Chinese Banks Plan Deposit Rate Cuts to Cushion Pain From a Faltering Economy

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personal loans to help stimulate the flagging economy. The People’s Bank of China has cut a key lending rate twice in the past year and commercial banks have trimmed loan benchmarks that are used to price mortgages and other debt. Those moves have come at a significant cost to lenders.

Several large banks that released first-half results this week said their net interest margins—which reflect the difference between what they earn from their assets and what they pay for deposits and other funding—dropped to new lows. Industrial & Commercial Bank of China, the world’s largest bank by assets, reported a net interest margin of 1.72%, which was below regulators’ recommended level of at least 1.8%. ICBC pointed to multiple reductions in the loan prime rate, decreasing loan yields, as well as higher average deposit rates that were a result of more time deposits.

The net interest margins of the next three biggest Chinese state-owned banks were also below that threshold at the end of June. The recent wave of mortgage prepayments has been bad for banks, because it reduces some of the income they expected to earn in the future. Chinese borrowers repaid the equivalent of around $508 billion in mortgages ahead of schedule in the first half of 2023, estimates Zhaopeng Xing, a senior China strategist at ANZ.

He said that represents around 10% of Chinese banks’ outstanding mortgage loans. “That has a very big impact on banks’ profits," Xing added. He predicted that the coming mortgage-rate cuts may cost Chinese banks $110 billion a year in profits, but a deposit rate cut of 0.1 percentage point will roughly offset that.