[ET Net News Agency, 27 June 2018] HSBC Global Research said the Reserve Requirement
Ratio (RRR) has been cut three times year-to-date by the People's Bank of China and
regulators' intention to reduce reliance on RRR as a policy tool looks clear.
The research house added investors should be prepared for further RRR cuts as even ten
further cuts of 50bp each is not improbable mid-to-long term. Cutting the RRR by 500bp
will increase HQLA by c.20-40% raise LCR by c.20-50ppts. For banks that have sufficient
capital, the released liquidity can be deployed to higher yielding credit assets and
contribute to revenue and profit. For banks that face liquidity tightness, RRR cuts may
have significant secondary benefit by lowering interbank rates and easing the pressure on
deposit competition.
While all banks should theoretically benefit from RRR cuts, HSBC believes Group 1 large
state-owned banks and Group 5 corporate-focused banks are likely to benefit more
operationally than Group 3 rural state-owned banks. Group 1 banks have strong capital
ratios which enable them to deploy released liquidity effectively to generate profit;
Group 5 banks could face reduced concern on liquidity shortage, valuation discount vs
peers may narrow. That said, Group 3 banks may benefit less as the banks larger-than-peers
exposure to interbank assets may yield less upon easing interbank liquidity.
HSBC reiterates preference on Bank of China (03988) as near-term outperformer and China
Construction Bank (00939) as a structural preferred pick. (HL)