New LDR calculation rules in China to impact BOC the most

Thanks to foreign currency businesses.

The announcement of China's CBRC on June 30 of new rules regarding the calculation of loan to deposit ratio (LDR), effective from July 1, is predicted to affect BOC the most, due to its higher share of foreign currency business.

According to a research note from Barclays, the BOC would see the most decrease in LDR, by 4.5-6.1 points on its estimate.

It also believes that in the medium to long run, the inclusion of the soon-to-launch NCD as deposits and bond-funded loans as deductible items in the LDR calculation would create incentives for banks to diversify their funding channels, which could encourage and facilitate the development of China’s NCD and bond markets.

Here's more from Barclays:

We estimate that BOC’s calculated LDR could be lowered by 6.1/4.5ppts by the new rule if subordinated and hybrid bonds are included/ excluded in the deductible items.

In comparison, CRCB would see the smallest LDR decrease of 2.3/0.2ppts. On average, the new rules would reduce LDR of our covered banks by 4.1ppts if subordinated and hybrid bonds are deductible, and by 2.3ppts if not.

In our view, the decrease in LDR would alleviate the banks’ liquidity pressure to some extent, which is likely have positive effects on the earnings, through either lower funding costs or increased lending capacity for the banks.