Supervision encourages orderly reduction of the provision rate and dredges wide credit channels. On April 13, the national Standing Committee proposed to “encourage large banks with high provision level to reduce the provision coverage in an orderly manner”. On April 15, the China Banking and Insurance Regulatory Commission said that large banks and other high-quality listed banks with high provisions are encouraged to gradually return the actual provision coverage to a reasonable level.
At present, the bank’s provision coverage is at a high level and there is room for reduction. The provision coverage ratio is the ratio of loan loss reserves to non-performing loans, and the regulatory provisions shall not be less than 120% – 150%. However, many banks make excessive provision for the purpose of active risk prevention and adjusting current profits.
From the perspective of the industry as a whole, in recent years, the coverage rate of bank provision ratio in 20162022q1 has steadily increased from 176.4% to 199.5%, about 50 percentage points higher than the regulatory standard of 150%. By the end of 2021, the provision coverage rates of state-owned banks, joint-stock banks, urban commercial banks, private banks, rural commercial banks and foreign-funded banks were 239.22%, 206.31%, 188.71%, 335.90%, 129.48% and 362.75% respectively. The provision coverage rates of state-owned banks and joint-stock banks exceeded 200%, so there is a lot of room for pressure drop.
From the annual reports of listed banks, according to the 26 banks that disclosed the annual reports of 2021, the provision coverage rate of 17 banks exceeded 200%, Changshu, Ningbo, China Merchants, Zhangjiagang, Suzhou, Postal Savings Bank Of China Co.Ltd(601658) ranked among the top, and the provision coverage rate exceeded 400%.
Internationally, sun Tianqi, director of the financial stability bureau of the central bank, disclosed at the Bank Of China Limited(601988) industry high quality development forum that as of June 2021, the overall provision coverage of global systemically important banks (g-sibs) in the United States was 245.7% and that in Europe was 67.6%. However, due to the differences in financing systems and the caliber of non-performing assets among economies, no international consensus has been reached on the reasonable range of provision rate.
How to reduce the bank reserve ratio?
First, from the perspective of scope, state-owned banks and high-quality joint-stock banks have wide coverage and strong credit derivation ability, which may be included in the scope of pressure drop.
Second, from the perspective of strength, according to the data of 2021, if the provision rate of state-owned banks and joint-stock banks is reduced to 200%, 170%, 150% and 120%, a total of 0.47, 0.96, 1.28 and 1.77 trillion yuan will be released. We believe that 170% – 200% is a reasonable space for market-oriented reduction. It is estimated that the loan provision reserve of 0.47-0.96 trillion yuan will be released. If 70% is included in the capital, it can supplement the capital of 0.33-0.67 trillion yuan, and then press 10 times the leverage to pry the credit of 3.3-6.7 trillion yuan. If the regulation intends to reduce the pressure, it is expected that the provision rate will fall to the current regulatory bottom line of 120% – 150%, supplement the capital of 0.90-1.24 trillion yuan, and leverage the credit scale of about 10 trillion yuan.
Third, from the perspective of rhythm, it should be a long-term process from reducing the provision rate to the formation of credit. We should consider not only the policy intention, but also the bank’s willingness to lend and the financing needs of market subjects. However, considering the current pressure on steady growth and the forward force, it is expected that the provision provision will decline in the first quarter or semi annual report.
Influence geometry? At the level of real economy, the policy aims to encourage banks to strengthen credit derivation, financial institutions to transfer profits to the real economy, accelerate the implementation of wide credit, guide the flow of funds to small and medium-sized enterprises and weak areas, and increase support for the real economy. At the bank level, it will reduce the risk cost of the bank, alleviate the pressure on the liability side, turn the provision for pressure drop into profit in the short term, form supplementary capital after deducting dividends, release the profit space of the bank and enhance the capital adequacy ratio of the bank.
Which banks will benefit? It is suggested to pay attention to banks with high provision and high asset quality. Main reasons: 1) steady growth is expected to rise and improve the overall risk appetite and valuation of the banking industry; 2) The asset side benefits from the release of real estate risks, and some banks deeply involved in real estate business will face a dilemma reversal; 3) The liability side benefits from regulatory guidance and reduces the cost of bank liabilities. Focus on Postal Savings Bank Of China Co.Ltd(601658) , China Merchants Bank Co.Ltd(600036) , Industrial Bank Co.Ltd(601166) , Ping An Bank Co.Ltd(000001) , Bank Of Ningbo Co.Ltd(002142) , Bank Of Chongqing Co.Ltd(601963) , Jiangsu Changshu Rural Commercial Bank Co.Ltd(601128) .
Risk tip: steady growth is less than expected, real estate has a hard landing, and the impact of policies is insufficient.
