New deposit-stabilisation rules restrict window-dressing of deposits in Chinese banks

H-share banks to benefit from rules.

For banks to avoid window-dressing deposit balances, MOF, PBOC and CBRC jointly announced Document 236 recently, to monitor the month-end deposit deviation of banks.

According to a research note from Maybank Kim Eng, Chinese banks are no longer allowed to set deposit-taking quotas or solely use their market share of deposits as KPI for staff.

Further, they are not allowed to window-dress their month-end deposit balances by offering higher-than-regulated deposit rates; offering cash rebates or gifts to depositors; and hiring third parties to take deposits.

Also, they are not allowed to window-dress their month-end deposit balances by delaying the repayment of deposits; agreeing with borrowers to convert their loans into temporary deposits; designing wealth-management products (WMPs) so that they mature before month-end; and classifying deposits from financial institutions (eg finance companies) as corporate deposits.

Here's more from Maybank Kim Eng:

Measurement of month-end deposit deviation. To implement the new rules, CBRC will request banks to report their month-end deposit deviations from Sep 2014 onwards.

This is to measure the deviation of their month-end deposit balances from their daily average balances.

If their deviation in a month is above 3%, their new businesses will not be approved (eg issue of WMPs, opening of outlets) for the next three months.

If their deviation is above 4%, CBRC will halt certain of their businesses, including the growth of assets with maturity of more than 90 days, for the next three months.

Based on our conservative estimation of daily average deposits, the deposit deviation of Chinese banks likely exceeded 4% in Mar 2014 and Jun 2014.

Banks may take expensive negotiated deposits to boost their monthly average balances or reduce their month-end deposit balances to lower their deviation, depending on their loan-deposit (L/D) ratios.

H-share banks to benefit from new rules. Due to their low L/D ratios in Jun 2014, we expect H-share banks, except for BOCOM and CCB, to meet the deviation rule, through lower deposit balances.

This will lower their interest expense. ABC, BOCQ and CQRB should be key beneficiaries of the rule.

What’s Our View. Maintain OVERWEIGHT. We see a 6-16% EPS CAGR for H-share banks in 2013-16, under our conservative assumptions for NPLs and provisions. Dividend payouts should be sustainable in 2014-16.