China’s latest 25 basis interest hike could be actually good news for China’s financial sector.
Firstly, it was a ‘symmetric rate hike’, meaning that both the 1-year deposit rate and lending rate were both increased by 25 basis points according to Citi’s Simon Ho.
It won’t hurt banks’ net interest margins (NIM, basically the spread they earn between their funding and their loans), and could actually end up being a boon:
Citi’s Simon Ho:
Earnings neutral on a static basis (i.e. just looking at impact from changes in loan and deposit rates) – overall impact is NIM and earnings neutral for the sector in our view.
Earnings positive on a dynamic basis – should the absolute level of market interest rates (money market rates and bond yields) also rise, which we think is likely, then the net impact could be positive for the sector, given that some 20- 30% of assets in the sector are invested in the interbank and bond markets (about 34% of assets for big banks, and about 20% of assets for smaller banks).
We would view any potential weakness on the back of this rate hike as a buying opportunity in the sector.
Score another point for those who feel China’s rate hike is a good sign.
(Via Citi, Chinese Banks, Simon Ho, 19 October 2010)
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