Analysts predict a 'neutral impact'.
According to Barclays Research, the PBOC, CBRC, CSRC, CIRC and SAFE jointly issued the long-awaited interbank regulations on May 16. On the same day, the CBRC also issued a companion regulation focused on operation-level implementation at banks.
Barclays noted that it views the new rules as largely as expected and should have a neutral impact as they do not include some strict measures the market had previously speculated about, such as including non-standard credit assets (NSCA) in the LDR calculation or provisioning requirement for off-balance-sheet NSCA.
In our view, with the new rules, the regulators aim to bring the interbank business back to its original purpose as a liquidity management instrument, but also avoid a sudden credit squeeze as the rules still allow NSCA in investments.
Overall, we believe that the purpose of the new regulations is to reduce risks in banks’ credit creation activity besides traditional loans, and encourage the use of more transparent and supervised instruments, such as corporate bonds and credit asset-backed securitization bonds.
According to our estimates, implementation of the new rules could reduce banks’ tier-1 CAR ratio by 11bps (BOC) to 143bps (CRCB), if the banks need to move TBR and AMP reverse repo to investment receivables.
In addition, the prohibition of guarantee in repo and interbank investments is likely to have a tightening effect of roughly RMB1.8tn on total social financing (TSF) in the next 1-2 years, as city and rural commercial banks may no longer invest in NSCA—this could reduce their NIM.
Consequently, for joint stock banks (JSB) that used to offer NSCA investments to small banks, related fee income could be lower and they may lose some customer relationships. We maintain our preference for large banks, with Bank of China (BOC) (rated OW) as our top pick.
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