• News
• 2024-08-10

Deposit Rate Cut Supports Stable Interest Spread

Since 2024, with the pressure of asset-side repricing improving quarter by quarter, the contribution of the liability side to the interest spread has also gradually become apparent. The release of the effectiveness of the reduction in deposit interest rates, combined with the downward trend in the cost of active liabilities, has driven the support of the liability side for the interest spread of listed banks. Moreover, the prohibition of "manual interest supplementation" is expected to further regulate competition in the bank's deposit market, thereby reducing the industry's deposit costs.

In the first half of 2024, commercial banks achieved a net profit of 1,257.4 billion yuan, a year-on-year increase of 0.4%, with a decrease of 0.3 percentage points in the growth rate compared to the first quarter. Looking at the performance of net interest income and non-interest income, the scale growth of commercial banks slowed down in the first half of the year, and the interest spread remained the same quarter-on-quarter, with net interest income growth continuing to face pressure.

Under the dual pressures of insufficient effective demand in the real economy and regulatory guidance to optimize supply, the growth rate of bank asset scale has continued to slow down since 2024. As of the end of June, the total assets of commercial banks reached 370 trillion yuan, a year-on-year increase of 7.28%, which was 3.68 percentage points and 1.86 percentage points slower than in 2023 and the first quarter of 2024, respectively. The net interest spread in the first half of 2024 remained the same as the first quarter at 1.54%.

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The net interest spread of banks in the first half of the year has stabilized quarter-on-quarter, and the contribution of the liability side has gradually become apparent. The industry's net interest spread in the second quarter of 2024 was 1.54%, remaining the same quarter-on-quarter. As the role of the liability side's contribution becomes increasingly prominent, it is expected that the downward pressure in 2024 will gradually ease quarter by quarter. Looking at 2024, the pressure of asset-side repricing is improving quarter by quarter, and the contribution of the liability side to the interest spread is also gradually becoming apparent. The release of the effectiveness of the reduction in deposit interest rates, combined with the downward trend in the cost of active liabilities, has driven the support of the liability side for the interest spread of listed banks. Moreover, the prohibition of "manual interest supplementation" is expected to further regulate competition in the bank's deposit market, thereby reducing the industry's deposit costs.

The inflection point of deposit costs is downward.

In 2024, against the backdrop of dual pressure from both the lending and deposit sides, the bank's interest spread faces significant downward pressure. Since 2024, although the credit interest rate has continued to decline, the deposit cost has also reached an inflection point and is heading downward, and the pressure on the bank's interest spread is expected to be significantly relieved.

Affected by the slowdown in demand, the loan interest rate is still in a downward channel. From a policy perspective, the lower limits of personal housing loan interest rates for the first and second sets were completely canceled in the second quarter, and the 1-year and 5-year LPR have cumulatively decreased by 10BP and 35BP respectively within the year.

Taking the Industrial and Commercial Bank of China as an example for calculation, the LPR interest rate cut since June 2023 will lead to a decrease in the loan yield for each quarter from the second quarter of 2024 to the first quarter of 2025 by 5BP, 4BP, 4BP, and 7BP, respectively. From the credit market perspective, since 2024, the new loan interest rate has continued to decline to a historical low, among which, the decline in the new personal loan interest rate is higher than the LPR, which means that in addition to the LPR, the downward trend in loan pricing points will further reduce the loan yield. Fundamentally, the weak effective credit demand leads to a greater downward amplitude on the loan side than the LPR.

With the gradual release of benefits such as multiple rounds of deposit挂牌 interest rate cuts and the removal of high-interest deposit products, the cost rate of liabilities has entered a downward channel. Looking at the data from the first quarter of 2024, the cost rate of interest-bearing liabilities of listed banks has decreased by 5.4BP compared to the beginning of the year. In terms of types, the decline in the cost rate of interest-bearing liabilities of state-owned large banks, joint-stock banks, city commercial banks, and rural commercial banks compared to the beginning of the year is 4.2BP, 6.8BP, 6.9BP, and 12.4BP, respectively.

