Debt Costs Soar as Banks Reevaluate Deposit Strategies

The landscape of banking in China is witnessing significant changes as major financial institutions have begun revising their deposit products, particularly those offering high interest rates. This shift follows a pattern that began with China Merchants Bank recently suspending the sale of medium to long-term large-denomination certificates of deposit (CDs). Effective May 8, Minsheng Bank has also announced the discontinuation of these savings instruments, which has sent ripples throughout the banking sector.

In the past month, banks have ramped up their efforts to phase out high-yield savings tools. The most notable of these are traditional savings mechanisms such as manual interest supplements, notice deposits, and large-denomination CDs, which are increasingly being restricted. Experts suggest that the disappearance of these popular savings options is primarily driven by banks grappling with widening interest margins and the need to rein in liability costs, hinting at the possibility of further rate cuts in the future.

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On May 8, it was observed that Minsheng Bank’s mobile app displayed only one-month and three-month term products for large-denomination CDs, with the annualized interest rate plummeting to as low as 1.7%. Employees from the bank indicated that there are currently no plans to reintroduce medium and long-term CD products. Alongside Minsheng Bank, other financial institutions, including the six major state-owned banks, have also followed suit, suspending various deposit offerings. Currently, banks like Bank of Communications, Postal Savings Bank, and CITIC Bank have no three-year CD products available, and many are showing insufficient funds for existing offerings.

The yield advantage of long-term CDs has eroded after multiple rounds of interest rate cuts. The rates for three-year CDs from major state-owned banks have dropped to about 2.35%, while other banks like Industrial Bank, Zheshang Bank, and Guangfa Bank offer slightly higher rates at around 2.6%. According to wealth management professionals at several banks, these long-term CD products are selling out fast, suggesting that future issuance will largely depend on the banks' asset-liability management. However, no significant issuance announcements were made concerning these popular products.

Despite the availability of shorter-term CDs, sales have not been promising. When questioned about the performance of one-year or shorter products, various wealth management specialists indicated limited interest from depositors, particularly when rates have fallen to as low as 1.7%. This has prompted customers to seek information about alternative investment opportunities.

The great appeal of large-denomination CDs in the past lay in their higher interest rates compared to traditional fixed-term deposits, as well as their flexibility regarding transferability. However, this once-strong financial tool is undergoing rapid revisions by banks under the current interest rate environment. In recent weeks, notice deposits have also started to fade from the market. Banks including Everbright Bank, Guangfa Bank, and Bohai Bank have announced they will stop automatically rolling over notice deposits, changing the way interest on these funds is calculated after maturity.

An additional tool for attracting deposits, manual interest enhancements, faced prompts for rapid corrections last month. During April, a self-discipline mechanism was implemented that prohibited banks from promising or paying interest that surpassed authorized rates, marking another blow to high-yield deposit strategies. Banks were expected to complete necessary adjustments within the month, indicating that commitment to higher interest rates via manual measures would be discontinued.

Analysts attribute the collective shift in deposit strategies to a common thread: banks are feeling the pinch of decreasing liability rates and net interest margins, compelling them to exercise caution regarding high-cost deposits. The average net interest margin for commercial banks in China dropped dramatically to a record low of 1.69% by the end of 2023, with no improvement noted in the first quarter of 2024, as reported by several listed banks.

Economic analysts are attributing this trend to the banks' strategy of reducing fees for the real economy and multiple cuts in the Loan Prime Rate (LPR). It is projected that banks will continue facing pressure to lower net interest margins throughout 2024. As long as pressure on liability costs remains, banks are likely to focus on optimizing their funding sources, particularly by lowering offerings on products like CDs.

Experts further elaborate that reducing deposit rates and minimizing funding costs have become a shared strategy among commercial banks. However, the specific actions and intensity of these adjustments may vary significantly from one institution to another, influenced by factors such as competition, market structure, and customer demographics. The overarching trend seems to lean toward reducing high-cost deposits, primarily to streamline and lower operational costs.

One analyst pointed out that the recent adjustments across various banks aim to standardize deposit rate levels, addressing concerns that high-yield savings products had been misused, which could potentially disrupt the deposit market. The rigid alterations in these high-yield deposit strategies may pave the way for a reduction in lending rates.

As the financial landscape continues to evolve, cheaper growth rates seem probable. With both policy and market interest rates likely to face additional downward pressure, future predictions suggest that deposit rates will also see cuts, leading to a continuous decline in costs for banks.

In light of diminishing high-yield deposit products, some market analysts have raised concerns that further reductions to deposit rates could lead citizens to curb their spending in favor of savings, thereby affecting short-term economic momentum. For individual investors, the suggestion is to remain adaptable and consider diversifying into low-risk investment products such as treasury bonds and short-term management funds to balance yield versus risk amid these shifting conditions.

Overall, the financial institutions are bracing for a period marked by adjustments in deposit strategies, as they navigate through a landscape defined by low interest rates and declining margins. Future expectations indicate that banks will persist in their efforts to manage costs more effectively and maintain stability in their operations, while individuals are encouraged to reevaluate their savings and investment strategies in light of these developments.