Rate cuts: China's state banks face margin squeeze as they comply with the call to slash mortgages to aid an ailing property market
China's biggest state-owned banks, mired in bad property loans, now face further downward pressure on profit as they prepare to respond to Beijing's call to cut mortgage rates and revive the country's faltering property market.
Industrial and Commercial Bank of China (ICBC) and Agricultural Bank of China (ABC) cut their deposit rates by between five and 25 basis points, according to their websites.
China Construction Bank (CCB), the world's third-largest bank by assets, said on Thursday that it would "implement the task of reducing interest rates on existing mortgages of first-time buyers in a lawful, orderly fashion," to "support the revival and expansion of consumption."
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Shanghai-based Bank of Communications, China's fifth-largest bank, held an internal meeting on Wednesday to "initiate the project to adjust the existing mortgage rates on personal home loans", according to a notice obtained by the Post. The bank's investor relations officers declined to disclose information about the meeting.
The moves came as the central bank and financial regulators unveiled new rules on Thursday to allow banks to cut interest rates on existing mortgages, which will lead to an 80-basis-point reduction on household interest payments, according to local media outlets.
The People's Bank of China (PBOC) building in Beijing, pictured on June 26, 2023. Photo: Bloomberg alt=The People's Bank of China (PBOC) building in Beijing, pictured on June 26, 2023. Photo: Bloomberg>
The impact of the cut will be felt differently across various Chinese cities, due to the complexity of how mortgage rate spreads are set in different locations.
Chinese banks will cut rates on 16 trillion yuan (US$2.2 trillion) of existing first-home loans, helping households save up to 109 billion yuan in interest outlays and total expenditures of 117 billion yuan, about 0.2 per cent of annual household disposable income, according to research by ANZ.
In another move to stimulate demand, the People's Bank of China and the National Administration of Financial Regulation on Thursday eased down-payment requirements for homebuyers, cutting the minimum down-payment for first- and second-time buyers to 20 and 30 per cent, respectively. The new rule also reduced the minimum mortgage rates for second-time homebuyers to 20 basis points above the loan prime rate (LPR), from 60.
Despite the measures, the boost for mortgage demand and home sales is likely going to be limited, some analysts said, as the fundamental problem is low consumer confidence in the face of a slowing economy.
"The reduced interest payments will mainly be translated into precautionary savings rather than consumption, because mortgage interest rates above 4 per cent are still too high for households facing a deteriorating job market," Xing Zhaopeng, senior China strategist at ANZ Research, said in a report.
The mortgage rate cut will have a tangible impact on bank profit margins, however, and China's major lenders are already preparing to reduce deposit rates by up to 25 basis points starting this month, as reported by local media.
"A 10-basis-point cut in deposit rates will add 150 billion yuan to profits, which will sufficiently offset the impact of the mortgage rate cut," the ANZ report said. "Therefore, it will be depositors who pay for the cut."
The state-owned Industrial and Commercial Bank of China, Bank of China, CCB and the Agricultural Bank of China reported a total of 659.6 billion yuan in additional residential mortgage loans in the first half of 2023, or a 5 per cent increase compared with the same period last year, in response to the central bank's call to support the property sector.
The four banks' property-related non-performing loans totalled 185.7 billion yuan in the first half of 2023, up 3.1 per cent from last December.
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.
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