Largest Rate Cuts Exceed 30 Basis Points! Mid-Size Banks Trigger Another Deposit Rate Cut Wave

After the Spring Festival, as the excitement of the “Opening Red” campaign 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 commercial banks. Considering that these banks have more room to raise 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 decreases 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 quite low, structural rate reductions 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 step in structurally lowering 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 banks before the Spring Festival that raised rates to boost their “Opening Red” campaign.

This round of rate adjustments mainly involves larger cuts to medium- and long-term products. On March 6, Xinjiang Bank announced that starting from the 10th, it would adjust its listed deposit rates in RMB, with reductions across all types including demand deposits, fixed deposits, negotiated deposits, and notice deposits, with a maximum cut of 15 BP. Specifically, the rates for demand deposits 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 rates for demand deposits have fallen to 0.05%, half-year products to 0.95%, and the listed rates for 1-year, 2-year, 3-year, and 5-year fixed deposits are 1.15%, 1.25%, 1.35%, and 1.35%, respectively.

In addition to listed rates, some banks have also cut deposit interest rates. On February 28 and March 5, Nanjing Pukou Jingfa Village Bank announced that from March 2, the interest rates for 3-year and 5-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 1-year deposit rate for individuals was lowered from 1.85% to 1.65%, and the 2-year deposit rate for both companies and individuals from 1.8% to 1.65%.

Yunnan Yuanjiang North Bank Rural Bank also lowered its 5-year fixed deposit rate from 2.2% to 1.9% starting March 1, with the 3-year rate decreasing by 20 BP to 1.8%, and the demand deposit rate dropping from 0.2% to 0.06%.

Some banks have shown more structural features in their rate adjustments across different deposit products. For example, Shanghai Songjiang Fuming Village Bank adjusted its 1-year fixed deposit rate to 1.85% (down 5 BP) starting March 1, and its 7-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 overall or structural deposit rate reductions 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 state-owned banks. Some of these banks had previously raised rates to boost their “Opening Red” campaigns, so rate cuts are an objective trend. Banks will adjust flexibly based on their own circumstances.

For example, Shanghai Songjiang Fuming Village Bank had just adjusted its deposit rates on December 25 last year. Comparing the two, it lowered the 3-month and 6-month fixed deposit rates by 10 BP and 20 BP, respectively, but increased the 2-year and 3-year fixed deposit rates by 3 BP and 5 BP to 1.93% and 1.75%.

Structural rate reductions may become the mainstream

Looking at the post-adjustment rates, small and medium-sized banks’ listed deposit rates still generally remain higher than those of large banks, but some are moving closer to the levels of state-owned banks.

Since the large-scale rate cuts in May last year, the listed rates for large banks’ demand deposits have fallen to 0.05%, with 3-month and half-year fixed deposits at 0.65% and 0.85%, and 1-year fixed deposits at 0.95%. The rates for 2-year, 3-year, and 5-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 raise rates, and some are not yet fully regulated in their deposit-raising behaviors. Even if listed rates are close, their actual implicit costs of deposits remain higher than those of state-owned banks.

Since last year, in addition to listed rate adjustments, the upper limit of deposit rates for nationwide commercial banks, including state-owned banks, has been somewhat lowered, narrowing the room for upward adjustments. Meanwhile, some banks have stopped offering rate increases for 3- and 5-year fixed deposits, and large-denomination certificates of deposit are hard to find. Currently, the main rate ceiling for 3-year fixed deposits of state-owned banks is 1.55%, with some 5-year fixed deposits at the standard rate of 1.3%, and a few special deposit products reaching 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, market expectations for further RRR and interest rate reductions remain. 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 easing policies.

“There’s still room for cuts, but not much,” said Dong Ximiao. “Overall, deposit rates may see moderate reductions this year, but the approach will likely be more flexible. Uniform, across-the-board cuts are becoming less likely.” He noted that after several rounds of reductions, the rates of large banks are already quite low, especially with 1-year fixed deposit rates below 1%, leaving limited room for further cuts.

In this context, more flexible, structural adjustments to deposit rates are expected to become the main trend. “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 reductions,” Dong said.

On March 12, there were reports that, following strengthened self-regulation measures for 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 suggest that after tighter regulation of interbank pricing, especially for the high-priced interbank deposits of nationwide and state-owned banks, small and medium-sized banks may lag behind in adjustments. As the 7-day reverse repo rate in the open market gradually becomes one of the most important benchmark rates in the domestic interest rate system, future interbank deposit rates are expected to be more regulated based on this rate.

Chief Editor: Xiao Yang