Squeezed by high funding costs and Beijing's pressure to relieve business borrowers' financial burdens by making inexpensive loans, China's leading banks are slashing deposit rates to protect margins.
Since the outbreak, China's benchmark one-year loan prime rate (LPR) has been reduced by 50 basis points to 3.65 percent, but one-year certificate of deposit rates have remained unchanged at 2.26 percent. Nonetheless, credit demand has slowed. In April, Chinese banks extended 718.8 billion yuan (US$103.99 billion) in new loans, less than a fifth of the total in March. Credit demand is projected to remain weak, putting pressure 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.
“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.”
Meanwhile, deposit-taking institutions have been flooded with money. Household savings increased by 9.9 trillion yuan in the first quarter, following a 17.8 trillion yuan increase in 2022. In the first quarter, deposit growth outpaced loan growth among the five major banks, with time deposits continuing to outstrip demand deposits.
China, the world's second largest economy, is slowing its economic rate. Following a faster-than-expected economic increase in the first quarter of this year, April's figures revealed a slowdown in exports and a dramatic drop in imports.
Beginning Monday, the four main state-owned banks were asked to cut deposit rate ceilings on some agreement and call deposits by 30 basis points under China's interest rate self-regulation mechanism, which is overseen by the central bank.
According to Citigroup analysts in a research note, the change is expected to "stabilise Chinese banks' net interest margins in the coming quarters."
According to its experts, it can "help stabilise banks' profitability and preserve their capital generation and lending capability," and it may increase banks' net interest margin by 3.5 basis points this year.
"In the long run, we expect the regulator to implement additional deposit-easing measures."
The entire banking sector net interest margin (NIM), a crucial measure of banks' profitability, has declined, according to data from the China Banking and Insurance Regulatory Commission (CBIRC), the country's banking and insurance regulator. According to CBIRC data, the NIM for 2022 was 1.91 percent, down 17 basis points year on year, and went below 2% for the first time since 2010.
"The NIM contraction was greater at city commercial banks and rural commercial banks than at major banks," CreditSights analyst Karen Wu explained.
“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.”
Zheshang Bank, headquartered in Zhejiang province, Hengfeng Bank of Shandong province, and Bohai Bank of Tianjin made the most recent layoffs. They cut the interest rate on five-year deposits by up to 30 basis points to 2.95 percent on May 5. This means that for every 1 million yuan deposited, a retail depositor will now get 15,000 yuan less in interest throughout the period of the deposit.
With these statements, all major Chinese banks, including six state lenders and 12 joint-equity commercial banks, have reduced their interest rates on individual deposits with maturities ranging from three months to five years to less than 3%.
“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.”
Last year, state-owned banks led the way in lowering deposit rates. On September 22, the Industrial and Commercial Bank of China (ICBC), Bank of China, Bank of Communications, and Agricultural Bank of China announced a 15 basis point reduction in interest rates on five-year deposits to 2.6 percent. This followed the central bank's decision in August to lower the one-year LPR from 3.7% to 3.65%.
ICBC highlighted "the combined influence of factors such as the lagged effect of reductions in LPR and the continuously increasing proportion of time deposits" as explanations for its NIM falling to 1.77 percent in its first-quarter report this year.
“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 continue in the fiscal year of 2023," they stated, citing one of the reasons as lower interest rates on new loans to support the weakening economy.
By fLEXI tEAM