01 Clarify some misconceptions about LPR
On the morning of January 20, the China Foreign Exchange Trading Center announced a new phase of LPR, which was 3.7% for 1 year and 4.6% for 5 years, down 10BP and 5BP respectively from the previous month.
Like all financial news, the "this thing meets the expectations of many analysts" is in line with our expectations (this is a definite clause in English).
Here, to interject, all the articles that write this news as "the central bank lowers the LPR" should not even understand what LPR is. Even, even if there is no subject "central bank", it is not appropriate to replace it with a subject-verb structure and write "LPR down".
Because the LPR is not adjusted by anyone, it is 18 quotation banks to quote the interest rate of their best loans in the current period, the foreign exchange trading center removes the highest and lowest price, and the remaining 16 quotations are made a simple average, and the interest rate obtained is this LPR. So, what it means is: the average interest rate of the best borrowing customers of representative banks. Because it represents the level of loan interest rates, or "lowest water level", for almost the best group of borrowers in the market.
Theoretically, if you have a loan with an interest rate much lower than this LPR, there's an explanation. LPR stands for the lowest water level, how can you be lower than it? Unless some of your customers are better than those of the quoting bank, it is a pity that you did not select your bank as the quoting bank.
Judging from this LPR generation process, this interest rate is not a policy interest rate, on the contrary, it is a market interest rate, which is quoted after the banking loan interest rate falls by itself.
Of course, for existing stock loan contracts, which have been anchored by LPR, then after the LPR falls, the execution rate of the contract will also decrease. This has the effect of "cutting interest rates". But this is not a rate cut by a central bank in the past sense, that is, the central bank directly adjusts the statutory benchmark interest rate. Instead, if the minimum water level in the loan market falls, then other contract interest rates will also fall in tandem.
The interest rate in the loan contract is signed in the form of "LPR+ pips" (the pips can be negative). Theoretically, the point is that the bank talks to the customer himself. If the bank's bargaining position is high and the LPR has fallen, but the bank says that the interest rate of the loan I want remains unchanged, then it is also okay to increase the additional point accordingly. Therefore, for newly signed loan contracts, the interest rate is really not necessarily high or low.
In addition, there is another thing that is easy to cause misunderstanding. That is, when the quoting bank quotes to the foreign exchange trading center, the interest rate format used is "MLF + point". For example, if the MLF interest rate is now 3%, and a quotation bank calculates that the LPR it wants to quote is 5% (that is, the interest rate of its best customer is 5%), then its quotation format is "3%+2%".
At this point, if the MLF rate drops to 2.9%, but the bank has the ability to make its best customers' interest rate level unchanged, or 5%, then it can still quote the LPR as 5%, in the format of "2.9% + 2.1%", that is, the added point can recover. So LPR is not directly linked to MLF interest rates.
But the two may be slightly linked. Because, after the MLF is lowered, the interest rate in the interbank market will also fall, and then, the cost of bank liabilities will fall, then the interest rate of the bank's loan to the customer will fall (including the optimal customer). As a result, the LPR will drop.
This time, at the beginning of the year, banks put a lot of credit, in order to grab the opening, banks scrambled for loans, so in the competition led to a decline in loan interest rates. At the same time, the decline in policy interest rates such as MLF and OMO has led to a decline in interest rates in the interbank market, which in turn has reduced the cost of bank liabilities, and bank lending interest rates can also be reduced. So the LPR reported this time decreased.
02 Is the decline in loan interest rates positive?
Direct answer first: Usually.
The social sciences have always had the problem of not being able to be too absolute, so our answer is "usually."
Mainly for the banking industry there are two points of benefit.
First, lowering the loan interest rate reduces the financial burden on borrowers and improves their operations, which is conducive to the asset quality of banks. Especially when the level of corporate debt is high and the burden of interest expense is heavy, many borrowing enterprises themselves are already being crushed by interest expenses, and it is still very helpful to suddenly reduce interest expenses. Enterprises that were once happy to live have suddenly returned to blood, so it is good for the asset quality of the banking industry.
Second, the decline in lending rates (which used to be a reduction in the statutory benchmark rate, now an LPR) is set against the backdrop of monetary easing in order to boost economic growth. Although the effect is not certain, but in the end there will be different degrees of effect, economic growth rebound, can drive the improvement of business operations, which will also improve the quality of bank assets, of course, will also increase the demand for bank credit.
It can be seen that the main positive factor is asset quality. While bank spreads may be falling, they are nothing compared to asset quality improvements. The change of bank spreads, more than 10BP per year is already a big change, but if the asset quality improves, the resulting credit cost reduction is far more than 10BP (when the concentration of non-performing concentrations, the annual non-performing generation rate is more than 1%)). Therefore, asset quality and interest rate differentials are two completely different indicators of orders of magnitude, and even a 10-fold difference in quantity.
One of the most easily remembered examples is that at the end of 2014, monetary policy was double-cut (interest rate cuts, RRR cuts), and bank stocks rose from the ground. In the following 3 years or so, the bank spreads fell significantly, and the net interest margins of the 16 old A-share listed banks, which were 2.56% in 2014, fell to 1.99% in 2017, which can be described as unbearable.
But you definitely remember the stock price performance of bank stocks during this time.
Especially in 2016-2017, it is very clear that the economy is good, which is the reason for driving the rise in bank stock prices. During this period, even if the net interest margin is unbearable, in the face of economic fundamentals, it is not a matter.
Of course, we analyze all this not to find a reason for laziness in calculating net interest margins. After all, we still calculate the net interest margin very carefully in order to make up the number of pages in the report.
This article is derived from the perspective of Wang Jian