China’s smaller banks cut deposit rates to ease margin pressure

BEIJING - Some smaller Chinese lenders cut interest rates for time deposits at the weekend, following a similar move by their larger rivals in 2022, after several lending rate reductions by policymakers started to squeeze their margins.

Rural lenders in provinces like Henan 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 in late March, 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 a

fter the lifting of Covid-19 curbs – with banks extending a record amount of new loans in January – analysts are cautious about the sector’s outlook.

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 benchmark one-year deposit rate for household savings is now 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”, said Everbright Securities analyst Wang Yifeng.

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.

China’s biggest banks in September cut their benchmark deposit rates across the board for the first time since 2015, a move meant to help them boost lending to shore up a virus-hit economy and a deepening property crisis. BLOOMBERG