Can the bank's net interest margin withstand the upcoming reduction in existing mortgage interest rates
2024-10-10
The interest rate for existing housing loans is about to be lowered. As of now, several banks have announced that they plan to release specific operational rules for adjusting the interest rates of existing housing loans on October 12th, and complete the bulk adjustment of existing housing loan interest rates before October 31st. Industry insiders believe that the adjustment of existing mortgage interest rates is conducive to reducing borrowers' mortgage interest expenses, thereby enhancing residents' consumption and investment capabilities. However, this has also raised concerns in the market about further pressure on bank net interest margins. The change in interest rate spread between deposits and loans is the main factor determining the change in net interest rate spread. For commercial banks in China, interest margin income is the main source of income, and the narrowing of net interest margin directly affects the profitability of commercial banks, posing significant challenges to their operations. According to expert analysis, reducing the interest rate of existing housing loans will have a certain negative impact on the yield of bank loan business. However, considering that deposit interest rates may be lowered simultaneously, the negative impact on the net interest margin of the banking industry is generally controllable. In addition, facing the pressure of net interest margin and profit decline, commercial banks should start from both the income and cost ends, based on their own endowments and advantages, continue to increase support for the real economy, especially small and medium-sized enterprises, optimize financial resource allocation, and strive to explore new business growth points; Actively developing intermediary businesses and striving to reduce the pressure of net interest margin. According to incomplete statistics by reporters, as of October 9th, more than 20 banks have announced that they will provide convenient services through multiple channels in accordance with market-oriented and rule of law principles, and carry out the adjustment of existing housing loan interest rates in compliance with laws and regulations. They plan to release specific operating rules on October 12th and complete the batch adjustment of existing housing loan interest rates before October 31st. Sun Nannan, a staff member of China Merchants Bank's personal loan business, told the reporter: "At present, our bank is carrying out the preparatory work for interest rate adjustment such as contract text change and system transformation in an orderly manner according to law, and the follow-up related matters will be published on the official website, WeChat official account and other channels." According to the initiative issued by the market interest rate pricing self-discipline mechanism, this batch adjustment of the interest rate of existing housing loans. For the existing housing loans with an increase of more than -30 basis points on the basis of the loan market quotation rate (LPR), the increase will be adjusted to not less than -30 basis points, and not less than the lower limit (if any) of the newly issued commercial personal housing loans in the city. Specifically, if the mortgage interest rate (excluding Beijing, Shanghai, and Shenzhen) is higher than LPR-30 basis points, it will be uniformly adjusted to LPR-30 basis points; If it is a first home loan for Beijing, Shanghai, or Shenzhen, and the interest rate is higher than LPR-30 basis points, it will also be uniformly adjusted to LPR-30 basis points; If the loan is for a second home in Beijing, Shanghai, or Shenzhen, and the interest rate is higher than the lower limit of the local housing loan interest rate policy, the housing loan interest rate will be uniformly adjusted to the lower limit of the local housing loan interest rate policy. In addition, starting from November 1, 2024, eligible borrowers can negotiate with commercial banks to adjust the increase in mortgage interest rates, as well as negotiate to adjust the repricing cycle. Cancel the restriction that the minimum repricing period for mortgage interest rates is one year, and the repricing period can be annual, semi annual, quarterly, etc. It should be noted that during the downward phase of interest rates, the shorter the repricing cycle, the earlier the borrower will enjoy low interest rates, but during the upward phase of interest rates, the earlier the borrower will bear high interest rates. Many industry insiders have stated that compared to last year's first round of mortgage interest rate cuts, this batch adjustment of existing mortgage interest rates has a wider scope and greater intensity. Dai Zhifeng, director of Zhongtai Securities Research Institute, believes that for individuals, adjusting the interest rates of existing mortgage loans can help alleviate the pressure of interest expenses and boost consumption. Earlier, Pan Gongsheng, the governor of the People's Bank of China, said that the bank's reduction of the interest rate on existing housing loans is expected to benefit 50 million households and 150 million people, and reduce the interest expenditure of households by 150 billion yuan annually on average. Yan Yuejin, Vice President of Shanghai E-house Real Estate Research Institute, told reporters: "This adjustment of the policy on the interest rate of existing housing loans has opened the second round of reducing the interest rate of existing housing loans since last year, and has a very good guidance. Although the situation in different regions and the degree of burden reduction may vary, overall homebuyers can enjoy a good burden reduction effect. The pressure on monthly mortgage payments has been reduced, which has a positive effect on boosting consumption." The impact on bank net interest margin is controllable. While the interest rate of existing housing loans has been lowered to reduce the burden on residents, the pressure on bank net interest margin has caused concerns among many industry insiders. The change in interest rate spread between deposits and loans is the main factor determining the change in net interest rate spread. For commercial banks in China, interest margin income is their main source of income. The narrowing of net interest margin directly affects the profitability of commercial banks and poses significant challenges to their operations. Industry insiders believe that reducing the interest rate of existing housing loans will have a certain negative impact on the yield of bank loan business. However, considering that deposit interest rates may be lowered simultaneously, the negative impact on the net interest margin of the banking industry is generally controllable. Dong Ximiao, the chief researcher of China Merchants Association, believes that the centralized reduction of the interest