China Banks:Removal of LDR restriction to marginally benefit

Long-expected removal of 75% cap on LDR

    The State Council announced late yesterday on its website that the 75% cap on LDR of China’s commercial banks is approved to be removed, which has been widely expected by the market. We expect CBRC to adopt liquidity coverage ratio (LCR) as a better monitor on banks’ liquidity in the future. We believe the State Council aims to release more bank lending, particularly for those joint-stock banks with higher than 75% LDR, to provide more support for China’s economic growth. We reckon that SMEs and agriculture-related business are likely to be among the largest beneficiaries.

    Positive for China banks, albeit marginally

    We view this as positive for the sector since the removal of the cap on LDR should release more lending capacity for China banks, particularly for those with higher LDR levels such as BOCOM, CITIC Bank and Minsheng. However, we think the impact should be rather limited given that currently most China banks do not see tight liquidity and the major restrictions on bank lending come from PBOC’s loan quota as well as weakening demand.

    Catalystsand Valuation

    Further loosening monetary policiesas well as potentiallyfavorablefiscal policies including extended local governmentdebt replacement plan could be positive catalysts for the share prices.Trading at 1.04x FY15E P/B and 6.73x FY15E P/E, we believe the sector’s current valuation is attractive compared to historical average of 1.25x P/B and 7.16x P/E. Remain cautiouslypositive on the sector and reiterate OVERWEIGHT rating with BOC amongour top pickstocks.