China banks' new loans in June jumped to RMB1.08t

Due to appetite for lending to SMEs.

Driven by a significant increase in short-term corporate loans, new loans for June in China banks amounted to RMB1.08t, much higher than consensus of RMB955b.

According to a research note from CCB International, this is attributed to the recent surge in short-term corporate loans to greater lending appetite by the banks to lend to SMEs.

Mortgage loans are stable on a MoM basis, in keeping with our earlier observation that the banks have not increased mortgage lending due to loan quota limits and low profit margins.

Meanwhile, total social financing (TSF) reached RMB1.97t in June, underpinned by strong entrusted loans, trust loans, and non-discounted bank bills.

This follows the slowdown in May caused by regulatory measures designed to curb shadow banking.

Here's more from CCB International:

Circular 127, jointly issued by the PBOC, CBRC, CSRC and CIRC, will not curtail financial innovation by the banks as they continue to securitize their loans to get them off their balance sheets.

Our channel checks reveal that many new practices (“innovations”) are now being used by the banks to bypass Circular 127.

In time, these loopholes will be closed by the regulator; just as surely, other loopholes will be exploited.

As this cat-and-mouse game with the regulator continues, we expect off-balance-sheet items to continue to expand rapidly.

Returns offered by internet MMFs such as Yu-e-bao have fallen below 4.2% and are now less attractive than bank WMPs offering 5.5–6.0%. We expect some money to flow back to bank WMPs as investors tend to prioritize returns over convenience.

New loans in 1H14 amounted to RMB5.74t, putting new loans on track fora 59% contribution to our 2014F total new loans forecast. This pace of new loan growth is similar to previous years.

Targeted RRR cuts, the PBOC’s relending facility and looser loan-to-deposit regulations all point to monetary loosening.

Should the economy suffer another slowdown, we would not be surprised to see broad RRR and rate cuts. Such measures would likely improve the asset quality of the banks and benefit their share prices accordingly.