rate of existing housing loans will inevitably affect commercial banks, especially large commercial banks with a high proportion of housing loan business. According to calculations, if the interest rate of existing housing loans is lowered by 50 basis points, it will lead to a narrowing of the bank's net interest margin by 7 basis points, a 3% decrease in operating income, and a 6% decrease in net profit. Moreover, if the LPR drops by 20 basis points, the interest rates on existing and new mortgages will further decrease. However, since the beginning of this year, with the continuous decline of deposit interest rates and the emergence of policy effects such as the crackdown on manual interest payments, the cost of funds for commercial banks has been reduced. At the same time, comprehensive reserve requirement ratio cuts, policy interest rate reductions, and efforts to continue lowering deposit interest rates will further reduce the cost of bank funds. It is expected that the net interest margin of commercial banks will remain basically stable Dong Ximiao told reporters. Dai Zhifeng stated that for banks, reducing the interest rates of existing housing loans will have a short-term impact on the bank's net interest margin and performance, but in the long run, it will help stabilize the scale of housing loans and reduce risks. Mortgage loans, as the cornerstone of retail assets for banks, are currently being suppressed not by the amount of investment, but by the high early repayment rate Dai Zhifeng said. Based on the data disclosed by the central bank, he stated that although the amount of bank housing loans has rebounded in recent years, the high early repayment rate has dragged down the growth of the scale, and the reason behind this is the high interest rate of existing housing loans. If the interest rate of existing housing loans is lowered, on the basis of the recovery of housing loan investment, the scale of bank mortgage loans will stabilize, which will help alleviate the growth pressure on the retail asset side of banks in the long run. The current pressure on residents to repay in advance is high, and the reduction of existing mortgage interest rates will help stabilize the quality of retail assets in banks. The research team of Huatai Securities predicts that the adjustment of existing mortgage interest rates will have a negative impact of 6 basis points on the bank's net interest margin. The reduction of interest rates for existing mortgage loans may have a short-term impact on the investment sentiment of bank stocks, but it will alleviate the interest burden on residents and reduce the pressure of early repayment. Considering the combined effects of reserve requirement ratio cuts and deposit interest rate cuts, it is expected that the overall impact of the reduction in interest rates for existing mortgage loans on bank net interest margins will be controllable. Taking multiple measures to alleviate the pressure of interest rate differentials, the continuously compressed net interest margin poses challenges to the operation of commercial banks, prompting them to proactively lower deposit interest rates to alleviate the pressure. Liu Yu, Chief Economist of Huaxi Securities, introduced that in recent years, the net interest margin of commercial banks in China has decreased. Data shows that from the end of 2021 to the end of the second quarter of 2024, the net interest margin of commercial banks in China decreased from 2.08% to 1.54%. Looking at the specific structure of the split, the net interest margin of state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks decreased from 2.04%, 2.13%, 1.91%, and 2.33% to 1.46%, 1.63%, 1.45%, and 1.72%, respectively. On July 25 of this year, six major state-owned banks took the initiative to adjust the deposit listing interest rate, which is the first time that a major bank will focus on lowering the deposit listing interest rate in 2024, and also the fifth time since the establishment of the market-oriented adjustment mechanism of deposit interest rate in 2022. With the net interest margin falling to a historical low, it will help banks save debt costs. To maintain a reasonable range of net interest margin, the Bank of China Research Institute expects bank deposit interest rates to continue to decline. The reduction of deposit interest rates is not only an inevitable requirement for commercial banks to cope with the narrowing of net interest margins, but also a manifestation of the effective role of market-oriented adjustment mechanisms for deposit interest rates. On September 24th, the People's Bank of China announced that while lowering the policy interest rate, it will also guide the deposit interest rate to be lowered simultaneously. It is expected that the deposit interest rate will be lowered by 0.2 to 0.25 percentage points in the next step. To fundamentally solve the problem of bank net interest margin, Liu Yu believes that it is necessary to start from both the revenue and cost ends separately. However, in the current context of weak credit demand and persistent asset shortages in the fixed income market, it is difficult to promote the recovery of bank profitability, and the breakthrough point for the recovery of net interest margin may be on the cost side. Liu Yu said, "In the past three years, the entire banking system has made considerable efforts from top to bottom, such as significantly reducing the interest rate for new deposits on the incremental end, and eliminating unreasonable cost expenditures by prohibiting manual interest payments on the stock end. Looking ahead, curbing the expansion of deposit regularization is the top priority of banking work." Dong Ximiao suggested that in the face of the pressure of net interest margin and profit decline, commercial banks should strive to explore new business growth points and increase net interest income through volume based pricing; We should actively develop intermediary businesses, such as expanding wealth management services, further increase the proportion of intermediary business income, and form effective support for operating income. Experts such as Li Ying, General Manager of the Rating Department of Standard&Poor's Financial Institutions, believe that the change in the spread between LPR and deposit rates is the main factor determining the change in net interest margin. On the one hand, the asset yield will further decline in the next 12 months, and it is expected that there is still 20 to 25 basis points of downward space for LPR in the fourth quarter of this year; On the other hand, due to the high probability of synchronous decline in deposit interest rates, the net interest margin will end the rapid downward trend of the past two years and instead show a stable and declining state. (New Society)
Edit：Yao Jue Responsible editor：Xie Tunan
Source：China Securities Journal
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