However, in recent days, as the mainland central government has implemented a number of measures such as raising interest rates, raising deposit reserve requirement ratio (RRR), introducing new banking regulatory standards and dealing with local government debts etc, Chinese domestic banks are facing impacts on their financial balanced sheets as well as stock price performance.
Analyzing China Banking Industry
In order to tighten monetary liquidity, the People's Bank of China (PBoC) has started raising interest rates since October last year, in an asymmetry way that the increase in time-deposit rates has normally been larger than that in lending rates, and the increase in lending rates has been far larger than that in saving deposit rates. Therefore it is normally expected that the current cycle of interest rate hikes should favor those Chinese banks with higher proportion of saving deposit. Among different mainland banks, Agricultural Bank of China (ABC stock codes: 601288.SH for A-shares; 1288.HK for H-shares) has the highest proportion of saving deposit (over 57% in 2010), followed by China Merchants Bank (CMB stock codes: 600036.SH for A-shares; 3968.HK for H-shares) and China Construction Bank (CCB stock codes: 601939.SH for A-shares; 939.HK for H-shares) which have over 56%. CITIC Bank (CITIC stock codes: 601998.SH for A-shares; 998.HK for H-shares), however, has the lowest proportion of saving deposit (less than 38% in 2010).
| Name of Bank | Stock Code (A-shares) | Stock Code (H-shares) | % Saving Deposit | % Loan-to-Deposit |
|---|---|---|---|---|
| Industrial and Commercial Bank of China (ICBC) | 601398.SH | 1398.HK | 51.97% | 60.93% |
| China Construction Bank (CCB) | 601939.SH | 939.HK | 56.62% | 62.47% |
| Agricultural Bank of China (ABC) | 601288.SH | 1288.HK | 57.74% | 55.77% |
| Bank of China (BOC) | 601988.SH | 3988.HK | 47.95% | 75.64% |
| Bank of Communications (BoComm) | 601328.SH | 3328.HK | 50.56% | 78% |
| China Merchants Bank (CMB) | 600036.SH | 3968.HK | 56.71% | 75.45% |
| CITIC Bank (CITIC) | 601998.SH | 998.HK | 37.21% | 73.04% |
| China MinSheng Banking Corp. (MSBC) | 600016.SH | 1988.HK | 45.95% | 74.64% |
| ChongQing Rural Commercial Bank (CQRC) | N/A | 3618.HK | 43.41% | 58.87% |
% Saving Deposit = Proportion (%) of saving deposit in total deposits
% Loan-to-Deposit = loan-to-deposit ratio (%)
In addition to interest rate hikes, the People's Bank of China (PBoC) also raised the deposit reserve requirement ratio (RRR) since November last year. RRR for large financial institutions has been increased from 17% to 21.5% in June this year, while RRR for small-and-medium-sized financial institutions has been increased from 13.5% to 18%, both increased by 4.5%. RRR hikes means Chinese banks need to put more deposits into the People's Bank of China (PBoC) as reserves. If the bank's loan-to-deposit ratio is already close to the domestic regulatory requirement of 75%, any RRR hike(s) should impact the lending capacity of that bank. Among different mainland banks, loan-to-deposit ratio of the Bank of China (BOC stock codes: 601988.SH for A-shares; 3988.HK for H-shares), Bank of Communications (BoComm stock codes: 601328.SH for A-shares; 3328.HK for H-shares), CITIC Bank, China Merchants Bank (CMB) and China MinSheng Banking Corp. (MSBC stock codes: 600016.SH for A-shares; 1988.HK for H-shares) are all over 70% in 2010 and hence should be relatively sensitive to the recent RRR hikes. In the contrary, loan-to-deposit ratio of the Agricultural Bank of China (ABC) and ChongQing Rural Commercial Bank (CQRC stock code: 3618.HK) are among the lowest (less than 60% in 2010). Loan-to-deposit ratio of the China Construction Bank (CCB) and Industrial and Commercial Bank of China (ICBC stock codes: 601398.SH for A-shares; 1398.HK for H-shares) are also kept at a relatively low level (about 60% in 2010), and thus are relatively insensitive to the RRR hikes.
Analyzing New Regulatory Policies: Impact on Small-and-medium-sized Banks
On May 3, China Banking Regulatory Commission (CBRC) issued "Guidance on Implementation of China's banking Industry New Regulatory Standards", and stated it will start implementing the new regulatory standards in 2012, as follow:
(1) The capital adequacy ratio of commercial banks shall be divided into core tier 1 capital adequacy ratio, tier 1 capital adequacy ratio and general capital adequacy ratio, with the minimum requirements at 5%, 6% and 8% respectively.
(2) The capital adequacy ratio of systemically important banks and non-systemically important banks should not be less than 11.5% and 10.5% respectively (c.f. the current capital adequacy ratio requirements of large banks and small-and-medium banks are no less than 11.5% and 10% respectively).
(3) The loan provision ratio and provision coverage ratio should not be less than 2.5% and 150% respectively. Regulatory requirements for loan provisions should be in accordance with the economic cycle, loan quality and bank profitability, with dynamic and differentiated adjustments.
(4) On top of the current liquidity risk monitoring indicators, CBRC will further introduce the liquidity coverage ratio and net stable financing ratio, in order to enhance the effectiveness of liquidity risk supervision.
Upon the implementation of the above new regulatory requirements, the current small-and-medium-sized banks will have to increase its capital adequacy ratio from 10% to 11.5% if they are included as systemically important banks, or they will have to increase its capital adequacy ratio from 10% to 10.5% if they are included as non-systemically important banks. In either case, the new regulatory standards should have a greater impact on small-and-medium-sized banks than on large-sized banks.
On the other hand, the "China Securities News" reported that the mainland regulator has started to carry out daily average assessment on loan-to-deposit ratio of Chinese commercial banks since June, in order to ensure that their daily average of loan-to-deposit ratio can comply with the regulatory requirement of 75% maximum (c.f. the original industry assessment on loan-to-deposit ratio was carried out at the end of each month and each quarter). It is expected that the move will also have a greater impact on small-and-medium-sized banks with loan-to-deposit ratio already close to 75%, as such assessment frequency should tighten the lending capability of these banks.
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