Chinese Banks Plan Deposit Rate Cuts to Cushion Pain From Faltering Economy
Banks will pay less on deposits to reduce the impact of mortgage-rate cuts
Large commercial banks in China are planning to lower some deposit rates starting Friday, softening the blow of mortgage-rate cuts that will further squeeze their profit margins at a crucial economic juncture.
Major state-owned banks are expected to cut interest rates on time deposits by up to a quarter of a percentage point, according to a Chinese state-media outlet.
A customer-service representative at one of the country’s biggest banks confirmed on Thursday that rates on its one-year deposits would be trimmed by 0.1 percentage point, while those on three- and five-year time deposits would be cut by 0.25 percentage point. One lender, Industrial Bank, announced its new deposit rates late Thursday night.
The deposit rate cuts will help cushion banks from taking another big hit to their profits after regulators pushed through widely-anticipated changes to mortgage rules on Thursday.
Chinese commercial banks can now reduce the rates they charge on existing loans, a move partly designed to discourage a recent trend of Chinese citizens using their money to pay back mortgages rather than spend in restaurants, bars and shops.
The exact size of the cuts will still be left to commercial banks and their customers to negotiate. The central bank has set a floor for how cheap loans can be, compared with a benchmark rate.
The country’s banks have been doling out cheaper corporate and personal loans to help stimulate the flagging economy. The People’s Bank of China has cut a key lending rate twice in the past year, and commercial banks have trimmed loan benchmarks that are used to price mortgages and other debt.
Those moves have come at a significant cost to lenders. Several large banks that released first-half results this week said their net interest margins—which reflect the difference between what they earn from their assets and what they pay for deposits and other funding—dropped to new lows.
Large Chinese banks’ time deposits currently earn 1.25% to 2.5% annually. Many of them have slashed their deposit rates already this year.
Industrial & Commercial Bank of China, the world’s largest bank by assets, reported a net interest margin of 1.72%, which was below regulators’ recommended level of at least 1.8%. ICBC pointed to multiple reductions in the loan prime rate, decreasing loan yields, as well as higher average deposit rates that were a result of more time deposits. The net interest margins of the next three biggest Chinese state-owned banks were also below that threshold at the end of June.
The recent wave of mortgage prepayments has been bad news for banks, because it reduces some of the income they can expect to earn in the future.
Chinese borrowers repaid the equivalent of around $508 billion in mortgages ahead of schedule in the first half of 2023, estimates Zhaopeng Xing, a senior China strategist at ANZ. He said that represents around 10% of Chinese banks’ outstanding mortgage loans.
“That has a very big impact on banks’ profits,” Xing added. He predicted that the coming mortgage-rate cuts may cost Chinese banks $110 billion a year in profits, but a deposit rate cut of 0.1 percentage point will roughly offset that.
The savings people can get by renegotiating their interest rates still might not be enough to deter them from paying back mortgages early, said Ting Lu, chief China economist at Nomura, in a research note on Thursday.
Many people who took out home loans in the past few years have been locked into paying higher rates than what banks are offering on newly issued mortgages. Unlike in the U.S., borrowers in China were previously barred from refinancing their mortgages by taking out new home loans at lower rates to pay down the old ones.
In mid-July, a senior official acknowledged that the gap between rates on new mortgages and existing ones has caused some home buyers to repay mortgages early and hinted that the central bank would change that.
The average rate on new residential mortgages in August was 3.9% for new homes, according to Beike Research Institute, which sampled 100 Chinese cities. That is 0.3 percentage point lower than China’s five-year loan prime rate, the benchmark that banks typically use to price mortgages. Mortgage rates in China had been above 5% from mid-2017 to mid-2021, according to Wind data.
Shortly after Chinese regulators pushed through the changes to lower existing mortgage rates, some major banks issued statements saying they were preparing to implement the policy. They included China Construction Bank, which has lent outstanding mortgages worth around $880 billion, and Agricultural Bank of China, which has a $739 billion mortgage book.