The "command gun" for adjusting deposit and loan interest rates has been fired!

In early September, banks took frequent actions on the deposit and loan sides. After state-owned banks fired the "starting gun" first, urban rural commercial banks began to follow up one after another.

From the deposit side, following the reduction of fixed deposit interest rates by state-owned banks in early September, the deposit interest rates of local banks such as Bank of Beijing, Bank of Shanghai, and Bank of Chongqing have also decreased, with a decrease of 10BP to 35BP. From the perspective of the loan side, the reduction of existing housing loans is about to enter the implementation stage. Following the announcement of the implementation rules for reducing the interest rates of existing first home loans by state-owned banks and joint-stock banks, some local urban commercial banks have also clarified the details of the adjustment of existing housing loan interest rates and plan to adopt a unified batch adjustment method on September 25th.

Some institutional insiders believe that this also means that the current round of deposit and loan adjustments is spreading from large banks to small and medium-sized banks. Compared to before, this round of bank adjustments has been more intense. However, the reduction in deposit interest rates can effectively mitigate the impact of the reduction in mortgage interest rates, with limited impact on the overall operation of banks and relatively controllable risks.

City commercial bank follows up with deposit interest rate reduction

"One step late, the interest rate has already been lowered yesterday," said Wu Da, a depositor at a city commercial bank. Due to learning the news late, he missed the higher fixed deposit interest rate of the previous two days. For him, the intensive reduction of deposit interest rates is more like a "race", with a quick response and early planning to save effectively.

There are many people who have had similar experiences with Wu. Just three months after the previous round of deposit interest rate cuts, a new wave of deposit interest rate cuts has arrived.

On September 1st, six state-owned banks and several joint-stock banks updated their deposit reference interest rate tables, reducing the interest rates for 1-year, 2-year, 3-year, and 5-year fixed deposits by 10BP, 20BP, 25BP, and 25BP, respectively.

Subsequently, several urban rural commercial banks including Bank of Beijing, Bank of Suzhou, Bank of Shanghai, Bank of Chongqing, and Bank of Qingdao followed suit and joined the trend of lowering deposit interest rates.

From the perspective of the magnitude of the reduction, this round of urban commercial bank's reduction is basically on par with state-owned banks and joint-stock banks, with a focus on medium and long-term deposit restrictions. Among them, the 3-year and 5-year fixed deposit and withdrawal interest rates have been reduced by about 25BP, while the 1-year and 2-year fixed deposit and withdrawal interest rates have decreased by 10BP and 20BP, respectively.

The first bank to follow suit was Beijing Bank. According to the official website of the bank, the new interest rate schedule will be implemented from September 2nd, with the listed interest rates for 1-year, 2-year, 3-year, and 5-year lump sum deposits and withdrawals being 1.75%, 2.1%, 2.25%, and 2.3%, respectively.

Some urban commercial banks have a higher reduction rate than joint-stock and state-owned banks. According to the official website of Suzhou Bank, a new interest rate schedule will be implemented on September 6th. The listed interest rates for 1-year, 2-year, 3-year, and 5-year lump sum deposits and withdrawals will be 1.7%, 2.1%, 2.4%, and 2.4%, respectively, with a reduction of 10BP, 20BP, 35BP, and 35BP.

Looking at the timeline, compared to the two rounds of deposit rate cuts in June and September last year, the current round of deposit rate cuts in various banks is more significant. According to the analysis by the China Securities Research Institute, in the September 2022 downward trend, state-owned and joint-stock banks generally lowered their current deposits by 5 basis points, 3-year deposits by 15 basis points, and other maturities by 10 basis points; In the June 2023 downward trend, state-owned large banks generally lowered their current deposits by 5 basis points, and the reduction in 3-year and 5-year deposits was generally more than 10 basis points. In this round of adjustment, most banks did not adjust their current deposits, and the decline in three-year and five-year deposits was mostly 25BP.

Linkage of existing housing loans

At the same time as the deposit interest rate has been lowered, the adjustment details for existing housing loans have also been disclosed in a coordinated manner.

After six major banks in China successively announced the specific policy of lowering the interest rates on existing first-time housing loans, several city commercial banks such as Bank of Shanghai, Bank of Beijing, and Bank of Chongqing also released announcements to disclose the adjustment details.

Overall, the detailed rules for adjusting the interest rates of existing first-time housing loans in the above-mentioned urban commercial banks are basically consistent with the context of state-owned large banks. From the perspective of adjustment rules, the above-mentioned banks divide the specific adjustment range of loans according to three time periods. For example, Chongqing Bank adjusted the loans issued before October 8, 2019, from October 8, 2019 to May 14, 2022, and May 15, 2022 in its announcement.

