded from the LDR calculation, and (2) negotiable CDs issued to individuals and enterprises will be recognized as deposits.

Here's more from CCB International:

Non-settlement interbank deposits are not included in the adjustment, despite the fact that these changes had been widely anticipated.

The regulator’s main concern is that non-settlement interbank deposits would make it easier for banks to inflate their interbank deposits in order to bypass their LDR requirement. Bond issuances by contrast are more transparent and therefore difficult to manipulate.

Bank loan issuing capacity to be enlarged by RMB1,253b at most, in our view, equivalent to 1.6% of total loans in the banking system. It is still unclear whether or not subordinated debt and/or hybrid capital bonds will be included in the adjustment.

If they are not to be included, the loan issuing capability of the banks would only increase by RMB327.2b. No decision has been made on negotiable CDs for individuals and enterprises.

Actual impact mitigated by loan quota limits. As each bank’s loan quota is regulated by the PBOC, the impact of boosting loans is limited whether or not LDR is loosened.

However, LDR loosening would ease bank funding pressure and costs. Historically, banks have turned to negotiable deposits or capital guaranteed WMPs to solicit deposits to meet the LDR requirement. By doing so, the banks have had to bear higher funding costs.