On August 20, the first quotation after the reform of the loan market prime rate (LPR) formation mechanism was born. The People's Bank of China authorized the National Interbank Funding Center to announce that the loan market quoted interest rate (LPR) on August 20, 2019 was: 1-year LPR was 4.25% (previously 4.31%), and 5-year and above LPR was 4.85%. This also means that the 1-year LPR interest rate after the reform has ushered in a long-awaited reduction. Previously, the LPR quotation was linked to the 1-year loan benchmark interest rate. Due to the lack of flexibility, it stayed sideways at 4.31% for 16 months (the 1-year loan benchmark interest rate was 4.35%). Industry insiders judge that changes in LPR will be more flexible in the future. However, from the perspective of the reform mechanism, if other existing conditions remain unchanged, the LPR will not be lowered too much than before.

Does not constitute a substantial interest rate cut

It is understood that my country's original LPR formation mechanism is mainly based on the official loan benchmark interest rate, and is only applicable to short-term loans of less than one year in terms of terms. The marketization effect is not obvious, and it cannot play an "anchor" role well, making it difficult to reduce the financing cost burden of enterprises.

On August 16, the National Standing Committee proposed to reform and improve the loan market quotation interest rate formation mechanism. Last weekend, the central bank officially announced the new loan prime rate (LPR) formation mechanism. According to the central bank's announcement, the 18 newly established quotation banks will generate their own LPR quotations based on the medium-term lending facility (MLF) with points added in steps of 0.05 percentage points, rounded to an integer. The National Interbank Funding Center removes the highest and lowest values, takes the arithmetic average, and rounds to the nearest integer multiple of 0.05% to calculate the LPR. Since MLF's interest rate adjustments are more frequent than the central bank's benchmark, future changes in LPR will be more flexible and volatility will increase.

On August 20, the new LPR quotation method was officially implemented. Judging from the data released yesterday, this new LPR is in line with market expectations, and the new pricing benchmark has dropped slightly from the previous one. It is understood that starting yesterday, banks mainly refer to LPR pricing for newly issued loans, and use LPR as the pricing benchmark in floating-rate loan contracts.

The "Golden Securities" reporter noted that in the opinion of analysts, this does not constitute a substantial interest rate cut. According to a research report by Guotai Junan Financial Group, according to convention, the current actual bottom line of loan interest rates is 10% of the one-year loan interest rate, that is, 3.915%. With the LPR reform, LPR will be considered the new loan interest rate bottom line. Therefore, if the newly quoted LPR is not less than 3.915%, the LPR reform should not be considered an interest rate cut; on the contrary, if the LPR quoted price is lower than 3.915%, it constitutes a substantial interest rate cut.

As for whether China will lower the required reserve ratio and interest rates, Liu Guoqiang, deputy governor of the People's Bank of China, said at the State Council's regular policy briefing held on August 20 that the short term mainly depends on reform (improving the formation mechanism of the loan market quotation rate LPR). After the reform, it will depend on the situation. There is room for lowering the required reserve ratio and interest rates, but whether to lower or not will depend on economic growth and price conditions.

Mortgage interest rates will not fall

In fact, although the purpose of the LPR reform is to guide the actual interest rate of loans to decline through a market-oriented approach to reduce the financing costs of the real economy, industry insiders judge that when other existing conditions remain unchanged, the LPR will not be reduced too much compared to before, and accordingly, the reduction in the actual loan interest rate will not be obvious. Many analysts also generally believe that in order to guide the LPR to continue to decline, there will be subsequent incentives to further guide interest rates downward through "new interest rate cuts" such as lowering the MLF operating interest rate.and possible.

In fact, because the decline in the 1-year LPR was basically in line with expectations, the yields on government bond futures and inter-bank spot bonds did not change much after the first quotation of the new version of LPR was announced, and the stock market reaction was also relatively muted. Xingshi Investment issued a statement on Monday stating that the new LPR formation mechanism is officially implemented, and the capital market is expected to enjoy a double boost in the numerator and denominator. On the one hand, after the reform of the LPR mechanism, the market risk-free interest rate is expected to decline, thereby promoting the improvement of corporate valuations; on the other hand, the reduction in financing costs is also expected to increase the profits of listed companies.

Ma Kunpeng, chief banking analyst at Hongyuan, also analyzed that after the LPR reform, high-quality enterprises will benefit more, and their role in reducing financing costs will be more obvious; for personal loans, since the interest rate for credit card installment repayments is usually a fixed interest rate, the LPR reform will not have an impact on it in the short term. Housing mortgage loans will depend on the pricing mechanism of the 5-year LPR, and the latter is still relatively vague at present.

In this regard, Liu Guoqiang, deputy governor of the People's Bank of China, revealed yesterday that the People's Bank of China will issue an announcement on personal housing loan interest rate policies based on full research in the near future. The new LPR formation mechanism will not reduce mortgage interest rates. The financial industry should pay attention not to deviate from the positioning of "housing is for living, not for speculation", and at the same time, avoid turning real estate into a tool.

Bank profit margin adjustment

Yesterday, bank stocks were deeply disturbed. Flush iFinD shows that the banking sector fell by 0.61% yesterday, significantly underperforming the major indexes. Only four stocks - Changshu Bank, Industrial Bank, Ping An Bank and China Merchants Bank - were in the red.

The "Golden Securities" reporter learned that the unification of loan interest rates will have a big impact on banks, involving how banks manage risks, how to adjust IT systems, etc. The differentiation of the entire industry may further intensify, and for some banks, deposit and loan interest rate spreads will be eroded in the short term. This is because, from a bank's perspective, in addition to making more reference to the MLF interest rate level in future loan quotations, liability-side costs such as deposits are very important factors in determining loan costs. At present, bank deposit interest rates are still determined on the basis of the deposit benchmark interest rate, which may bring about the effect of "asymmetric interest rate cuts."

The macro team of Ping An Securities believes that after interest rate integration, banks’ credit interest rates will decrease, deposit and loan interest rate spreads will narrow, banks may lose credit qualifications, and credit risk monitoring and pricing capabilities need to be significantly improved. Once deposit rates are market-oriented, banks' liability costs will rise as a whole, and some banks may have to raise loan rates. This stage is the period when banks are under greatest operating pressure.

The fixed income team of Huatai Securities believes that the adjustment of bank stocks as a profit-maker (the asset side changes the anchor, the liability side remains unchanged) is good for other sectors. However, the new mechanism is still in the process of exploration, and the actual impact will take time to materialize and will be limited in the short term.