On May 20, the interbank lending center announced the latest quoted interest rate of LPR. The one-year LPR interest rate was 3.7%, unchanged from the previous month without adjustment; The five-year LPR interest rate was 4.45%, down 15bps from the previous period, the largest decline since the LPR reform in August 2019. The 5-year LPR was reduced by 15bps, which exceeded the market expectation, reflecting that the monetary policy strengthened the countercyclical regulation and released a stronger signal of “stable growth”. However, we believe that the sharp reduction of the five-year LPR is also “reasonable”. On the one hand, LPR is formed by the addition of MLF interest rate. Affected by MLF interest rate and bank debt cost, although the MLF operating interest rate remained unchanged on May 16, the early RRR reduction, interest rate reduction and deposit interest rate marketization reform significantly reduced the bank’s debt end cost and created space for the sharp reduction of LPR. On the other hand, the disturbance of the epidemic and the downward pressure on the economy still exist, and the market is generally pessimistic about the annual economic growth. The five-year LPR directly affects the medium and long-term credit demand of real enterprises. Reducing the five-year LPR will help stimulate the financing demand of real enterprises. In addition, in terms of real estate, residential housing loans decreased by 60.5 billion in April, an increase of 402.2 billion year-on-year. The fundamentals of real estate have not yet reversed. The five-year LPR reduction, combined with the central bank’s reduction of the lower limit of residents’ first housing loan interest rate on May 15, reflects the determination of supervision to stabilize the real estate market. With the gradual emergence of the boosting effect of real estate policies, the real estate market is expected to find the bottom in the next few months.
The purpose of LPR adjustment and reduction is to promote the recovery of real financing demand, and the countercyclical regulation is expected to continue to increase. From the financial data in April, the epidemic has had a great impact on credit demand, the financing demand of residents and enterprises is weak, and “stabilizing credit” still needs greater easing. The sharp reduction of the five-year LPR interest rate will help promote the repair of the financing needs of real enterprises. It is an important implementation of macro policy requirements such as “moving forward”, “active response” and “increasing support for the real economy”. Looking forward to the follow-up, considering the clear attitude towards steady growth at the policy level and the downward pressure on the economy, we expect that the central bank will continue to strengthen monetary, credit and other policy adjustments, and there is still policy space for steady growth in the future.
The cost on the liability side is falling ahead, and the negative impact of LPR reduction on bank profits is expected to be limited. Looking back from history, the reduction of LPR will drag down the performance of banks’ interest margin. Based on the static calculation of 2021 data, this 5-year LPR reduction will have an impact on the 23-year net interest margin of listed banks of about 2.5bps and an impact on interest income of about 0.6%. However, it should be noted that since April, the central bank has effectively reduced the debt cost of banks by reducing the reserve requirement and establishing a market-oriented adjustment mechanism of deposit interest rate. According to the data in the 22q1 monetary policy implementation report of the central bank, the weighted average interest rate of new deposits in financial institutions across the country in the last week of April was 2.37%, down 10 basis points from the previous week, The decrease of debt side cost helps to reduce the pressure on bank interest margin caused by LPR reduction. Therefore, we believe that the actual negative impact of LPR reduction on bank profits is limited.
The sharp reduction of the five-year LPR released a strong signal of “steady growth”. Combined with the recent positive statements of supervision, it can be predicted that the policy strength is expected to be further improved under the pressure of steady growth in the second quarter, continue to increase the underlying economy and repair the extremely pessimistic expectations of the market. As of May 20, the static Pb valuation level of the banking sector was only 0.59x, still at an all-time low. We are still optimistic about the opportunity to maintain the “stable growth” of the industry in the second half of the year, and we are still optimistic about the “stable development” of the bank’s valuation in the second half of the year.
In terms of individual stocks, it is suggested to pay attention to: 1) value targets with excellent profitability and leading asset quality represented by China Merchants Bank Co.Ltd(600036) ( China Merchants Bank Co.Ltd(600036) , not rated) and Bank Of Ningbo Co.Ltd(002142) ( Bank Of Ningbo Co.Ltd(002142) , not rated); 2) Undervalued targets represented by Industrial Bank Co.Ltd(601166) ( Industrial Bank Co.Ltd(601166) , not rated) and Postal Savings Bank Of China Co.Ltd(601658) ( Postal Savings Bank Of China Co.Ltd(601658) , buy); 3) Urban rural commercial banks with strong regional economic advantages represented by Bank Of Jiangsu Co.Ltd(600919) ( Bank Of Jiangsu Co.Ltd(600919) , buy), Shanghai Rural Commercial Bank Co.Ltd(601825) ( Shanghai Rural Commercial Bank Co.Ltd(601825) , not rated), Bank Of Chengdu Co.Ltd(601838) ( Bank Of Chengdu Co.Ltd(601838) , not rated), Bank Of Nanjing Co.Ltd(601009) ( Bank Of Nanjing Co.Ltd(601009) , not rated).
Risk tips
The economic downturn exceeded expectations, resulting in higher than expected pressure on the asset quality of the industry; The liquidity risk of real estate enterprises continues to spread, disturbing the asset quality of banks; The duration and coverage of the epidemic exceeded expectations; Changes in assumptions affect the calculation results.
