Smaller China banks cut deposit rates to ease margin pressure

SOME smaller Chinese lenders cut interest rates for time deposits over the weekend, following a similar move by their larger rivals last year, after several lending rate reductions by policymakers started to squeeze their margins.

Rural lenders in provinces including Henan and Hubei lowered deposit rates by as much as 45 basis points on some tenors, according to their announcements. After the adjustment, these lenders will pay an annual 1.9 per cent for one-year deposits, down from the previous 2.25 per cent.

Chinese banks are facing mounting pressure to maintain profitability at a time when the authorities are ramping up efforts to boost the world’s second-largest economy. The People’s Bank of China (PBOC) unexpectedly lowered the reserve requirement ratio late last month in a move that will give lenders more cash to disburse loans and drive down their funding costs.

While China’s economic activity is rebounding this year after lifting Covid restrictions — with banks extending a record amount of new loans in January — analysts are cautious about the outlook for the sector.

State-owned banks posted a 13 per cent decline in pre-provision operating profit, which is income before accounting for funds set aside for bad debts, in the last three months of 2022 — the worst quarter since 2010, according to Jefferies Financial Group. Most of the banks also reported deteriorating net interest margins, a measure of profitability that will likely fall further in 2023.

China’s commercial banks have had some leeway in setting their own rates since the central bank scrapped direct control in 2005. The PBOC, however, maintains substantial sway by setting a ceiling and floor for rates through the interest rate self-disciplinary body.

The country’s benchmark one-year deposit rate for household savings is currently 1.5 per cent. Smaller banks still pay well above their larger rivals and the benchmark after the latest adjustment.

More coordinated efforts are needed to curb disorderly competition for deposits and strengthen the industry’s risk management as margin pressure is “tremendous”, Wang Yifeng, a Beijing-based analyst at Everbright Securities, said in a note to clients on Sunday (Apr 9).

Market expectations for deposit rate cuts at some banks drove China’s 10-year government bond yield to the lowest closing level since Jan 9 on Friday. It was little changed at 2.85 per cent on Monday.

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China’s biggest banks in September lowered their benchmark deposit rates across the board for the first time since 2015, a move designed to help them boost lending to shore up the economy battered by Covid restrictions and a deepening property crisis. BLOOMBERG