Smaller Chinese banks cut deposit rates on squeezed margins

BEIJING   – Several small and mid-sized banks in China have lowered their deposit interest rates, a move that could help ease costs as loan growth faces more pressure amid rising economic risks.

Rural commercial banks and credit unions in Hubei and Henan provinces cut rates on a range of deposits over the weekend, following cuts at some regional lenders in the southern province of Guangdong last week, statements from the lenders showed.

Henan LuoShan Rural Commercial Bank on Saturday lowered the interest rate for one-year deposits by 35 basis points (bps) to 1.9  percent, by 30 bps for two-year deposits to 2.4  percent and by 45 bps for three-year deposits to 2.85  percent, according to a statement.

The move comes as lenders face rising pressure from narrower profit margins as China’s economy recovers from three years of harsh pandemic curbs and a property market slump. Household savings have surged while credit demand remains sluggish.

China’s economy reopened after zero-COVID policies were lifted in December but commerce and domestic demand are not back to pre-pandemic levels. The foundation of the recovery is not yet solid, analysts warned.

“Against the backdrop that financial institutions are encouraged to support the economy, lending rates have obviously fallen,” Ming Ming, a fixed income analyst at CITIC Securities, wrote in a research note released on Monday.

“But the costs of liabilities of banks remain relatively rigid, and net interest margins continue to shrink, which added to their operating pressures,” he said.

Nicholas Zhu, a banking analyst at Moody’s, said smaller banks’ pricing changes usually follow larger banks’ initiatives with a time lag. In September, China’s largest banks lowered deposit rates in their first broad-based move since 2015 to ease margin pressure.

The deposit rate cuts by some Chinese banks in April were “normal behavior” guided by the self-disciplinary mechanism, the People’s Bank of China (PBOC) said in response to a Reuters request for comments, a mechanism that was rolled out for market-orientated pricing of interest rates.

Lower deposit rates could also help ease banks’ margin pressures at a time when investors have raised their hopes for a cut in lending rates to prop up the economy.

“The economy is still running below its potential,” said Zhiwei Zhang. “There is room for fiscal and monetary policies to boost growth further.”

“With inflation dropping in China and the rate hike cycle in the U.S. coming to its end, the likelihood of a PBOC rate cut is rising,” he said.