Moody's: Chinese Banks’ Profitability Pressure As Loans Reprice To LPR

Moody's Investors Service says in a new report that China's new loan prime rate (LPR), which was reintroduced in August 2019 and has functioned well to bring down lending costs in the coronavirus economy in 2020, will further weaken banks' profitability as more loans come to be repriced on lowered LPR. "We expect banks' lending income will weaken as more outstanding floating rate loans switch to being LPR-based and as the government grants loan-rate caps and regulatory forbearance on loan payments to support economic recovery," says Yan Li, a Moody's Assistant Vice President and Analyst. The LPR is now broadly used as the reference rate of Chinese bank loans, with more than 90% of new floating interest rate loans already repriced at the end of 2019. Moody's expects the People's Bank of China (PBOC) will continue using the LPR to drive down lending rates. The central bank has mandated that banks use the LPR as the benchmark for all new floating interest rate loan contracts that commence after 1 January 2020, and all outstanding loans must be repriced under the new benchmark by August 2020. "We expect the decline in average loan yields will quicken as more loans are repriced under it, especially as the LPR has declined by 46 basis points between August 2019 and June 2020," adds Li.

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