China Galaxy Securities has released a research report stating that the innovation and implementation of the overnight reverse repo tool primarily serves the function of managing cross-period liquidity. This is conducive to enhancing the efficiency of bank treasury FTP pricing and provides marginal support for the improvement of liability-side costs for banks, particularly for joint-stock banks and some city/rural commercial banks with a higher reliance on interbank liabilities. However, the short-term impact is expected to be limited.
The fundamental improvement logic for banks is expected to continue, benefiting more from the release of remaining repricing benefits on deposits and the growth of intermediary income driven by a recovery in the capital markets. Concurrently, valuations remain at low levels, enhancing the sector's attractiveness, with high dividend yields and value characteristics persisting.
The firm continues to be positive on the allocation value of the banking sector, maintaining a recommended rating. The key viewpoints from China Galaxy Securities are as follows:
Overnight Reverse Repo Tool's Initial Implementation Totals 900 Billion Yuan
On June 17, Governor Pan Gongsheng previewed at the Lujiazui Forum the enrichment of the open market operation toolkit and the addition of an overnight reverse repo. On June 25, the central bank announced the addition of the overnight variety for operations on June 29 and 30. The overnight reverse repo tool was formally implemented on June 29, with an initial injection of 300 billion yuan, followed by another 600 billion yuan on June 30, totaling 900 billion yuan over the two days. The operations used a fixed interest rate and quantity bidding, with the central bank not disclosing the operation rate on either day.
Combined with 7-Day OMOs, Reverse Repo Operations Aim to Safeguard Cross-Quarter Liquidity
The overnight reverse repos, combined with the 227 billion yuan in 7-day reverse repo injections and 1,001 billion yuan in maturities over the last two days of June, resulted in a cumulative net liquidity injection of 126 billion yuan. This effectively filled the liquidity pressure arising from quarter-end MPA assessments, credit extension, and accelerated government bond issuance, alleviating tight funding conditions. As of June 29, the state-owned and joint-stock bank acceptance bill rediscount rate fell to 0.59%.
Although financing demand remains weak, the intensity of volume-driven lending is expected to remain high. Additionally, the issuance scale of local government special bonds in June alone reached 925.7 billion yuan, a significant increase from the 500+ billion yuan levels in April and May, leading to greater liquidity absorption. Following the central bank's end-of-month reverse repo operations, the DR001 rate declined to 1.35%-1.36%, and the overnight SHIBOR fell to 1.36%, below the policy rate level of 1.4%.
Marginal Support for Bank Liability Cost Improvement, but Impact Magnitude Limited
This is mainly reflected in the following aspects: First, alleviation of maturity mismatch. Bank treasuries can obtain overnight funds based on actual needs, optimizing FTP pricing efficiency and providing marginal support for stabilizing net interest margins. For example, the scale of overnight reverse repo injections far exceeded that of 7-day reverse repos, helping to ease tight liquidity at quarter-end and excess liquidity at quarter-start, balancing the mismatch between asset-side yields and liability costs caused by fluctuations in financing demand through targeted fine-tuning.
Second, pressure is eased for banks to issue NCDs at high costs to fill short-term liquidity gaps. The overnight reverse repo operation offers greater flexibility, effectively smoothing liquidity at a lower cost, reducing banks' forced issuance of high-priced NCDs in the short term, and alleviating liability-side pressure from both a marginal cost and structural perspective.
Referring to the spread data between the 7-day OMO rate and DR001 since 2026, it is expected that the overnight reverse repo rate will be 5-15 basis points lower than the 7-day OMO rate, estimated at 1.25%-1.35%, significantly below the 1-month NCD rate of 1.44% at month-end. Joint-stock banks and some regional city/rural commercial banks with higher dependence on interbank liabilities are expected to benefit more.
Third, the "providing quantity but not price" approach means the overnight reverse repo rate is temporarily not used as a pricing benchmark, but rather serves more of a liquidity management function. It is expected to be deployed mainly at critical junctures such as quarter-ends or month-ends, with a short duration. Coupled with the fact that the 7-day OMO rate remains the policy rate, it is difficult for this tool to substantially impact the core pricing of bank liabilities. Subsequent room for improvement is expected to come mainly from the release of remaining repricing benefits on maturing deposits.
Risks to Consider
Key risks include economic performance falling short of expectations and the risk of asset quality deterioration; as well as interest rate declines leading to pressure on Net Interest Margins (NIM).
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