For Efficient Supply of Liquidity
The authors are analysts of Shinhan Investment Corp. They can be reached at sh.kim@shinhan.com and jongseon@shinhan.com, respectively. -- Ed.
BOK announces higher-than-expected rate cut and bank debenture purchase
The Monetary Policy Committee of the Bank of Korea cut its base rate by 50bp in an emergency meeting on March 16. It also broadened the eligible collateral for open market operations to include debentures issued by special entities and banking institutions. The BOK’s preemptive move aims to help financial institutions raise funds during times of credit crunch and increase fund flows into policy finance and commercial banks. Interest rates on bank intermediated lending support facility will be lowered from 0.5-0.75% to 0.25%, but net interest margin (NIM) should remain unaffected.
Annual pre-tax income to fall 5.5% on base rate cut; NIM to rebound from 4Q20
Annual NIM is forecast to decline by about 7bp and pre-tax income by 5.5% with the 50bp rate cut. NIM is likely to rebound from around 4Q20, a delay from previously expected 2Q20. Past cases show that base rate cuts led to an immediate rebound in share prices when: 1) no additional rate reduction was made; 2) credit cost was expected to fall on easing interest burden of borrowers; and 3) a drop in NIM was offset by loan growth amid economic recovery. Banking stocks may rise in the near term, but conditions for a short-term rally are not fully met.
Partial deregulation needed for efficient supply of liquidity
A mix of monetary and fiscal policies is needed for banks to offer their lending services effectively during times of emergency. The weight for loans extended to small office home office (SOHO) businesses should be eased to 85%, the same applied to small/medium-sized enterprise (SME) loans.