[ET Net News Agency, 8 March 2018] The China Banking Regulatory Commission (CBRC) last
week issued a note officially lowering the minimum requirements on banks' NPL coverage
ratio and LRR (Loan Reserve Ratio) from 150% and 2.5% to 120-150% and 1.5-2.5%
respectively.
BofA Merrill Lynch said the bulls may see this as a measure to allow banks to reduce
provisions and boost earnings, which would appear to be good news.
However, it said that CBRC's provisioning measures have been counter-cyclical, ie, the
regulator should tighten provision requirements in an up-cycle of the economy, and lower
the requirements in a down-cycle.
In light of the recent regulatory statement on continued financial deleveraging, this
may actually be a measure in anticipation for the potential rebound in NPL ratios and
formations, to facilitate the deepening of deleveraging. It may also reflect central
government's intention to push for more accurate NPL reporting, similar to the push for
more accurate GDP reporting, which resulted in sharp reduction in GDP numbers in several
local governments, the research house noted.
As such, BofAML expects to see NPL ratios and formation rebound in the system this year,
which could be a negative surprise to the market. (KL)