New loans in China banks climb to RMB1.02t

Strong corporate demand's a factor.

February new loans involving China banks came to RMB1.02t, much higher than the consensus figure of RMB750b thanks mainly to strong corporate short-term and MLT loans.

According to a research note from CCB International, off-balance sheet lending is still weak as new trust loans are at a low level, while non-discounted bank bills continue to shrink.

Meanwhile, entrusted loans remain low despite a modest RMB130b recovery.

Here's more from CCB International:

LGFV debt swap fundamentally positive - China’s Ministry of Finance will release details of local government bond issuances totaling RMB1t intended as a swap for existing LGFV debt.

Municipal bond issuance is a more appropriate mechanism than bank loans for financing public projects because its transparency enhances local government fiscal discipline and its funding cost is lower than that of banking loans. We believe local government bonds could prove to be a long-term remedy to LGFV issues and, therefore, positive to the asset quality of the banks.

Accelerating pace of reform - We see mounting signs that the pace of reform in China is accelerating, including amendments to commercial banking law (regarding LDR and business scope) and relaxation of the ceiling deposit rate.

We believe allowing banks to conduct brokerage business will be positive to earnings even if the impact is not significant. Further liberalization of deposit rates will reduce NIM, though the impact may diminish over time as most bank deposit pricing is currently below the 1.3x benchmark. City commercial banks are much more likely to be hurt than stateowned and nationwide joint-stock banks.

Bank shares to benefit from monetary loosening - There is growing market speculation that further rate and RRR cuts are necessary to stabilize the economic growth. These measures would be positive to the asset quality and balance sheet liquidity of the banks and may even lead to a share price rally.

Relief in LGFV loan quality pressures and a further relaxation in LDR will benefit smaller banks more due to a more risky loan mix and tighter balance sheet liquidity.