Deposit interest rates have been inverted, smart notice deposits have been shut down, and small and medium-sized banks have reduced the cost of liabilities

Under the tightening of net interest margins, the "smart" call deposit products, which were once a tool for savings, have gradually withdrawn, and the "halo" of high interest rates on long-term deposits has also shown signs of dimming.

The reporter noted that recently many small and medium-sized banks in Fujian terminated the "Fulibao" intelligent notice deposit product on March 21. This is also another batch of banks choosing to follow up and adjust since last year, after major banks intensively removed such deposit products from the shelves. In addition, there are also some local small and medium-sized banks that have inverted or flattened medium and long-term deposit interest rates, which is considered by the industry to reduce the cost of liabilities by guiding the adjustment of deposit structure.

Behind this, controlling the cost of debt has become the focus of small and medium-sized banks in the near future, and the battle to defend net interest margin is about to start. According to data disclosed by the State Administration of Financial Supervision and Administration, in the fourth quarter of 2023, the net interest margin of commercial banks fell below 1.7% to 1.69%, falling below the 1.8% level for the first time. Some industry analysts believe that at present, the net interest margin of banks is shrinking, and more measures to reduce the cost of liabilities will be launched in the future.

Another smart notice deposit product "exits"

Recently, more than 10 rural commercial banks and village banks in Fujian Province, including Fuzhou Rural Commercial Bank, Xiamen Rural Commercial Bank, and Lianjiang Rural Commercial Bank, have successively issued announcements saying that in order to implement the relevant policy requirements, the "Fulibao" intelligent notice deposit product will be automatically terminated on March 21, 2024.

"Fulib Treasure" is a "smart notice deposit". According to the product disclosure information, when the customer's account balance reaches the agreed "initial deposit amount each time", the account will automatically roll over the full amount of the call deposit. The customer does not preset the deposit type in advance, and the system intelligently selects the "7-day call deposit", "1-day call deposit" or current deposit interest rate according to the situation.

"Compared with ordinary call deposits, smart call deposits generally have higher returns, which virtually raises the cost of the bank's liabilities. According to an industry insider, the ordinary call deposit requires the user to specify the "1-day call deposit" or "7-day call deposit" option, if the call deposit time exceeds 7 days, but the pre-selected is "1 day", the income will be calculated according to the interest of the 1-day call deposit. In the case of smart notification deposits, there is no need for users to make preset designations, and the maximum return is automatically calculated.

This is not the first time that demand deposits have been controlled. In March 2020, the People's Bank of China (PBOC) issued the Notice on Strengthening the Management of Deposit Interest Rates (Yin Fa [2020] No. 59), which stipulates that all depository financial institutions are required to rectify the early withdrawal of fixed deposits and interest-bearing products. In May 2023 last year, with the adjustment of the self-regulatory caps for agreement deposits and call deposits, many banks have taken the lead in suspending the smart notice deposit business. For example, Ping An Bank announced that it will suspend the sale of "smart notice deposit" products from May 14, 2023. The product no longer supports new contracts in the bank's online and offline channels.

Some people in the industry believe that this kind of current innovative deposit products, the general effective interest rate is higher than that of ordinary deposits, which can increase customer income, which is a "sharp weapon" for savings, but it also increases the cost of debt. Banks have successively shut down such products, which is conducive to reducing the cost of liabilities.

Previously, Wang Yifeng, deputy director of Everbright Securities Research Institute and chief analyst of the financial industry, estimated in the research report that the demand deposit interest rate has not changed since 2012, but since 2018, the cost rate of corporate demand deposits has risen above the high point in 2013 and continues to rise. The calculation shows that if the demand deposit interest rate of all enterprises falls to the average level of about 0.70% in 2013~2018, the weighted average decline in the current deposit cost rate of listed banks will be about 30bp, which will boost the interest rate spread by about 5.5bp and affect the revenue growth rate of listed banks by 2.3pct.

Medium and long-term deposit rates are inverted

In addition to adjusting the smart notice deposit products, some small and medium-sized banks have recently chosen to reduce the interest rate of long-term deposits.

According to the reporter's incomplete statistics, in the past month, a number of small and medium-sized banks, including Baode Rural Commercial Bank and Xinjiang Tianshan Rural Commercial Bank, have updated their deposit listing rates, among which the five-year time deposit interest rate and the three-year time deposit interest rate have been flat or inverted.

