The deposit interest rate of small and medium-sized banks has accelerated at a faster pace, and there is still room for interest rate cuts in the future

November is usually the node for deposits at the end of the year, but the pace of decline in the fixed deposit interest rate of small and medium-sized banks has been gradually and frequently in recent years.

According to the incomplete statistics of the first financial reporter, in just two weeks, more than ten small and medium-sized banks, including Leizhou Rural Commercial Bank and Tianjin Jinnan Village Bank, issued announcements to reduce the interest rate of time deposits of different periods, ranging from 5BP~35BP.

The industry generally believes that the current round of intensive interest rate cuts by small and medium-sized banks is a "follow-up reduction" of the deposit interest rate reduction of large banks in September. On September 1 this year, the Bank of China, China Construction Bank, Industrial and Commercial Bank of China and other large state-owned banks officially announced that they would cut deposit interest rates again, with the one-year lump sum deposit interest rate reduced by 10 basis points to 1.55%, the two-year lump sum deposit interest rate reduced by 20 basis points to 1.85%, and the three-year and five-year lump sum deposit interest rates reduced by 25 basis points to 2.2% and 2.25% respectively.

Compared with the previous rounds of deposit reductions, the current round of deposit reductions for small and medium-sized banks is mainly based on medium and long-term maturity, with a larger adjustment range and a faster follow-up rate. Looking ahead, many industry institutions said that there is still room for downward movement in the follow-up deposit rate.

Small and medium-sized banks are gradually "following the decline".

On November 17, Guangdong Chaoyang Rural Commercial Bank issued an announcement to reduce the deposit interest rate. According to the announcement, the one-year lump sum deposit rate was reduced by 15BP to 1.65%, the three-year lump sum deposit rate was reduced by 35BP to 2.35%, and the five-year deposit rate was reduced by 25BP to 2.35%.

In fact, there are not a few small and medium-sized banks that have recently cut deposit interest rates as sharply as Guangdong Chaoyang Rural Commercial Bank. After incomplete combing, more than 10 small and medium-sized banks, including Leizhou Rural Commercial Bank, Changji National Village Bank, Tianjin Jinnan Village Bank, etc., have recently lowered their time deposit interest rates, ranging from 5BP to 35BP.

Judging from the lowered interest rates, the above-mentioned banks have all lowered the interest rate of fixed deposits to below 3%, among which the reduction of medium and long-term deposits of more than two years is larger, generally around 20BP.

This is in line with previous trends in institutional statistics. According to the statistics of the Rong 360 Digital Technology Research Institute, the average interest rate of deposits with a maturity of 2 years and above continued to fall in October. Among them, the average interest rate of 3-month and 6-month deposits of rural commercial banks remained unchanged, the average interest rate of 1-year increased slightly, and the average interest rate of 2 years and above decreased month-on-month.

It is worth noting that while small and medium-sized banks have focused on lowering interest rates on longer-term deposits, short-term deposit rates have been lowered to a lesser extent, and some banks have even increased instead of falling. For example, Dujiangyan Jindu Village Bank, compared with its two deposit rate announcements in May and November, the one-year lump sum deposit and withdrawal interest rate rose from 2.2% to 2.25%. Liu Yinping, an analyst at the Rong 360 Digital Technology Research Institute, told the first financial reporter that in order to alleviate the pressure on interest rate spreads and cope with the trend of regular and long-term deposits, the banking industry as a whole continues to reduce the cost of long-term deposits.

In fact, the current round of small and medium-sized banks has been expected by the market. In September this year, the Bank of China, China Construction Bank, Industrial and Commercial Bank of China and other large state-owned banks fired the "starting gun" and officially announced that they would cut the deposit interest rate again, ranging from 10BP~25BP. Some people in the industry believe that the current round of small and medium-sized bank cuts is a "follow-up reduction" to the reduction of deposit interest rates in September.

It is worth noting that this round of small and medium-sized banks "follow up" faster. In the long term, in September 2022, June and September 2023, state-owned banks fired three rounds of deposit rate cuts, and then small and medium-sized banks followed suit.

