Rate cuts exceed 30 basis points at maximum! Deposit rates at small and medium-sized banks trigger another wave of reductions

After the Spring Festival, as the momentum of the “opening red” surge gradually subsides, bank deposit rates have once again experienced a wave of adjustments, primarily led by local small and medium-sized banks.

According to a review by First Financial, the current round of deposit rate cuts mostly range from 5 basis points (BP) to 30 BP, with medium- and long-term products seeing larger reductions. Interviewees believe that this adjustment is still a partial reduction by small and medium-sized banks in response to the earlier nationwide rate cuts by large state-owned banks. Considering that these banks have more room to float their actual rates and that their deposit-raising behaviors still need regulation, their funding costs remain higher than those of state-owned banks, leaving room for further reductions in the future.

With banks’ net interest margins falling to historic lows, the timing of reserve requirement ratio (RRR) cuts and interest rate cuts, as well as whether they will lead to a new round of deposit rate reductions, are highly anticipated. However, given that the deposit rates of large banks, especially for products under one year, are already at relatively low levels, structural rate cuts are likely to be the main approach moving forward. On March 12, there were reports that interbank deposit rates might see further reductions, which is viewed as an important direction for structural efforts to lower banks’ liability costs.

Small and medium-sized banks initiate another wave of deposit rate cuts

Since late February, many small and medium-sized banks in Shanghai, Yunnan, Jiangsu, Xinjiang, and other regions have announced reductions in deposit rates, contrasting sharply with some smaller banks before the Spring Festival that raised rates to boost their “opening red” performance.

This round of rate adjustments still involves the largest cuts in medium- and long-term products. On March 6, Xinjiang Bank announced that starting from the 10th, it would adjust its listed RMB deposit rates, with reductions across savings, fixed deposits, negotiated deposits, and notice deposits, with a maximum cut of 15 BP. Specifically, the rates for savings and fixed deposits of three years or less generally decreased by 10 BP, while five-year fixed deposits dropped by 15 BP. Negotiated deposits and seven-day notice deposits also decreased by 10 BP, and one-day notice deposits by 5 BP.

Post-adjustment, the bank’s listed savings rate has fallen to 0.05%, the six-month deposit rate to 0.95%, and the listed rates for one-, two-, three-, and five-year fixed deposits are 1.15%, 1.25%, 1.35%, and 1.35%, respectively.

In addition to listed rates, some banks have also lowered their deposit interest rates. On February 28 and March 5, Nanjing Pukou Jingfa Village Bank announced that from March 2, the interest rates for three- and five-year deposits for both corporate and individual customers would be reduced from 2.2% to 1.88%, a decrease of 32 BP; from March 9, the one-year deposit rate for individuals was lowered from 1.85% to 1.65%, and the two-year deposit rate for both companies and individuals from 1.8% to 1.65%.

Yunnan Yuanjiang North Silver Village Bank also lowered its five-year fixed deposit rate from 2.2% to 1.9% starting March 1, with the three-year rate cut by 20 BP to 1.8%, and the savings rate from 0.2% to 0.06%.

Some banks have more structural features in their rate adjustments across different deposit products. For example, Shanghai Songjiang Fuming Village Bank adjusted its one-year fixed deposit rate to 1.85% (down 5 BP) starting March 1, and its seven-day notice deposit rate to 1.30% (down 25 BP) from March 10. The bank stated that these adjustments were based on changes in the Loan Prime Rate (LPR) and funding market rates, combined with its deposit product structure.

According to incomplete statistics, about ten small and medium-sized banks have collectively or structurally lowered deposit rates since the Spring Festival, with local banks, especially rural financial institutions, being the main players.

“Mostly just partial reductions,” said Dong Ximiao, Chief Economist at Zhaolian and Deputy Director of the Shanghai Financial and Development Laboratory. He noted that the main entities adjusting deposit rates recently are still local small and medium-sized banks, which generally still offer rates above the mainstream levels of large state-owned banks. Some of these banks had previously raised rates temporarily to boost their “opening red” performance, so rate cuts are an inevitable trend. Banks will adjust flexibly based on their own situations.

For example, Shanghai Songjiang Fuming Village Bank had just adjusted its deposit rates on December 25 last year. Comparing that, it lowered the three-month and six-month fixed deposit rates by 10 and 20 BP, respectively, but increased the two-year and three-year fixed deposit rates by 3 and 5 BP to 1.93% and 1.75%.

Structural rate cuts may become the mainstream

Looking at the post-adjustment rates, the listed deposit rates of small and medium-sized banks still generally remain above those of large banks, but some banks are further aligning with state-owned banks.

Since the large-scale rate cuts in May last year, the listed rates for large banks’ savings deposits have fallen to 0.05%, with three-month and six-month fixed deposit rates at 0.65% and 0.85%, and one-year fixed deposits at 0.95%. The rates for two-, three-, and five-year fixed deposits are 1.05%, 1.25%, and 1.3%, respectively.

However, industry insiders believe that, in practice, small and medium-sized banks still have more room to float their rates upward. Additionally, some of these banks’ deposit-raising behaviors are not fully regulated, so even if their listed rates are close to those of large banks, their actual implicit costs remain higher.

Since last year, besides the listed rates, the self-discipline upper limit for deposit rates of nationwide commercial banks, including large state-owned banks, has also been somewhat lowered, narrowing the room for upward adjustments. Meanwhile, some banks have stopped offering rate premiums for five-year or even three-year fixed deposits, and large-denomination certificates of deposit are hard to find. Currently, the main rate ceiling for three-year fixed deposits of large banks is 1.55%, with some five-year fixed deposits at the standard rate of 1.3%, and a few special deposit products offering up to 1.6%.

With the government’s work report explicitly stating that this year will continue to implement a moderately loose monetary policy and emphasizing the flexible and efficient use of tools like RRR and interest rate cuts, combined with the central bank’s recent statements that there is still room for RRR and rate reductions this year, market expectations for further easing remain high. Given that banks’ net interest margins are still under pressure, the market is also watching whether deposit rates will be further lowered to create space for more accommodative monetary policy.

“There’s still room for further reductions, but it’s limited. Overall, deposit rates may see moderate decreases this year, but the approach is expected to be more flexible. Uniform, across-the-board cuts are becoming less likely,” said Dong Ximiao. He pointed out that after several rounds of reductions, the rates of large banks are already quite low, especially the one-year fixed deposit rate, which has fallen below 1%. The scope for further cuts is limited.

In this context, more flexible, structural adjustments to deposit rates are likely to become the main approach. “On one hand, banks with higher overall rates and interest payments will more targetedly lower deposit rates; on the other hand, long-term products with higher rates will remain a focus for future rate adjustments,” Dong added.

On March 12, there were reports that following the strengthening of self-discipline management in 2024, interbank deposit rates might see further reductions. Dong Ximiao believes that lowering interbank deposit rates is also part of the structural effort to reduce banks’ liability costs.

Industry experts note that after stricter regulation of interbank activities, the previously high-priced interbank deposit rates of nationwide commercial banks, especially large state-owned banks, have been rectified. Small and medium-sized banks may still lag behind. As the seven-day reverse repo rate in the open market gradually becomes one of the most important benchmark rates in the domestic interest rate system, interbank deposit rates are expected to be more regulated and anchored to this rate in the future.