100bp RRR cut in China proves further monetary loosening

The cut is the second in 2015.

The PBoC announced another 100bp RRR cut, which became effective 20 April 2015, the second RRR cut this year, with the first taking place in February 2015.

According to a research note from CCB International, the 1ppt cut will release RMB1.25t into the banking system.

RRR is still at a historical high level in order to absorb strong capital inflows, said the note, and that there is still considerable room for RRR cuts as the PBoC’s forex position is now weakening.

Here's more from CCB International:

Smaller banks to benefit more - In general, we believe China’s smaller banks will benefit more from the RRR cut due to their higher LDR constraint and tighter balance sheets.

We estimate the positive impact to bank FY15 earnings is around 0.4-0.9%, assuming that the liquidity released from the statutory reserve is directed towards interbank business.

The positive impact to CRCB and BCQ earnings is 0.9%, higher than peers due to the higher risk appetite for interbank business.

Meanwhile, there will be an extra 50bp RRR cut to state-owned banks and nationwide joint-stock banks that are active in rural or SME lending.

Bank shares rally likely to sustain - We believe this most recent RRR cut will improve investor sentiment towards the China banks.

Recent strong share price performance by the China banks is likely to sustain in the current monetary loosening cycle due to the perceived improvement in asset quality.

In the liquidity driven rally, we prefer the smaller banks, particularly CMB due to its rising strength in corporate banking and interbank business and CITIC Bank, which we view as a valuation laggard with conservative provisioning.