Expectations for a new round of deposit interest rate cuts are heating up, with LPR asymmetric rate cut quotes | LPR | interest rates
On August 21st, the LPR asymmetrically lowered interest rates, while interest rates over 5 years remained unchanged.
On the 18th, the People's Bank of China, the State Administration for Financial Regulation, and the China Securities Regulatory Commission jointly held a video conference proposing to play an important role in the market-oriented adjustment mechanism of deposit interest rates, enhance the sustainability of financial support for the real economy, and effectively play the positive role of finance in promoting consumption, stabilizing investment, and expanding domestic demand.
Market analysis generally believes that this means that the possibility of policy signals pointing to a reduction in deposit interest rates is increasing. Recently, the net interest margin of commercial banks has continued to narrow. Against the backdrop of net interest margin pressure, maintaining commercial bank profits has become a key policy at present.
A new round of deposit interest rate cuts may begin
The People's Bank of China has authorized the National Interbank Funding Center to announce that on August 21st, the loan market quoted interest rate was 3.45% for a one-year LPR, a decrease of 10 basis points from the previous month; LPR over 5 years reported 4.2%, the same as last month.
On the 15th, the three major interest rates achieved their second collective reduction within the year, and the MLF interest rate fell by 15BP, triggering market expectations for a corresponding reduction in LPR quotes for this month.
However, based on the actual quotation on the 21st, the 1-year LPR quotation has been reduced by 10BP, which is smaller than the decrease in MLF interest rates, while LPR quotations for more than 5 years have remained stagnant.
Multiple market analysts predict that, in addition to the imminent adjustment of existing mortgage interest rates, this may mean that commercial banks will start a third round of adjusting deposit listing rates based on their own business needs and market conditions in the future.
According to the market-oriented adjustment mechanism of deposit interest rate, the deposit interest rate will be adjusted reasonably by reference to the bond market interest rate represented by the 10-year treasury bond bond yield and the loan market interest rate represented by the one-year LPR quotation.
Data shows that after the latest LPR results were released, the yield of 10-year treasury bond bonds declined rapidly, hitting a new low of 2.545%. As of the close on the 21st, the yield of 10-year treasury bond was 2.554%.
Wang Qing, the chief macro analyst of Oriental Jincheng, believes that this means that a new round of deposit interest rate reduction process may start, driven by the reduction of 1-year LPR quotation in June and August, and the continuous downward trend of recent 10-year treasury bond bond yield.
Relieve the pressure of narrowing net interest margin
In recent years, the cost of social financing has been continuously decreasing. The interest rate for corporate loans from January to July this year was 3.94%, a year-on-year decrease of 0.35 percentage points. The continuous decline in loan interest rates is continuously compressing the net interest margin space of the banking system.
The latest data from the State Administration of Financial Regulation shows that the net interest margin of commercial banks in the second quarter was 1.74%, with a slightly narrower year-on-year decline and the same as the first quarter.
Wang Yifeng, Chief Analyst of the Banking Industry at Everbright Securities Research Institute, believes that from the perspective of net interest margin stability, the net interest margin pressure on China's banking system is still significant. Although the State Administration for Financial Regulation announced that the net interest margin of banks remained stable in the first half of this year compared to the first quarter, this does not mean that the net interest margin has stabilized. On the contrary, the subsequent pressure remains significant.
The continuous narrowing of net interest margin has also led to a decrease in the growth rate of commercial bank profits. In the first half of 2023, commercial banks achieved a cumulative net profit of 1.3 trillion yuan, a year-on-year increase of 2.6%, a decrease of 4.5 percentage points compared to the same period last year.
Wang Qing believes that the overall LPR quotation reduction is not as expected, and it will continue to reduce the financing costs of the real economy while easing the pressure on banks to narrow their net interest margin. It will also promote banks to quickly lower the interest rates of existing housing loans.
Wen Bin, Chief Economist of Minsheng Bank, stated that in the current environment where bank asset side returns are still under pressure, it is expected that the central bank will continue to guide deposit interest rates downward in the future to stabilize bank interest rate spreads and profit margins. The continued downward trend of deposit interest rates will also to some extent promote the conversion of high savings among residents, accelerate consumption and investment behavior, and thus promote a virtuous cycle of economy and finance.
Regarding the net interest margin risk of banks, the People's Bank of China pointed out in the "2023 Q2 China Monetary Policy Implementation Report" that commercial banks need to maintain a reasonable level of profit and net interest margin to maintain stable operations and prevent financial risks, which is also conducive to enhancing the sustainability of commercial banks supporting the real economy.
The report stated in its column that the asset size and total profit of commercial banks in China are gradually expanding, but the net interest margin and asset profit margin are showing a downward trend. With the deepening of interest rate marketization reform, competition in the credit market has intensified, especially since the COVID-19, loan interest rates have declined significantly, and the profitability of banks has declined.
The report also states that considering that financial and economic cycles are often not fully synchronized, bank credit risk exposure takes some time, and there should be some financial preparation and risk buffering. Allowing banks to maintain their stable operations in a reasonable manner can enhance their ability to continuously support the development of the real economy.
Against the backdrop of a significantly faster decline in yield on the loan side than on the deposit side, commercial banks have been continuously adjusting their deposit strategies this year. For example, banks have recently suspended sales of large deposit certificate products. "Our bank's large deposit certificates currently have almost no limit, and the fixed deposit interest rate has recently declined significantly. Moreover, the interest rate on large deposit certificates is not high," a customer manager of a state-owned large bank told reporters.
Wang Yifeng believes that major banks may once again lower their deposit listing rates and simultaneously lower their internal interest rate authorization limits in the near future, and the magnitude will be greater than the previous round. From the trend of deposit regularization, the reduction of listed interest rates may still be asymmetric, with a larger decline in the long term than in the short term. This is beneficial for easing deposit regularization and long-term, as well as reducing fund arbitrage.
In addition to lowering the deposit listing interest rate, Shen Wan Hongyuan and Jia Dongxu believe that the reserve requirement reduction has a more direct effect on easing the cost pressure on commercial banks, and there is still room for further reserve requirement reduction operations. When the cost of commercial banks on the debt side eases, the space for subsequent LPR decline will naturally open up.