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China rate cut good for economy, bad for banks
The PBOC’s 25 basis point (bp) cut in loan and deposit bank interest rates and a 50bp reduction in the RRR (required reserve ratio) immediately boosted Chinese stock prices. Markets expect this move -- the fifth so far this year -- to invigorate economic growth by releasing about Rmb750 billion of liquidity.
But, there is a flip side. Barclays warns that bank earnings will come under increasing pressure.
“The banking sector’s earnings growth has slowed to 2% in 1H15 on narrowing NIM [net interest margins] and higher credit charges. We see further pressure on NIM as well as earnings growth upon the rate cut and abundant liquidity in the banking system,” Barclays research team write in a note.
“2009 was the last time China aggressively cut [rates] to stabilize the economy, and banking sector earnings dropped from 31% in 2008 to 15% in 2009. In addition, during this round of rate cuts which started from Nov 2014, sector profit growth slowed to 2% in 1H15 from 10% in 2014 on narrowing NIM as well as higher credit charges. With the recent loosening measures from the PBOC, we see further earnings pressure on China banks.”
Photo: Stephen Chipp