Among them, after the deposit interest rate of large banks was lowered in September 2022, most small rural commercial banks and village and township banks began to follow up with the first round of deposit rate reduction on a large scale after March this year. However, in the two rounds of deposit rate cuts in June and September 2023, small and medium-sized banks have followed suit faster. For example, Leizhou Rural Commercial Bank only "made up for the reduction" in March 2023 to follow up the first round of deposit rate reductions, and issued two deposit rate adjustment announcements in June and November.

There's still room to fall

Looking ahead, institutions generally believe that there is still room for bank deposit rates to be lowered.

"The pressure on bank interest rate spreads is still large, and there is still some room for deposit rates to be lowered. Liu Yinping pointed out that as the interest rate of medium and long-term deposits continues to fall, the attractiveness of time deposits to individual investors has gradually weakened, and some deposit funds may flow into bank wealth management, public funds, and insurance products.

Continued pressure on interest margins has been a key factor in the downward trend in bank deposit rates. After the bank's net interest margin fell to 1.74% in the second quarter of this year, continuing to hit a record low, the interest margin data in the bank's third quarter report is also not optimistic.

As of the end of the third quarter of 2023, the net interest margins of China Construction Bank, Industrial and Commercial Bank of China, Bank of China, Agricultural Bank of China, and Bank of Communications were 1.75%, 1.67%, 1.64%, 1.62%, and 1.3%, respectively, which was lower than the "Warning Line" of 1.8% for the Implementation Measures for Qualified Prudential Assessment (2023 Revised Edition). According to Choice data, since the third quarter, 37 of the 40 banks that have disclosed data have continued to narrow their net interest margins.

Banks' net interest margins continue to narrow, and deposit rates are likely to have more downward pressure in the fourth quarter, driven by rising deposit costs on the one hand, and declining returns on assets such as loans on the other.

Yang Yewei, chief analyst of fixed income at Guosheng Securities, pointed out that the cost of deposits continues to rise in the case of lower deposit interest rates, which is related to the deposit structure. In the process of interest rate decline, the proportion of demand deposits continued to decline, and the proportion of time deposits continued to rise. The process of regularization of deposits will bring pressure on the cost of deposits to continue to rise.

A bank account manager in Guangzhou also introduced that this year, due to the continuous decline in deposit interest rates, wealth management and the stock market have not been significantly positive, and the customer's "stability" mentality is significant, and some customers choose to deposit long-term deposits to lock in income in advance.

More importantly, from the asset side, bank asset returns will face greater pressure in the second half of the year. On the one hand, banks need to reduce lending rates in a trend to boost financing and consumption. Since the second half of this year, loan interest rates have continued to fall, and the annualized interest rate of consumer loans of some banks has dropped to about 3%. On the other hand, the recent frequent cost-cutting policies in the market, such as the reduction of existing housing loans, the issuance of special refinancing bonds, and the support of banks for local government debt swaps, will also significantly reduce the income of banks' assets. According to Guosheng Securities' calculation in the research report, the scale of bank concessions through mortgages is about 197.6 billion yuan. Under the package of bonds, if a new batch of special refinancing bonds is launched within the year, it is expected that the interest expense saved by the replacement of special refinancing bonds will be 40 billion ~ 60 billion yuan.

Given that net interest margins have fallen to low levels, the pressure will be transmitted to the depository side. "The cost of deposits needs to be reduced more substantially. Yang Yewei believes that the fixed interest rates of various deposits need to be lowered more sharply to promote the decline of the overall cost of deposits. That is, the deposit rate needs to accelerate the downward trend. According to the calculation, to keep the net interest margin unchanged, the fixed deposit interest rate should be reduced by 30bp~50bp.

Soochow Securities' fixed income Li Yong's team also holds a similar view in the latest research report. He pointed out that the deposit interest rate as a whole shows the characteristics of higher frequency of cuts, and the longer the maturity, the greater the reduction rate. Based on this characteristic and the current macro environment, there is room for the deposit rate to be lowered again.

How will the deposit reduction be carried out in the future? Ming Ming, chief economist of CITIC Securities, and his team pointed out two paths in a recent report. The first is for large state-owned banks to play an exemplary role and further reduce the interest rates on deposits, especially the pricing level of long-term deposits. The second is to further limit the upper limit of the interest rate on high-interest deposits such as structured deposits, agreement deposits, and call deposits, and control the issuance scale of some special deposit products, so as to reduce the space for banks to "attract deposits at high interest rates".