What is the signal for the new round of reduction of the deposit interest rate? Will the LPR be lowered in the future?

On December 22, a new round of deposit rate cuts began. As of press time, five major state-owned banks, including Bank of China, Agricultural Bank of China, Industrial and Commercial Bank of China, China Construction Bank and Bank of Communications, as well as China Merchants Bank, have adjusted their deposit interest rates.

According to the official websites of the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, the Construction Bank of China and the Bank of Communications, the one-year RMB deposit rate was lowered to 1.45% from the previous 1.55%, the two-year deposit rate was reduced by 20 basis points to 1.65%, and the three-year and five-year deposits were reduced by 25 basis points to 1.95% and 2% respectively. Rates for both 3-month and 6-month deposits were cut by 10 basis points.

The listed interest rates of one-year, two-year, three-year and five-year fixed deposits of China Merchants Bank are 1.45%, 1.65%, 1.95% and 2.00% respectively, which are consistent with those of major state-owned banks.

According to CCTV, a number of banks such as the Postal Savings Bank will also adjust the deposit listing interest rate from Friday, and at the same time, a number of national joint-stock banks will follow suit. This is also the third time this year that China's major commercial banks have cut deposit rates, the first two of which occurred in early June and early September.

How to view the third round of "deposit interest rate cuts" this year

Horizon Securities believes that there are two main reasons for the reduction of the deposit interest rate: first, the bank is under serious pressure, with the rapid rise in the scale of deposits, the cost pressure as a liability side has increased sharply, which is to reduce costs and increase efficiency to ensure profits. Second, next year, a large number of government debts issued in the past five years will face redemption at maturity, and the cost of bond issuance at that time is high, including a large number of hidden debts, and continue to rely on borrowing new to repay old debts to reduce the cost of debt subjects.

"The main reason is that some banks make full use of the market-oriented adjustment mechanism of deposit interest rates to ease the pressure on net interest margins and expand space for banks to further benefit the real economy; Zhou Maohua, a macro researcher at the financial market department of Everbright Bank, said.

Wen Bin, chief economist of Minsheng Bank, said that since 2023, bank liability control measures have been continuously introduced, and policy dividends will be further released in 2024, but the market does not regulate competition and the fixed-term and long-term deposits also partially hedge the policy effects such as lowering the listed interest rate of deposits in the early stage, resulting in relatively rigid pricing on the liability side, and it is difficult to hedge the downward pressure on the asset side in a short period of time for debt cost control. In order to promote the stability of deposit and loan spreads, it is still necessary to reduce the idling arbitrage space of funds in the system and the inflated scale in the early stage, and guide the effective downward trend of deposit costs.

Ming Ming, chief economist of CITIC Securities, believes that the main driving factors for the continued adjustment of deposit interest rates in this round are: (1) the loan interest rate has fallen significantly, but the bank's debt cost has remained relatively rigid, and the interest rate spread has continued to compress, which has increased the operating pressure. (2) The trend of fixed-term deposits is becoming more and more obvious, and the pricing of long-term deposits and some special deposit products is on the high side. In the future, small and medium-sized banks may also follow suit, but the time point may be after the year, and the magnitude may not be as large as that of large banks. It is estimated that the deposit interest rate cut will reduce the average deposit cost of commercial banks by about 3-5bps, which will help alleviate the pressure on banks' net interest margins, and in addition, the probability of LPR quotation reduction has also increased.

What is the impact on bank liabilities?

According to the estimation of Zheshang Securities, this round of deposit interest rate cuts can improve bank interest margins by 6.2bp, of which 2.6bp will be reflected in 2024. Among all types of banks, rural commercial banks account for a high proportion of long-term deposits, and relatively benefit from deposit interest rate cuts.

CITIC Securities pointed out that if the adjustment range of other banks is basically the same as that of state-owned banks, it is expected that the average deposit cost of commercial banks will be reduced by about 3-5bps, which can reduce the operating pressure of banks and boost net interest margin to a certain extent. However, in the long run, the reduction of deposit interest rates will reduce the attractiveness of depositors, the phenomenon of "deposit moving" may be strengthened, and low-risk asset management products such as bank wealth management will usher in incremental funds.

"From the quantitative point of view, the current deposit supply is relatively abundant, and the bank's motivation to collect deposits at high interest rates is limited, so it is more urgent to stabilize interest margins from the liability side to free up pricing space for the asset side. From the perspective of debt cost, the deposit repricing cycle is relatively long, and the bank deposit cost is relatively rigid. Huafu Securities said that the recent new deposits in the high-cost resident time deposits accounted for a relatively high proportion of the bank's debt costs, which also caused some pressure on the bank's debt costs, and the reduction of deposit interest rates is also a direct relief of the pressure on the bank's debt costs.

In addition, according to the calculation of Minsheng Securities, the 23H1 fixed deposits of 42 listed banks accounted for 14.6% of the average balance of interest-bearing liabilities, assuming that the average replacement period is 3 years and the average reduction range is 20BP, it will save 67.9 billion yuan in costs, and the contribution to the net interest margin in 2024 will be +3BP, which may boost the revenue growth rate of +1.2pct in 2024 and the growth rate of net profit attributable to the parent company +3.2pct.

Will the LPR be lowered in the future?

CITIC Securities pointed out that the 5-year LPR has been maintained at 4.2% since June, and since then it has experienced an MLF interest rate cut in August, a RRR cut by the central bank in September, and a collective reduction in the deposit listing rate by major state-owned banks in September. Considering the cumulative impact of the above events, superimposed on the adjustment of the deposit rate, the possibility of the downward trend of long-end LPR quotations has increased, but the magnitude of the adjustment may also be relatively limited. Looking ahead, there may still be room for strengthening the cost reduction and credit easing tools, combined with the "flexible, moderate, precise and effective" monetary policy tone of the Central Economic Work Conference, it is not ruled out that the MLF will further cut interest rates in the first half of next year to guide the LPR quotation down.

Minsheng Securities also believes that the "good start" stage at the beginning of the year is generally more concentrated, so a large proportion of deposits will be replaced at maturity. The reduction was selected before the "good start", and the effect on the bank's debt cost in 2024 (especially in the first half of the year) may be more significant. This move opens up room for LPR interest rate cuts in the first half of 2024, and symmetric rate cuts will have little impact on net interest margins, and are expected to boost economic expectations and help bank valuations repair.

CICC also said that it would not rule out the possibility of a 10bp-20bp LPR cut at the beginning of next year, but the impact on loan repricing will be mainly reflected in the next 1-2 years, which will be relatively matched with the impact of deposit interest rate cuts, so as to avoid the impact of LPR cuts on interest margins at the end of the year.

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