Steady Promotion of LPR Application: Loan Bond Interest Rate Swap Matches

 Steady Promotion of LPR Application: Loan Bond Interest Rate Swap Matches

New LPR is gradually landing

Recently, 19 Tongwei SCP004 has been issued. This is the first floating-rate bond with the quoted interest rate (LPR) in the single-linked loan market in China. The issuer is Tongwei stock. The interest rate is 55 BP higher based on one-year LPR.

Since the central bank announced the reform and improvement of the formation mechanism of LPR on August 17, the application of LPR under the new mechanism (hereinafter referred to as new LPR) has been gradually promoted and its scope has gradually expanded.

Hang Seng Bank and Standard Chartered Bank announced earlier that they would link loans to LPR. Hang Seng Bank (China) Co., Ltd. said on August 19 that it had reached the first batch of loans with a number of enterprise customers, with a total value of nearly 150 million yuan, targeting private enterprises in North China, East China, Guangdong, Hong Kong and Macao. As one of the first foreign quotation banks under the new LPR mechanism, Standard Chartered Bank (China) Co., Ltd. took the lead in completing a batch of trade financing loans based on LPR after the launch of the new LPR, with a total amount of 31 million yuan, including Suning Easy to buy and so on.

While foreign banks began to actively change anchors, domestic banks also used new LPR for a variety of products, such as loans, bonds and interest rate swaps linked to LPR. It is understood that China Merchants Bank Shenzhen part of the mortgage business interest rate has been linked to LPR, Construction Bank more than half of the new loans used LPR. Since October 8, the benchmark of individual housing loan interest rate pricing will be formally converted to LPR. As for bonds, apart from floating-rate bonds linked to LPR by Tongwei Stock, one-year LPR was chosen as the benchmark interest rate in the loan mortgage bonds issued by Societe Generale Bank.

Supervising New LPR Interest Rate Swaps

In addition to conventional loans and bonds, new LPR interest rate derivatives have emerged. In August, Bank of Communications concluded the first five-year interest rate swap transaction linked to LPR, and conducted a one-year interest rate swap agent transaction linked to LPR; Guotai Junan also reached a one-year interest rate swap transaction linked to Silver Leaf Investment in the same period.

According to the information disclosed by the Foreign Exchange Trading Center, as of the end of August, there were 133 interest rate swaps linked to LPR, with a total nominal principal of 18.59 billion yuan. Among them, the most important is the one-year interest rate swap transactions linked to one-year LPR, with the number of pens and nominal principal amounting to 74 and 12.18 billion yuan respectively.

With more and more interest rate swap transactions linked to the new LPR, the regulatory authorities are gradually improving the relevant mechanisms. Official information shows that since September 2, 2019, the National Interbank Borrowing Center has added interest rate swap contracts based on one-year LPR and five-year LPR to the X-Swap system, and issued the interest rate swap curve and the interest rate swap valuation to meet market membersdemand for the valuation of LPR interest rate swap.

In addition to RMB interest rate swaps, banks have reached currency swaps linked to LPR. According to the public information, Minsheng Bank of China successfully concluded the first five-year fixed-rate US dollar and five-year floating-rate RMB LPR currency swap on August 27, and the first one-year floating-rate US dollar and one-year floating-rate RMB LPR double-floating-rate currency swap business.

Applying the new LPR to loans will squeeze bank profits, but under the impetus of relevant policies, it is imperative that the new LPR be applied to the ground. Moreover, at present, the bank profit margin is not low, there is still room for pressure drop.

The central bank has said that the application of quoted interest rates in the loan market and the competition of loan interest rates should be included in the macroprudential assessment (MPA). It is understood that the central bank requires all banking financial institutions not to set the implicit lower limit of loan interest rate through cooperation, otherwise, in the MPA assessment, one vote veto will be implemented.

The central bank also proposed the 358 target. 358 means that as of the end of September, the proportion of new loans issued by national banking financial institutions using LPR as the pricing benchmark is not less than 30%; as of the end of December, the proportion mentioned above is not less than 50%; as of the end of March next year, the proportion mentioned above is not less than 80%.

The impetus of supervision impels banks to move forward, and the higher profit level of Chinas banking industry also provides pressure drop space. Zhang Xu team of Everbright Securities pointed out that in 2018, Chinas listed banks realized a total net profit of 1.50 trillion yuan, accounting for 40.7% of the total net profit of A-share listed companies, and the ROE average value was 12.3%, compared with 9.8% in the United States, with a difference of 2.5 percentage points. In fact, the profitability of our banking industry is not low, and there is room to further support the real economy. Zhang Xu team said.

Source: Responsible Editor of China Securities News: Chen Hequn_NB12679