China’s largest state-owned banks are reducing deposit rates for the third time since the beginning of this year.
The mentioned actions of financial institutions are an attempt to ease the pressure on their net interest margin and increase profitability.
The Industrial and Commercial Bank of China, China Construction Bank, Agriculture Bank of China, Bank of China, and Bank of Communications announced a downward revision of the deposit rate. In the case of some products, this indicator will decrease by 25 basis points. This was reported by creditors.
Analysts at Japanese investment bank Nomura say that lower interest rates will reduce pressure on net interest margins. Also, in their opinion, these actions by financial institutions can form a kind of basis for the People’s Bank of China to cut interest rates on loans in January, which have remained unchanged over the past four months. If the regulator makes an appropriate decision, it will signal that Beijing is concerned about downward pressure on economic growth. Analysts note that deflation and a sharp change in US rates have partially eliminated obstacles to similar measures by the People’s Bank of China.
Last year, the profitability of financial institutions in the Asian country was under pressure. The reason for this was Beijing’s demand to reduce interest rates on loans to banks. The authorities made this decision to support Chinese developers, who are forced to fight for survival amid a deep crisis in the real estate sector and stimulate the real sector of the economy.
The net interest margin of Chinese lenders fell to a record low of 1.73%. The 1.8% level is necessary to maintain acceptable profitability of financial institutions.
After adjustments, banks will pay annual interest of 1.45% on term deposits for one year. The rates for two-year, three-year, and five-year deposits are now 1.65%, 1.95% and 2%, respectively.
Chinese banks have already made similar decisions in June and September.
Li Ying, head of Financial institution ratings at S&P Global (China) Ratings, says that lenders in the Asian country maintain a reasonable level of profitability. The expert noted that these efforts are very important for the sustainability of China’s financial sector. Li Ying also stated that the reduction in the deposit interest rate creates greater flexibility to further decline the basic loan rate if necessary.
As we have reported earlier, China’s Local Governments Support Troubled Banks.
