A new round of listed interest rate adjustments has arrived. In the early morning of July 25th, several state-owned major banks updated their fixed deposit listed interest rates on their official websites, with various types of RMB deposit interest rates being adjusted to varying degrees.

From the major banks that have updated their deposit interest rates, the interest rates for fixed deposits with a term of 2 years and above have generally been reduced by 20 basis points (BP), while the interest rates for fixed deposits with a term of less than 2 years, as well as for demand deposits, zero-deposit fixed-withdrawal, and interest-on-principal deposits, have been reduced by 10BP. The interest rate for demand deposits has been reduced by 5BP. At the same time, the interest rates for negotiated deposits and notice deposits have also been reduced by 10BP.

This follows the last collective reduction in listed deposit interest rates by state-owned major banks, which occurred seven months ago on December 22, 2023.

A leading market expert told Yicai, a financial media outlet, that this reflects the effective role of the market-oriented adjustment mechanism for deposit interest rates, and further strengthens the ability of commercial banks to price in a market-oriented manner. Industry insiders analyze that, according to past experience, it is expected that joint-stock banks will follow suit with adjustments soon, and small and medium-sized banks may gradually follow in batches to reduce the rates.

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Taking the Industrial and Commercial Bank of China (ICBC) as an example, after the adjustment, the bank's fixed deposit interest rates for 2-year, 3-year, and 5-year terms have been reduced to 1.45%, 1.75%, and 1.8%, respectively, from the previous rates of 1.65%, 1.95%, and 2%. The fixed deposit interest rates for 3-month, 6-month, and 1-year terms have been reduced to 1.05%, 1.25%, and 1.35%, respectively, from the previous rates of 1.15%, 1.35%, and 1.45%.

At the same time, ICBC's demand deposit interest rate has been reduced from 0.2% to 0.15%, and the interest rates for 1-year, 3-year, and 5-year term deposits with zero-deposit fixed-withdrawal, fixed-deposit zero-withdrawal, and interest-on-principal have been reduced to 1.05%, 1.25%, and 1.25%, respectively, from the previous rates of 1.15%, 1.35%, and 1.35%. The interest rates for negotiated deposits and 1-day and 7-day notice deposits have been reduced to 0.6%, 0.15%, and 0.7%, respectively, with a reduction of 10BP for each.

As of the time of writing, other banks that have updated their RMB deposit interest rate tables on their official websites include the Agricultural Bank of China, Bank of China, and Bank of Communications, with the scope and magnitude of adjustments being synchronized with ICBC. According to the information disclosed on the official websites, the aforementioned interest rate updates were made on July 25, 2024, and will be effective from the date of publication. The latest deposit interest rates can also be queried on the mobile banking platform of the China Construction Bank, with the update date being July 25th.

The banks have also synchronized their execution interest rates. Taking ICBC as an example, the bank's mobile banking page shows that the highest fixed deposit interest rate for 3-year term deposits is 2.15%, which is 40BP higher than the listed rate, and the highest fixed deposit interest rate for 5-year term deposits is 1.8%, which is consistent with the listed rate and does not increase (5-year term deposits for individual pension funds can be increased to 2.2%). Before this adjustment, the highest execution interest rates for the bank's 3-year and 5-year term deposits (non-individual pension fund products) were 2.35% and 2%, respectively.

The mobile banking platform of the China Construction Bank also shows that the highest fixed deposit interest rate for 3-year term deposits is 2.15%, which is 40BP higher than the listed rate, and the highest fixed deposit interest rate for 5-year term deposits is 1.8%, which is consistent with the listed rate and does not increase. Before this, the highest execution interest rates for the bank's 3-year and 5-year term deposits were 2.35% and 2%, respectively.This is also the second time that state-owned major banks have collectively lowered their deposit listing rates after a gap of seven months following December 22, 2023. Previously, First Financial Daily reporters learned that the execution (preferential) interest rates of Bank of Communications in some areas such as Beijing have been reduced since the 23rd, with the preferential interest rate for three-year fixed deposits being lowered by about 10 basis points (BP).

Since the establishment of the interest rate marketization adjustment mechanism in April 2022, state-owned major banks have conducted six rounds of deposit rate adjustments, five of which involved collective adjustments of listed rates. Looking at the rhythm of past adjustments, it is mainly the major banks that set an example, followed by joint-stock banks and small and medium banks, with the latter showing a larger difference in the pace of follow-up, and many local small and medium banks are still catching up with the previous adjustments to make up for the reduction.