In April, the regulatory rectification of "manual interest supplementation", under static calculation, it is expected that this move will boost the average net interest spread of state-owned large banks and joint-stock banks in 2024 by 1.5BP and 3.7BP, respectively. In July, after the LPR was reduced, banks immediately started a new round of deposit interest rate cuts, among which, the挂牌 interest rate of demand deposits was generally reduced by 5BP, the interest rate of one-year fixed deposits was reduced by 10BP, and the interest rate of fixed deposits with a term of two years or more was reduced by 20BP. Under static calculation, it is expected to boost the net interest spread of state-owned large banks, joint-stock banks, city commercial banks, and rural commercial banks in 2024 by 1.8BP, 1.6BP, 1.5BP, and 1.5BP, respectively, and there is still a large room for the cost rate of interest-bearing liabilities to decline in the future.At present, the improvement in current deposit costs is mainly attributed to three factors: First, the governance of "manual interest supplementation" in the second quarter of 2024 has addressed the shortcomings in deposit cost control, resolving the rigidity of corporate deposit costs. Second, the two rounds of significant deposit rate cuts in December 2023 and July 2024 have had a noticeable impact on repricing. Third, the three rounds of deposit rate cuts in the third quarter of 2022, the second quarter of 2023, and the third quarter of 2023 are still effective.

Due to the influence of various factors, the first three rounds of deposit rate cuts did not significantly reduce deposit costs. From September 2022 to September 2023, state-owned large banks successively lowered deposit挂牌 rates in three rounds, but the deposit costs increased instead of decreasing.

According to the analysis of Donghai Securities, there are mainly three reasons for the increase in bank deposit costs: First, the decrease in residents' housing expenditure and consumption tendency, and the weakening of corporate investment and receivables has intensified the termization of deposits. Second, the market-oriented reform of deposit rates is slower than that of loans, and the interest rate transmission is lagging behind, with the first three rounds of deposit rate cuts being slow and small in amplitude. Third, deposits generally use fixed interest rate pricing, and repricing usually waits until the deposit matures, with the repricing cycle for medium and long-term deposits exceeding one year (the pricing rule for medium and long-term loans is generally LPR + fixed points, and the repricing cycle is generally within one year), which lags behind the reduction in loan costs.

However, with the shortcomings in cost control being addressed and multiple rounds of repricing, bank deposit costs are expected to decrease significantly. Taking the Industrial and Commercial Bank of China as an example, it is estimated that the governance of "manual interest supplementation" and multiple rounds of repricing will significantly reduce deposit costs, and the support for the interest spread can offset the LPR repricing with a slight surplus.

Specifically, if implemented effectively, the governance of "manual interest supplementation" will significantly promote the improvement of the deposit cost rate in the second quarter of 2024, with a conservative estimate of an improvement of 5BP. The two rounds of deposit rate cuts in July 2024 and December 2023 cover a wide range of products, and the long-end decline is more significant, with an estimated cumulative improvement of 5BP and 3BP in the deposit cost rate from the second quarter of 2024 to the first quarter of 2025. From September 2022 to September 2023, the three rounds of deposit rate cuts are still effective, and it is expected to cumulatively promote the improvement of the deposit cost rate by 5BP from the second quarter of 2024 to the first quarter of 2025.

The first mid-year report of listed banks has corroborated the above estimates. In the first half of 2024, the overall deposit cost rate of Nanjing Bank decreased significantly compared to the whole year of 2023, among which, the corporate demand deposit cost rate, which was previously more rigid, benefited more from the governance of "manual interest supplementation" and decreased more significantly.

Bank interest spread pressure slows down

Affected by the interweaving of multiple factors, the bank interest spread will continue to hover at a low level in the future. On the one hand, it is relatively certain that the pressure on bank interest spreads will slow down in 2024, mainly due to the following three factors: 1. The support from deposit repricing is more significant; 2. The interest rate on interbank liabilities has significantly decreased; 3. Under the pressure of credit risk from small and medium banks, the regulatory authorities will care for the net interest spread of banks, and the synchronization of deposit and loan rate cuts is expected to be maintained in the future.