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From the perspective of application time and adjustment methods, the above-mentioned urban commercial banks all adopted a unified batch approach to actively adjust the interest rate of existing first home loans on September 25th. Chongqing Bank announced that when the original loan was issued, the first home loan interest rate policy in the city where it was issued was implemented, and the current floating rate stock mortgage is priced at LPR. The bank will take the initiative to adjust the contract interest rate uniformly starting from September 25, 2023, and the new interest rate will take effect from the day of adjustment. According to a notice from Bank of Beijing, on September 25, 2023, for eligible first-time personal housing loans, customers do not need to submit an application. The bank will actively adjust the loan interest rate in bulk according to the adjustment rules.

However, there are also some situations where borrowers need to actively apply according to the bank's requirements. For example, Bank of Beijing stipulates that customers who apply for interest rate adjustments after October 22, 2023, including those who have added "non first home to first home" loans, outstanding principal and interest repayments for non-performing loans, and existing housing loan customers who are currently implementing fixed or benchmark interest rate pricing, can apply and the bank will conduct manual review on a case by case basis. Chongqing Bank also stipulates that in cases involving the conversion of second homes to first homes in existing housing loans, overdue loan repayment of outstanding principal and interest in existing housing loans, and customers requiring new loan replacements, customers must actively apply.

What is the impact on the net interest margin of banks?

Behind the double decline in deposit interest rates and stock mortgage interest rates, there is actually a certain degree of linkage. Industry insiders have analyzed that it is necessary for banks to reduce their existing mortgage loans in the current situation of sluggish growth in personal mortgage loans and frequent early repayment. However, considering the current pressure on the overall interest rate spread of banks, it is necessary to reduce deposit interest rates to ensure reasonable interest rate spread space and maintain the stable survival of banks.

Especially for urban commercial banks that have previously faced significant pressure to narrow their net interest margin, it is particularly necessary to closely follow the trend of state-owned banks to lower their interest rates. According to calculations by Guojin Securities, multiple LPR reductions since last year have driven the loan weighted interest rate back to 4.19% in mid-2023. During this period, the net interest margin of banks significantly narrowed, with urban rural commercial banks experiencing a significant narrowing. In June 2023, the net interest margin between Urban Commercial Bank and Rural Commercial Bank narrowed by 27.4 BP and 44.1 BP respectively compared to the end of 2021. However, the net interest margin of large banks and joint-stock banks narrowed by 36.5 basis points and 31.5 basis points compared to the end of 2021.

What is the impact of this round of deposit and loan adjustment on the net interest margin of banks? Most institutions hold a positive attitude.

According to Dai Zhifeng, Chief Analyst of Zhongtai Securities in the banking industry, listed banks provided approximately 23 trillion yuan in mortgage loans from 2018 to 2022, accounting for 65.5% of the current stock mortgage loans of listed banks. Assuming that this portion can enjoy a reduction in the interest rate of stock mortgage loans, it is expected to save residents 138.8 billion yuan in interest expenses, and the impact on the interest spread of listed banks in 2024 is expected to be about 4.7BP.

Dai Zhifeng further pointed out that, taking into account the current round of deposit and loan adjustments, the reduction in deposit interest rates can effectively mitigate the impact of the reduction in mortgage interest rates. The impact on the net interest margin of listed banks is less than 2.4 BP, and the impact on the interest margin of rural commercial banks, urban commercial banks, joint-stock banks, and state-owned banks is+0.9 BP, 0, -2 BP, and -2.86 BP, respectively. This also means that it may have a positive impact on the rural commercial bank and urban commercial bank sectors, and a negative impact on large banks and joint-stock banks.

In addition, the reduction of existing housing loans may alleviate the pressure of early repayment and also help alleviate the downward pressure of interest rate differentials. Liu Chengxiang, Chief Analyst of Open Source Securities Bank, predicts that if residents do not make early repayments, the average yield on the bank's existing mortgage loans will be 4.6%; If residents make early repayments, the bank can use this funds for financial investment, assuming an average rate of return of 3%. Therefore, if residents do not make early repayments, banks can receive a 1.6% interest margin. Therefore, in the conservative, neutral, and aggressive scenarios, the decrease in early repayment ratio is expected to improve the net interest margin of listed banks by 0.46BP, 1.14BP, and 1.83BP.