Chinese central bank's RRR cut raises banks' asset yields: analysts

Higher asset yields will relieve pressure on profitability.

The People’s Bank of China’s (PBOC) decision to slash the reserve requirement ratio (RRR) by 50-100bp will allow affected banks to hold less cash in reserve and increase asset yields, according to a Moody’s report.

The RRR will now be 11% for large banks and 9% for joint-stock commercial banks with the PBOC paying 1.62% interest on required reserves and 0.72% on excess reserves. Higher asset yields will alleviate pressure on profitability which has been burdened by lower lending rates.

The funding will support primarily micro and small businesses with credit lines under $1.4m (RMB10m), individuals affected by COVID-19, start-up guarantee and self-employed loans, analysts Yan Li and Minyan Liu said. However, inclusive financing poses higher asset risk than other types of lending, they added.

“According to the China Banking and Insurance Regulatory Committee, the nonperforming loan ratio of inclusive financing was 3.56% as of 30 September 2019 compared with an average of 1.86% for all bank loans. Early bank intervention and support in the inclusive financing sector will help alleviate the formation of distressed loans amid the outbreak, but the credit risk from incremental lendings will become a new concern,” analysts said.

The PBOC still has room for future monetary policy easing since interest rates and RRRs can be lowered further and it also has other measures to implement policy changes, they noted.

For example, the relending loans initiative 2 will bring banks incremental interest income but could affect profits. The interest spread of the PBOC relending loans is up to 150bp, lower than banks' net interest margin of 2-3%. The average lending rate of the PBOC's first batch of relending loans was 2.56% as of 13 March, with an outstanding amount of $26b (RMB184b), they concluded.

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