Major Chinese Banks Lower Deposit Rates to Protect Margins — Update

Some of China's biggest state lenders have cut deposit rates as they look to protect record-low profit margins after lowering lending rates under Beijing's push to boost the economy.

Major banks including Industrial & Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank have cut deposit rates by 5 basis points to 20 basis points, according to statements released Thursday.

China's smaller regional lenders are expected to follow suit, with some already having cut deposit rates.

"This is clearly about ensuring commercial banks have room to lower lending rates after the policy lending rate cuts, without further squeezing net interest margins," said Duncan Wrigley, chief China economist at Pantheon Macroeconomics.

The trims came days after banks lowered benchmark lending rates they use to price the country's commercial loans, including mortgages, by 10 basis points on Monday. That followed the central bank's surprise cut of a key short-term policy rate as authorities step up efforts to achieve the annual economic growth target of around 5% after a sharper-than-expected slowdown in the second quarter.

Reducing deposit rates could help bolster the banking sector's slimming net profit margins, which hit a record low of 1.54% at the end of March, well below the 1.8% threshold authorities deem as safe.

Chinese banks are in a tough spot: households' reluctance to spend amid uncertainty about the economy has resulted in built-up savings that have driven up lenders' liability costs. They're also dealing with bad loans from the beleaguered property sector, while complying with Beijing's guidance to ease borrowing rates to support the economy.

For China's central bank, lenders' falling margins pose a dilemma.

"One of the key reasons [interest] rate cuts have become so difficult to implement in China is the continued decline of bank net interest margins," Nomura analysts said in a note on Thursday. Lowering lending rates to boost consumption while also protecting bank profit margins is a "formidable challenge."

It's unclear how much of an impact the latest round of deposit rate cuts will have.

The Nomura analysts point out that prior rounds of deposit rate cuts have had little effect on funding costs. There are several factors at play: new rates don't apply to existing deposits and households have been shifting money into accounts with higher rates amid continued declines in banks' asset returns.

Chinese banks have also been offering competitive deposit rates for some corporate clients to attract more business, a practice that's drawn criticism from the PBOC as a sign of "excessive liquidity."

Since late last year, policymakers have expressed concern that prior rounds of monetary policy action may have led to funds sitting idle in the banking system instead of being funneled into the real economy. Weak borrowing demand from businesses and consumers has led to vast sums of cash being parked in bank accounts, eroding the effectiveness of policies meant to stimulate growth, economists say.

The central bank has been pushing to effectively lower banks' deposit costs since April, making it clear that lenders will not be allowed to offer preferential rates, according to the Nomura report by Harrington Zhang, Jing Wang, Hannah Liu and Ting Lu.

"It is possible that banks' deposit costs may have already declined somewhat amid this process of self-regulation and correction," they said, citing comments from earnings calls. "That said, it will likely still take some time for the previous four rounds of deposit rate cuts in 2022 and 2023 to take full effect."

To help ease the margin squeeze, the PBOC on Thursday delivered another unexpected cut to borrowing costs on its one-year policy loans for lenders. The insurance sector could be next.

"Chinese regulators have reportedly met with insurers to discuss proposed cuts to the traditional insurance interest rate ceiling, dividend insurance ceiling and universal insurance guaranteed interest rate ceiling; another move to lower funding costs to the real economy," Pantheon's Wrigley said.

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(END) Dow Jones Newswires

July 25, 2024 06:28 ET (10:28 GMT)

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