What’s new: Several of China’s small and midsize banks have cut interest rates on five-year time deposits to protect their profit margins as expectations grow for a continued decline in lending rates.
Meizhou Hakka County Bank Co. Ltd. in Guangdong province, for example, on March 1 cut its rate on five-year time deposits to 2.5% from 2.7%, according to announcements on the bank’s website.
Caixin found the interest rates offered by four other small and midsize banks on the same type of product are now on par with or even lower than their rates on three-year time deposits.
The rate cuts are in response to expectations for further reductions in benchmark lending rates, which will push down the rates that banks can charge on their loans, eroding their profit margins, industry insiders said.
“Currently, banks, particularly small local ones, are still willing to accept three-year time deposits, but have become less inclined toward five-year ones,” an employee at a rural lender told Caixin. “As a result, they are intentionally reducing the interest rates on five-year time deposits, somewhat ‘dissuading’ customers from choosing them.”
The background: Declining lending rates can squeeze banks’ profit margins unless they reduce their funding costs, such as by lowering the interest rates they pay savers.
There are already signs lenders are feeling pinched. The average net interest margin (NIM) of all Chinese commercial banks fell to a record low of 1.69% last year, data from the National Financial Regulatory Administration show.
NIM represents net interest income — which makes up a large portion of banks’ profits and refers to the difference between interest earned on lending and interest paid on deposits and borrowed funds — expressed as a percentage of their interest-earning assets.
That’s below the warning level of 1.8% that a government-backed industry group has defined as reasonable profitability.
Analysts widely expect further cuts to the country’s benchmark lending rates to stimulate demand and enliven the economic recovery.
Read more In Depth: China Set for Interest Rate Cuts to Support Economy
Contact reporter Qing Na (qingna@caixin.com) and editor Michael Bellart (michaelbellart@caixin.com)
