Chinese banks seek to nurse bruised interest margins with deposit-rate cuts as slowing economy bloats savings

Squeezed by high funding costs and pressure from Beijing to alleviate corporate borrowers' financial burden by issuing cheap loans, major banks in China are cutting their deposit rates to preserve margins.

Since the pandemic struck, China's benchmark one-year loan prime rate (LPR) has been cut by 50 basis points to 3.65 per cent but the one-year certificate of deposit rates has remained steady at 2.26 per cent. Still, credit demand has decelerated. Chinese banks extended 718.8 billion yuan (US$103.99 billion) in new loans in April, less than a fifth of March's tally. Weak credit demand is expected to continue to weigh on Chinese banks.

"As favourable base effects subside and post-Covid recovery momentum wanes, credit growth is likely to remain subdued in months to come," said Lu Ting, chief China economist with Nomura said in a note.

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"As the pent-up demand for in-person services may not be long-lived, property woes re-emerge and the export sector deteriorates, we believe the post-Covid sweet spot for China's economy is drawing to a close."

A signboard of China Zheshang Bank is seen at its branch in Beijing, China, March 14, 2016. Photo: Reuters alt=A signboard of China Zheshang Bank is seen at its branch in Beijing, China, March 14, 2016. Photo: Reuters>

Meanwhile, deposit-taking institutions have been inundated with a glut of savings. In the first quarter, household savings soared by 9.9 trillion yuan on the heels of a 17.8 trillion yuan rise in 2022. Deposit growth surpassed loan growth in the first quarter among the five largest banks, with time-deposit growth continuing to outpace demand deposit growth.

China, the world's second largest economy, is experiencing a slowdown in growth momentum. After a faster-than-expected economic expansion in the first quarter this year, April's data unveiled an exports slowdown and a sharp contraction in imports.

Starting Monday, the four largest state-owned banks have been urged to lower the deposit rate ceilings on some agreement and call deposits by 30 basis points under China's interest rate self-disciplinary mechanism overseen by the central bank.

The move is expected to "stabilise Chinese banks' net interest margin in the coming quarters", said Citigroup analysts in a research note.

It can "help stabilise banks' profitability and preserve their capital generation and lending capability", its analysts said, adding that it may boost banks' net interest margin by 3.5 basis points this year.

"In the longer term, we expect the regulator to launch more deposit easing measures."

Data from the China Banking and Insurance Regulatory Commission (CBIRC), the country's banking and insurance regulator, shows a decline in the overall banking sector net interest margin (NIM), a key measure of banks' profitability. CBIRC figures show the NIM for 2022 was 1.91 per cent, down 17 basis points year on year, and fell below 2 per cent for the first time since 2010.

"The NIM contraction was larger at city commercial banks and rural commercial banks than major banks, as these banks have long been relying on deposit rate competition to attract deposits," CreditSights analyst Karen Wu.

"China set up a market-oriented deposit rate pricing mechanism in April last year, which encouraged banks to make adjustments to deposit interest rates based on changes in market interest rates. Many large banks have already lowered their deposit rates since then. And recently there has been a new round of deposit downward adjustments led by small and medium sized banks in April."

The most recent cuts were made by Zheshang Bank, headquartered in Zhejiang province, and Hengfeng Bank of Shandong province and Bohai Bank of Tianjin. On May 5, they lowered the interest rate for five-year deposits by up to 30 basis points to 2.95 per cent. This means that a retail depositor will now receive 15,000 yuan less in interest for every 1 million yuan, over the term of the deposit.

With these announcements, all major banks in China, including six state lenders and 12 joint-equity commercial banks, have lowered their interest rates to below 3 per cent for individual deposits with maturities ranging from three months to five years.

"It is good news for banks and their investors, as it means the funding cost of banks will be lowered," said Tommy Wu, senior China economist at Commerzbank.

"We could see more banks joining the chorus in the coming weeks and later this year due to the pressure on narrowing NIM."

State-owned banks led the way in reducing deposit rates last year. On September 22, Industrial and Commercial Bank of China (ICBC), Bank of China, Bank of Communications, and Agricultural Bank of China announced that they had cut interest rates for five-year deposits by 15 basis points to 2.6 per cent. This followed the central bank's decision to reduce the one-year LPR from 3.7 per cent to 3.65 per cent in August.

In its first-quarter report this year, ICBC cited "the combined influence of factors such as the lagged effect of reductions in LPR and the continuously increasing proportion of time deposits" as reasons for its NIM decreasing to 1.77 per cent.

"Financing cost pressure clearly continued increasing in the first quarter, meanwhile lending rate of loans to corporates and individuals is kept at a lower level," said Fan Xinjiang, Sinolink Securities' chief analyst of fixed-income.

"That could prompt banks to kick off another round of deposit rate cuts."

Growing net income "will be increasingly challenging" for banks in the current year, CreditSights analysts wrote in a report earlier this month.

"NIM compression continued into the first quarter and is expected to persist in the financial year of 2023," they said, pointing to the reduced interest rates on new loans for supporting the slowing economy as one of the reasons.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

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