On the other hand, the bank interest spread is still subject to the suppression of multiple potential factors: 1. Since the second quarter of 2024, the termization has intensified again; 2. Some deposits affected by interest rate cuts may look for new directions to buffer the impact of interest rate cuts, such as replacing them with other types of deposits or deposits from other banks with higher interest rates; 3. The manufacturing PMI is below the boom-and-bust line, indicating weak credit demand, and the current exchange rate has loosened the constraints on monetary policy, and there may still be room for loan interest rates to decrease within the year.

Taking into account the above factors, the supporting role of deposit rate cuts on bank interest spreads is gradually becoming apparent. Although the decline will slow down, affected by the weak demand on the asset side, the bank interest spread will continue to hover at a low level for some time in the future.Data indicates that in the first half of 2024, the net interest margin (NIM) for commercial banks was 1.54%, remaining unchanged quarter-on-quarter. Looking at the performance of different types of banks, the net interest margin for state-owned large banks narrowed by 1 basis point (BP) to 1.46%, while for joint-stock banks and rural commercial banks, it increased by 1 BP to 1.63% and 1.72% respectively, and for city commercial banks, it remained unchanged at 1.45%. The judgment that the net interest margin has stabilized at this stage is mainly attributed to the improvement in deposit costs and the continuous accumulation of positive factors on the liability side.

These positive factors mainly include the following three aspects: 1. As time deposits gradually mature and are renewed, the effect of the reduction in deposit挂牌 rates over the past two years is accelerating; 2. In the second quarter, regulatory rectification of bank deposits' "manual interest supplementation" has driven improvements in the deposit costs of some state-owned large banks; 3. Banks actively manage high-yield products such as notice deposits and large-denomination certificates of deposit.

It can be said that the strengthening of cost control on the liability side has made an indispensable contribution to the net interest margin of banks remaining at 1.54% quarter-on-quarter in the first half of 2024.

Looking forward to the full year of 2024, the net interest margin of banks still faces pressure, but it is expected that the decline will narrow under the background of liability cost control. Considering the current weak effective credit demand and the possibility of intensifying stable growth policies, there is still downward pressure on newly issued loan rates, especially mortgage loan rates; coupled with the low interest rate substitution of bond investments, the asset side yield is expected to continue to be under pressure throughout 2024.

However, considering the regulatory layer's protective attitude towards bank interest margins, with synchronized cuts in deposit and loan interest rates, and banks continuously strengthening liability cost control, the reduction in liability costs is expected to alleviate the downward pressure on interest margins. From the perspective of liability structure, the impact of deposit outflows and structural changes such as the regularization and long-termization of deposits due to the reduction in deposit interest rates requires further observation.

At this stage, the impact of the economic fundamentals on the banking sector remains positive: concerns about risks in key areas such as real estate and urban investment have eased, and the current safety of the banking sector is higher than the low point in the first quarter; with the intensification of policies to boost consumption, it is conducive to the improvement of the banking operating environment.

In the first half of the year, commercial banks maintained steady profits, credit allocation entered a stage of high-quality development, the scale growth rate slowed down as expected, the net interest margin remained unchanged quarter-on-quarter, and asset quality indicators were stable. Looking forward to the full year of 2024, against the backdrop of insufficient effective demand, the overall expansion of bank scale is expected to slow down; there is still downward pressure on the asset side interest rates, and based on this, the interest margin is still under pressure; but considering the accelerated improvement in deposit costs, the decline in the interest margin for the full year of 2024 is expected to narrow year-on-year; under the situation of reduced volume and reduced prices, it is difficult to improve the short-term growth rate of bank performance. However, under the current policies that protect bank interest margins, optimize real estate policies, and promote local debt, the pressure of non-performing loans in key areas of banks is expected to improve marginally, and the probability of the industry's interest margin and performance sliding beyond expectations is low.