Deposit Rates Expected to Decline as Net Interest Margins Narrow for Chinese Banks

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Domestic analysts expect China’s financial regulators to permit further declines in rates on bank deposits, as net interest margins shrink for Chinese lenders amidst from authorities to extend more credit.

As of the end of 2022, the overall net interest margin of China’s commercial banks was 1.91%, for a decline of 17 basis points compared to the end of 2021, according to a report from Zhongtai Securities.

The annual reports released by 24 of China’s listed banks further indicates that their annualized cumulative net interest margin was 2.08%, for a decline of three basis points from end of the second half of 2022, while the deposit interest rate increased by four basis points over the same period.

According to Dai Zhifeng (戴志锋), chief banking sector analyst at Zhongtai Securities, the shrinking of net interest margins will prompt China’s financial regulators to permit declines in deposit rates, in order to shore up credit extension by Chinese banks as well as forestall risky lending behaviour.

“Regulators still have the motivation to further reduce the liability costs of banks, and it is expected that bank deposit interest rates will slowly decline,” Dai writes.

“If the interest rates of bank assets are floating, but their liability costs remain high, then pressure on the net interest margin will compress bank profits during a cycle of interest rate declines.

“On the one hand, the bank’s motivation to reduce loans costs is insufficient, which is unfavourable for the recovery of the real economy. On the other hand, under the pressure of interest rate spreads, some banks may increase their risk appetite, which is unfavourable for the stability of the financial system.

“Consequently, the regulator still has the motivation to further reduce liability costs for banks.”

For this reason, Dai expects regulators to continue to strengthen the use of deposit constraints and seek to further optimise market transmission mechanisms.

“In terms of interest rates, firstly, the benchmark interest rate, as a ballast, is being adjusted more cautiously in the current environment. Since 2015, the one-year deposit benchmark interest rate has remained at 1.5% and has not changed with the CPI. Secondly, there is a possibility of further lowering the upper limit of the floating interest rate, with the core issue being the pressure on the interest margins of banks.”