What China’s Stimulus Means for HSBC and Standard Chartered

Chinese authorities implemented a range of fiscal and monetary measures last week designed to stimulate the economy.

Central to these efforts is the role of banks in monetary policy, notably through a reduction in existing mortgage rates by October 31. Analysts at UBS predict this will lead to an overall decrease of 100 basis points, although this will be somewhat counteracted by an anticipated reduction of 20-25 basis points in deposit rates. This change follows a 20 basis point cut to the 7-day repo rate and similar reductions in the overnight, 7-day, and 1-month standby facility rates, which now stand at 2.35%, 2.50%, and 2.85%, respectively.

Furthermore, a 50 basis point cut in the reserve requirement ratio (RRR) was also announced, alongside measures intended to support the property market.

The Minister of the National Financial Regulatory Administration disclosed plans to inject CET 1 capital into six state-owned banks, with reports suggesting this could total approximately 1 trillion RMB (around $142 billion). If accurate, this could impact the Bank of Communications, in which a prominent international bank holds a 19% stake.

For this international bank, operations in mainland China accounted for 11% of its profit before tax in the first half of 2024, with 66% of this profit coming from its associate stake in the Bank of Communications. Analysts from UBS noted that most of its remaining profit in China stemmed from Global Banking & Markets, although retail operations were slightly unprofitable.

In a similar vein, another major bank cited that mainland China made up about 5% of its group revenues, profits, and loans. Investor presentations in 2023 indicated that 40% of its onshore revenues originated from retail operations, while 60% came from corporate and institutional banking. A portion of the retail income was generated through wealth management services.

UBS analysts highlighted that both banks stand to benefit from a stronger domestic Chinese economy and improving equity markets, primarily through their impacts on cost of equity and wealth management services, especially via operations in Hong Kong.

The international bank acquired its stake in the Bank of Communications for $1.75 billion in 2004. As of the first half of 2024, this stake, listed in the H-share line, had a book value of $22.1 billion and a market value of $11.1 billion.

Its estimated “reasonably possible” value in use is calculated to be between $14.1 billion and $31.1 billion. UBS noted that uncertainties exist regarding the potential capital injection into the Bank of Communications. The bank’s base case assumes a private placement of A-shares at book value, in which the international bank would not participate, potentially leading to a reduction of its stake by 10-20%, while maintaining associate accounting.

Analysts expressed uncertainty about whether a capital injection would trigger a reassessment of book value. If it were to happen, they would expect any resulting charges related to earlier write-downs to be capital neutral.