What Chinese banks must have learned from interbank rate hike

Interbank business to shrink for some firms.

According to Barclays, post the increase in interbank rates, China’s banks have learned that they need to manage liquidity risk more carefully. 

Here's more:

Therefore, we expect the interbank businesses to shrink for those joint-stock banks that have pursued aggressive growth in this segment.

Minsheng is one of them, and thus, we cut our estimate for Minsheng’s 2013 net profit by 5%, but we lower our assumption for the bank’s cost of equity from 13.8% to 13.7% as the volatile interbank business should become less of a profit contributor.

Hence, as we maintain our 12-month price target for Minsheng at HK$11.65, we upgrade our rating on Minsheng Bank to Overweight from Equal Weight given the 43% potential upside we estimate.

Indeed, we believe most of the negatives catalysts in the interbank business have been priced in, and we still like the bank’s business strategy of pursuing micro-lending and other business with micro- and small enterprises, which we believe is a good strategy amid interest rate deregulation going forward.