On September 3, Financial Association News (Reporter Guo Zishuo) the banking sector experienced a heavy correction today.

At the close, out of the 42 listed bank stocks, except for Shanghai Rural Commercial Bank, which rose 0.3%, and Chongqing Bank, which remained flat, the other 40 all fell. The bank sector fell 1.52% during the day, leading all industry sectors. Within the bank sector, the six major state-owned banks all fell by more than 2%, leading the sector. Among them, Agricultural Bank of China fell 4.48% and Industrial and Commercial Bank of China fell 3.03%.

Several interviewees told reporters that the decline in bank stocks today is to some extent related to the market's expectation of a reduction in interest rates for existing home loans.

Wang Xiaomeng, Chief Analyst of the Residential Big Data Research Institute, told the Financial Association News: "The decline in bank stock prices today is most likely related to the expectation of a reduction in interest rates for existing home loans reported in the market in the past two days. Once the interest rates for existing home loans are lowered, it will further reduce the banks' profitability and directly impact their profitability. In the short term, it will have a certain negative impact on bank stock prices."

"Overall, the expectation of a reduction in deposit and mortgage interest rates does have a certain impact on the performance of bank stocks." Yan Yuejin, Deputy Director of the Shanghai E-House Real Estate Research Institute, also told the Financial Association News: First, for banks, if the transition from existing mortgage loans to mortgage reform is confirmed, it will be bearish. Second, from the personal loan data of banks, the downturn in the real estate business has had a certain impact on loans, with a significant year-on-year decrease in personal housing loans. Third, the latest non-performing loan ratio for personal housing loans has increased in many banks, especially for some city commercial banks.

China International Capital Corporation believes that the recent rapid rise in bank stock prices has led to a correction. In addition to concerns about pressure on interest rate spreads due to adjustments in existing mortgage rates, the increase in trading crowding in the short term has led to an outflow of safe-haven funds from high dividend stocks in the overall market risk appetite improvement.

However, China International Capital Corporation has also pointed out that assuming a reduction in existing mortgage rates, although it suppresses the performance of bank stock prices in the short term, it also means the early release of medium-term risks. Wang Xiaomeng added that in the long run, lowering deposit interest rates is expected to alleviate the current phenomenon of early repayment of loans, ease the pressure on household loans, improve current consumption expectations, and boost the market's consumption capacity and confidence. The reduction in interest rates for existing home loans helps to better manage risk and stabilize development.

The expectation of a decrease in interest rates for existing home loans is increasing, and institutional estimates show that the downward space may exceed 200 billion.

In terms of policies, according to the "China Regional Financial Operation Report (2024)" released by the central bank in July of this year, the downward adjustment of interest rates for existing home loans plays a significant role in reducing prepayment and driving consumption growth. In the next step of work, it emphasizes the need to "adhere to the market-oriented and rule-of-law track to promote financial innovation and development, urge financial institutions to continue to implement the effectiveness of lowering interest rates on existing home loans, rationalize the relationship between incremental and existing home loan interest rates, effectively reduce the interest burden on residents, unleash public investment and consumption vitality, and stimulate market activity, promoting sustained economic recovery and improvement."

In the market, the gap between interest rates for existing home loans and new home loans is further widening. Since the downward adjustment of mortgage interest rates in the fourth quarter of last year, the central bank has twice lowered the 5-year and above LPR by a total of 35 basis points to 3.85%, and has cancelled the lower limit of first and second home loan interest rates at the national level. Currently, except for Beijing, Shanghai, and Shenzhen, where the lower limit of mortgage interest rates has not been cancelled, the lower limit of interest rates has been cancelled in other cities nationwide. The interest rate for newly issued first-home mortgages in many cities has been reduced to around 3.2%, and in some cities, the rate has been reduced to below 3%.

In Wang Xiaoye's view, since September is a high-incidence period for real estate policies, and significant policies have been issued multiple times in previous Septembers, it cannot be ruled out that there is a possibility of lowering the lending interest rates of existing home loans in September. Although it may bring negative impact and operational pressure to banks in the short term, from the perspective of overall macroeconomic development, reducing interest rates for existing home loans is the general trend.

"As the policy window approaches, if the interest rates on existing home loans are lowered, the potential space may be twice that of September 2023." He Ning, Chief Macro Analyst of Kaiyuan Securities, believes that the optimistic scenario may include two parts of adjustments: one is the case of downward adjustment for non-first-home existing homes, similar to the supplementary adjustments in September 2023. The other is the case where the lower limit of mortgage interest rates is cancelled in May 2024 but existing home loans do not enjoy it. The total potential space for these two cases corresponds to a potential downward adjustment range of 192.2 billion yuan to 269.3 billion yuan, accounting for 0.35% to 0.49% of residents' disposable income in 2023.

China International Capital Corporation estimates that if all mortgage loan interest rates are lowered to the level of new loans through transfer and self-adjustment, the average mortgage interest rate for existing loans is estimated to be reduced by about 60 basis points, and the estimated reduction in borrower interest payments is about 240 billion yuan per year, exceeding the scale in 2023. Assuming that the range of transfer only includes first-home mortgages (assuming it accounts for about 90% of existing home loans), the average mortgage interest rate for existing loans is estimated to be reduced by about 54 basis points, and the estimated reduction in borrower interest payments is about 200 billion yuan per year.

The enthusiasm for prepayment remains unabated, and banks' high-quality mortgage assets are still shrinking.

Mortgage loans have always been favored by banks as high-quality assets. From the interim report data, the demand for prepayment by existing home loan users is still strong, and the trend of banks' mortgage asset shrinkage has not stopped.

According to the East Money Choice data, the balance of personal housing loans of 42 listed companies reached 34.076 trillion yuan in the first half of the year, a decrease of 1.97% compared to the same period last year. The six state-owned large banks had a total balance of personal housing loans of 26.12 trillion yuan in the first half of the year, accounting for 77% of the total balance of personal housing loans of 42 listed banks. In the first half of the year, the balance of personal housing loans of only the six large banks decreased by 654.759 billion yuan year-on-year. Excluding Postal Savings Bank, which saw an increase in scale, the balance of personal housing mortgage loans of the other five state-owned large banks decreased by 692.306 billion yuan.

However, the net interest margin of commercial banks still faces certain pressures. Regarding the possibility of converting existing loans to mortgages and reducing interest rates on existing housing loans, Yan Yuejin also suggested that a direct reduction in business would have a significant impact and would require a comprehensive consideration of the bank's interest margin space, including reducing the cost of deposits, only then banks will have initiative.

The KR Research Center also believes that when it comes to interbank mortgage conversions, commercial banks need to consider various factors, including how to establish a unified loan conversion procedure, how to avoid excessive conditions imposed by new loan banks, how to alleviate the operational pressure faced by banks after the narrowing of their net interest margins. The net interest margin of banks is around 1.5%. The decrease in existing housing loan interest rates and the promotion of interbank mortgage conversions have a great negative impact on commercial banks and will directly restrict their enthusiasm and safe operation. More detailed regulations are needed to support them.