Comparatively, the latest two adjustments of deposit listing rates by state-owned major banks have a broader range than the previous three adjustments, but they continue to maintain a rhythm where the adjustment of long-term products is greater. Looking back since September 2022, the three-year and five-year fixed deposit listing rates of state-owned major banks, which have attracted the most attention from depositors, have cumulatively decreased by 100BP and 95BP, respectively.

Considering the latest decline in the Loan Prime Rate (LPR), and against the backdrop of the continuous narrowing of banks' net interest margins, the market has anticipated a new round of deposit rate adjustments. According to the requirements of the deposit rate marketization adjustment mechanism, deposit rates will be reasonably adjusted in reference to bond market interest rates represented by the 10-year government bond yield, and loan market interest rates represented by the 1-year LPR quote. In November 2023, the People's Bank of China's Monetary Policy Department published an article titled "Continuously Deepening Interest Rate Marketization Reform," in which it proposed to improve the interest rate transmission mechanism of "market interest rate + central bank guidance → LPR → loan rate" and "LPR + government bond yield → deposit rate."

On July 22, after the 7-day reverse repo operation (OMO) rate was adjusted from 1.80% to 1.70%, both the 1-year and the 5-year and above LPRs were synchronized to decrease by 10 basis points, with the latest rates reported at 3.35% and 3.85%, respectively, with the 5-year and above LPR being the second reduction within the year. This is also the 10th and 9th adjustments of the 1-year and 5-year and above LPRs since the LPR reform in 2019, with a cumulative decrease of 90BP and 100BP over five years, respectively.

Dai Zhifeng, the chief analyst of the banking industry at Zhongtai Securities, recently pointed out in a report that judging from the recent adjustments of LPR and deposit rates, "for every two reductions of the LPR by the central bank, the major banks will follow with two reductions in the listed deposit rates." On one hand, the liability side is adapted to the reduction on the asset side, and on the other hand, it also opens up space for further reductions on the asset side.

What is different this time?

The proactive reduction of deposit rates by state-owned major banks this time is only three working days apart from the interest rate cut of the 7-day reverse repo operation. The aforementioned market authoritative expert told First Financial Daily that this reflects the effective role of the deposit rate marketization adjustment mechanism and further strengthens the market-oriented pricing ability of commercial banks. Some industry insiders analyzed that, according to past experience, it is expected that joint-stock banks will follow up with adjustments soon, and small and medium banks may gradually follow up in batches.

In April 2022, the People's Bank of China guided the interest rate self-discipline mechanism to establish a market-oriented adjustment mechanism for deposit rates, urging banks to refer to market interest rate changes and reasonably adjust the level of deposit rates. As of 2023, major banks have taken the lead in adjusting deposit rates four times under the influence of the deposit rate marketization adjustment mechanism.

Industry experts said that the proactive reduction of deposit rates by major banks such as ICBC, ABC, CCB, and BOC this time is based on the autonomous decision-making of market interest rate trends such as the decline in the 1-year LPR and government bond yields, which is a manifestation of a more market-oriented deposit rate. Since June 2021, the 1-year and 3-year deposit rates of major banks have cumulatively decreased by 0.5 and 1.7 percentage points, respectively.The aforementioned experts stated that adjusting and optimizing deposit interest rates is conducive to stabilizing the cost of bank liabilities. In recent years, banks have provided significant support to the real economy, with a noticeable reduction in loan interest rates. However, on the liability side, there has been a clear trend towards the term and long-term deposit products. The effects of the deposit rate cuts will gradually emerge as the existing deposits are repriced, but some banks have engaged in excessive internal competition, using improper manual interest supplementation to attract deposits. Due to a series of factors, the reduction in liability costs has been less than the decline in asset returns.

In the first quarter of 2024, the net interest margin of banks was 1.54%, narrowing to the lowest level in history. In April, regulatory authorities carried out rectifications for the improper manual interest supplementation, effectively reducing interest expenditure, which is close to the effect of a deposit rate cut. Several national banks reported that after the rectification of the improper manual interest supplementation, their deposit interest payment rate in June, especially for corporate deposits, has significantly decreased compared to April, and the net interest margin has rebounded.

The aforementioned market authorities indicated that the banks' proactive reduction of deposit interest rates, coupled with a larger decrease in medium to long-term deposit rates, is beneficial for further reducing interest expenditures, alleviating the long-term deposit issue, stabilizing the cost of bank liabilities, and also beneficial for improving the profitability of banks, increasing the equity of bank shareholders, and positively impacting the valuation of corresponding stocks.