Chinese regulator's MSE loans buy won't help regional banks' capital

But ChongQing Rural Commercial Bank and Bank of ChongQing will slightly benefit.

The Chinese central bank’s plans to purchase micro and small enterprises (MSE) loans from regional banks is likely to do little to help the latter’s capital, according to a report by Jefferies Equity Research.

The People’s Bank of China (PBOC) announced that it will purchase RMB400b worth of MSE loans from qualified regional banks for one year. The plan is to lower the funding cost for MSE credit loans by purchasing 40% of such loans. The regulator also urged banks to delay more loan payments to March 2021.

Whilst this move will lower funding cost for qualified loans, it will not help capital as the purchased loans are likely to stay on commercial banks’ risk weighted assets (RWA). Further, the PBOC stated that all interest and risks are still borne by the regional banks.

Therefore, the purchase is more like an interest subsidy—that is, a targeted re-lending tool with zero interest rate, or a targeted RRR cut, but not to help regional banks’ capital, according to Jefferies analysts Shujin Chen and Alfred He.

However, introducing this tool signals limited further targeted RRR cuts for regional banks from their current 5-9%.

Of the banks, ChongQing Rural Commercial Bank and Bank of ChongQing should slightly benefit from the move, as their net interest margins and operating income can be boosted by <5 basis points (bp) and <2%, respectively.