China Banks:Symmetric 25bps rate cut partially offset by 50bps RRR cut

25bps rate cut along with full interest rate liberalization:neutral for FY15E while slightly weighs on FY16E.

    We think PBOC’s symmetric rate cut of 25bps on both lending and depositrates aims to further reduce the financing cost for enterprises and thus, inturn, supports China’s economic growth. We believe the rate cut shouldhave limited impact on H-share China banks’ NIM and NPAT in FY15E.

    Although PBOC completely removed the ceiling for deposit rate of all tenors,we believe banks would not float their deposit rates to a higher premium tobenchmark, judging from the deposit rates conducted by China banksfollowing the removal of deposit rate ceiling for those with over 1-year tenor.

    That said, we reckon that this round of rate cut should have negative impacton H-share China banks’ NIM in FY16E - likely to narrow by 15-20bps YoY,more than our previous expectation of 14bps YoY compression in FY16E.

    50bps RRR cut to release liquidity for banking system.

    We estimate the 50bps general RRR cut together with further 50bps RRRcut for eligible financial institutions to support agriculture related businessand SME business should release more than RMB669 bn liquidity forbanking industry, which is estimated to increase FY15E NPAT by 0.10-0.16% for H-share China banks.

    Overall neutral impact on H-share China banks.

    Overall, we see PBOC’s move as neutral for H-share China banks as, onone hand, the negative impact from the rate cut and the removal of thedeposit rate ceilings should be partially offset by the positive impact fromRRR cut, and on the other hand, the lower interest rate should help toreduce the financing cost for enterprises and thus relieves asset quality