Some fixed-income products withdrawn

Lenders remove certificates of deposit in effort to shore up profitability

China’s commercial banks are removing some of their long-term fixed-income products and cutting rates offered to depositors, in an bid to shore up profitability, as challenges – including a slumping property sector, mounting local government debt and slow consumption recovery – weigh on lenders’ earnings.

China Merchants Bank, the country’s seventh-largest bank by asset known for its retail services, said last week that it would stop offering three-year and five-year certificates of deposit (CDs), which are fixed-income savings accounts usually with a minimum deposit amount of 200,000 yuan (HK$216,500). Citic Bank also removed five-year CDs from its product shelf last week.

A customer service representative at the Industrial and Commercial Bank of China, the country’s largest bank, said on condition of anonymity that while the bank was still offering long-term CDs, “there is no guarantee that customers could get them”.

The move was intended to cut funding costs and protect banks’ net interest margins (NIM), said Li Ying, head of financial institutions ratings at S&P Global (China) Ratings.

“Bank margins are pressured on both the assets and liabilities sides, and since the lenders do not have much leeway in boosting their interest revenue on the asset side this year, they need to reduce higher-cost funding, such as longterm CDs, and cut deposit interest rates in general,” she added.

First introduced in 2015 by the People’s Bank of China, CDs function similarly to time deposits, but have higher minimum deposit requirements and pay higher interests. Commercial banks across the country now offer nine types of CDs, with maturities ranging from one month to five years.

Certificates of deposit have gained popularity in recent years as uncertainties tied to the Covid-19 pandemic and lacklustre performance of the country’s stock market dented people’s risk appetite, prompting retail investors to turn towards safer options.

Official data from last year showed financial institutions issued 5.5 trillion yuan in CDs in the first quarter of 2023, the largest such quarterly issuance since 2015.

But these higher interestpaying products are taking a visible toll on lenders’ profitability.

Bank of Communications, a Shanghai-based state-owned lender, in March posted its slowest earnings growth for the full year of 2023 in almost two decades, while its net interest margins also narrowed. Other major stateowned lenders also saw their net interest margins decline.

More than 20 small and mid-sized banks have cut deposit rates by 5 to 45 basis points this month, according to Everbright Securities International whose analysts said that net interest margins for commercial banks fell to 1.69 per cent at end of last year, narrowing by 4 basis points quarter on quarter, and 22 basis points from 1.91 per cent at end2022 to a new low.

“By reducing the offering of long-term CDs and cutting time deposit rates in general, banks can offset the higher cost caused by rising popularity of long-term deposit products, but even with lower funding cost, we expect lower NIM this year due to asset side pressure,” S&P’s Li said.

“Banks are charging lower interest rates on their mortgage portfolio due to the one-off mortgage interest rate cuts later last year. Meanwhile, the lenders are receiving lower interests from their loans to stressed property developer clients and local government funding vehicles.”

“Frequent loan prime rate (LPR) cuts in previous years have significantly narrowed the overall loan interest rates, and more LPR cuts are expected going forward,” she added.

The mounting pressure on net interest margins came as loan rates declined faster than deposit rates last year, as banks were required to surrender more profits to support the real economy, Everbright analysts said.

Bank margins are pressured on both the assets and liabilities sides

LI YING, HEAD OF FINANCIAL INSTITUTIONS RATINGS AT S&P GLOBAL (CHINA) RATINGS