For example, Qionghai Dazhong Village Bank has adjusted the listed interest rates of 3-year and 5-year time deposits from March 1, and the adjusted execution interest rates are both 3%.

There are also banks that have inverted term interest rates after adjustments. For example, since March 1, Meizhou Hakka Village Bank has adjusted the listed interest rate of RMB deposits, which is 1.95% for one-year lump sum deposits, 2.3% for two-year lump sum deposits, 2.65% for three-year lump sum deposits and 2.5% for five-year lump sum deposits.

Some industry analysts believe that the occurrence of term "inversion" is mainly related to the adjustment of bank debt costs. In recent years, there has been a serious trend of regularization of bank deposits. The key to reducing the cost of debt lies in promoting the activation of funds and guiding the adjustment of the deposit structure.

Some of the data can also be corroborated from the side. According to the data of the Bank of China International Research Report, in 2023, the deposits of the resident sector will continue to maintain high growth, with obvious regularization characteristics, and there is still no turning point, and the fixed deposits of residents will increase by 17.84 trillion yuan and 16.67 trillion yuan respectively in 2022~2023. Under the trend of fixed-term deposits, although the interest rate of listed deposits has been lowered several times, the cost of bank liabilities is still rising. Hua Chuang Securities pointed out in the research report that from 2021 to the third quarter of 2023, the cost of bank liabilities has entered a plateau period, and the cost of comprehensive liabilities has continued to rise.

"The high cost of fixed-term deposits has led some banks to reduce the interest rate on the most expensive long-term deposits. The above-mentioned industry analysts told reporters that many small and medium-sized banks have adopted a "step-by-step" strategy in the implementation of the "make-up reduction" stage, first reducing long-term deposits, and the interest rate on short- and medium-term deposits will not move, so as to minimize the loss of depositors.

It is urgent to reduce the cost of debt

The withdrawal of smart notice deposit products and the reduction of long-term deposit interest rates are essentially small and medium-sized banks' initiative to reduce the cost of liabilities.

In fact, for banks, with the tightening of net interest margins, it is urgent to control the cost of debt. Recently, data disclosed by the State Administration of Financial Supervision and Administration showed that in the fourth quarter of 2023, the net interest margin of commercial banks fell below 1.7% to 1.69%. Among them, the net interest margins of urban commercial banks and rural commercial banks were 1.57% and 1.90% respectively.

"It is of great necessity and practical significance to take care of the net interest margin of banks. Dong Dezhi, deputy director of the Economic Research Institute of Guosen Securities, believes that the net interest margin of mainland banks has dropped rapidly from 2.2% at the end of 2019 to 1.73% in the third quarter of 2023, a decline of nearly 50bp in less than four years, and the room for further compression of bank interest margins is relatively limited.

Dai Zhifeng, director of Zhongtai Securities Research Institute and chief analyst of the banking industry, pointed out that net interest margin is still facing downward pressure. The trend of fixed-term deposits on the liability side is still continuing, and the decline in deposit interest rates is difficult to fully offset the impact of fixed-term deposits.

"Since 2019, although the regulatory level has repeatedly guided the reduction of bank deposit interest rates, the overall deposit cost of banks has increased by 10bp in the first half of 2023 due to factors such as 'deposit regularization and rising US dollar deposit interest rates'. Ma Tingting, chief banking analyst at Guosheng Securities, also holds a similar view.

Many institutions believe that bank deposit rates may fall further in the future, and more measures to reduce the cost of liabilities will be introduced.

Ma Tingting stressed that in 2024, driven by the three major catalytic factors of "lower deposit rates, slowing down of the trend of regularization, and nearing the end of the Fed's interest rate hike", the cost of bank deposits will improve.

"The LPR cut in February may 'advance' the bank's interest rate spread space. Dong Dezhi believes that under the constraints of rigid interest rate spreads, there is still a possibility of supplementary reduction in deposit interest rates in the first half of the year.

Wang Yifeng previously pointed out in the research report that there is still a back hand for deposit cost control, and "quasi-demand" deposits are an important starting point. Interbank deposit shell agreement deposits need to continue to be corrected, and "fake" structured deposits with too low option value must still be regulated, and the guaranteed return and option value of structured deposits may be included in the upper limit of the self-discipline mechanism at the same time, so as to further reduce the interest rate of structured deposits.