Chinese banks’ profitability can weather record cut in mortgage lending rates, analysts say

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The banks cut the five-year LPR by 15 basis points last Friday to 4.45 per cent

Banks have only cut the five-year LPR, as saving the property sector has become a new focus, Jefferies analyst says

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The People’s Bank of China building in Beijing. Last week’s LPR cut has come without a corresponding cut in the policy rate. Photo: Bloomberg

Georgina Lee

Published: 6:45pm, 23 May 2022

Chinese banks are likely to survive an unexpectedly large cut in their loan prime rate (LPR), the benchmark they use to price mortgages and long-term infrastructure loans, thanks to lower funding costs that have given them more headroom to heed Beijing’s call to support the ailing property sector, analysts said.

The banks decide the five-year LPR, which is calculated from the quotes provided by a panel of 18 banks on the 20th of each month. They cut the rate by 15 basis points last Friday to 4.45 per cent. The five-year rate is the basis on which banks price their mortgage loans. The tenor of the one-year LPR remains unchanged at 3.7 per cent.

The cut on Friday was the largest on record and the second this year after a 5 basis point cut to 4.6 per cent in January. While banks’ LPRs are guided by the central bank’s one-year medium-term lending facility, a policy rate at which the People’s Bank of China (PBOC) lends to commercial banks, last week’s LPR cut has come without a corresponding cut in the policy rate.

The impact on banks’ operating income was likely to be minimal, said Chen Shujin, an analyst at Jefferies. With mortgage loans accounting for about a fifth of banks’ yuan loan books, banks are likely to see a total reduction of 0.8 per cent to 1.2 per cent in their operating incomes, she said.

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“Banks have cut only the five-year LPR, as saving the property sector has become the new focus for them,” Chen said. The cut, effective since last Friday, will affect newly-issued mortgages immediately. Existing loans are expected to be repriced lower starting January 1, when Chinese banks reset the pricing of their existing mortgage loans.

The banks will be able to withstand the impact due to more cushy funding conditions. The PBOC guided banks to lower the cap on time deposit rates by 10 basis points in April, while banks’ cost of funding in the interbank market also dropped this month by 40 basis points from March, she said.