In the second quarter of 2024, the net interest margin of commercial banks was 1.54%, showing signs of bottoming out for the first time. Recently, several senior executives of listed banks have also publicly stated that there are signs of stabilization or a slowing down of the decline in the net interest margin, injecting a strong confidence booster into the market. Fitch Ratings recently stated, "It is still too early to determine whether the net interest margin has bottomed out. The government may further reduce the LPR to lower the cost of loans."
According to Caixin, since the decline of the net interest margin of commercial banks in the first quarter of last year, "when will the net interest margin bottom out" has become the top focus in the industry.
According to the data released by the China Banking and Insurance Regulatory Commission, the net interest margin of commercial banks in the second quarter of 2024 was 1.54%, consistent with the first quarter of 2024, showing signs of bottoming out for the first time. Several senior executives of listed banks have also publicly stated that there are signs of stabilization or a slowing down of the decline in the net interest margin, injecting a strong confidence booster into the market.
However, the well-known credit rating agency Fitch Ratings recently stated, "It is still too early to determine whether the net interest margin has bottomed out. In order to support home sales, the government may further reduce the LPR to lower the cost of loans, especially for personal mortgage loans. The reduction of LPR also means a further narrowing of the profit margin for the bank's high-quality interest-earning assets.
In fact, with the expectation of a potential rate cut for existing home loans, the market's view on the trend of the net interest margin of banks has once again become more divided. After all, the adjustment of "existing home loan interest rates" is one of the important influencing factors for the decline in the net interest margin of the banking industry in the first half of the year.
Fitch Ratings: It is still too early to say that the net interest margin has bottomed out.
As of now, at least 10 listed banks have publicly declared during the interim report or performance briefing that the net interest margin of banks has shown marginal stabilization and improvement.
Xu Xueming, Deputy President of Postal Savings Bank of China, stated at the performance release conference that the next step for the interest margin still faces pressure, but the trend of slowing down is expected to continue. Peng Jiawen, Deputy President of CM Bank, also pointed out at the performance exchange meeting that the pressure of bank interest margin contraction still exists, but the marginal pressure has eased. From next year's perspective, the interest margin of banks may gradually stabilize.
Chairman Wang Hui of the Bank of Chengdu said: "As of the end of June, the cumulative impact of the downward adjustment of loan interest rates based on LPR since 2022 has largely been released, while the cumulative contribution of the downward adjustment of time deposit interest rates has only been released in a small amount. This will form a crucial support for the later impact of the interest rate repricing and the repair of net interest margin."
For whether the net interest margin has bottomed out, Fitch Ratings believes it still needs to be observed. First, the continuous pressure on the real estate market and the repricing of housing loans may drag down the recent profitability of the banking industry. Fitch Ratings said: "To support home sales, the government may further lower LPR to reduce the cost of loans (especially for individual housing mortgage loans)." As of the end of the first half of 2024, individual housing mortgage loans accounted for 15% of the total loans of financial institutions. With the impact of the reduction of reserve requirement ratio and deposit interest rates beginning to show, the net interest margin of the banking industry in the second quarter of 2024 was 1.5%, the same as the first quarter.
As a high-quality asset mortgage loan, the market is highly concerned about the impact of the rumored adjustment of the existing mortgage loan on the net interest margin of banks.
An unnamed bank analyst told Caixin reporter: "If the mortgage loan interest rates for existing homes are lowered, it will cause certain pressure on the net interest margin of some banks in the short term, but the overall impact is controllable. In the long run, if the reduction of mortgage loan interest rates for existing homes drives the recovery of the property market, banks can adjust pricing accordingly, and the accelerated economic recovery will help improve the asset quality and profitability of banks."
"The main focus for the second half of this year and next year is the potential impact of the reduction in existing mortgage loan rates on the interest margin." China International Capital Corporation believes that whether the interest margin can stabilize fundamentally depends on whether residents can improve credit demand by reducing debt pressure, and the assessment of the impact of interest rate cuts on existing mortgage loans needs to consider the above two factors. The guiding direction of policy support for the real economy is also crucial for the fundamentals of banks.
According to Liang Fengjie, a bank analyst at Zheshang Securities, if the mortgage rate is reduced, in the pessimistic, neutral, and optimistic scenarios, it will drag down the bank's interest margin by 13bp, 8bp, and 4bp, respectively, with an impact on revenue of 5.8%, 3.8%, and 1.8%, and a profit of 11.6%, 7.6%, and 3.6%. Xiao Feifei, the chief banking analyst at Citic Securities, believes that if the news is true, based on the sensitivity analysis performed, assuming a 75% adjustment ratio for existing mortgages and a 55bps pricing adjustment, the negative impact on the net interest margin of the entire banking system is estimated to be around 4.5bps for the year, with a greater impact on nationwide banks with a higher proportion of mortgages.
Reducing costs to offset the negative impact of existing mortgage loans
However, several analysts also believe that if the interest rate on existing mortgage loans is lowered, and at the same time the cost of liabilities is lowered, it may offset the negative impact of the adjustment on the interest margin, resulting in a limited impact on the net interest margin of banks.
Li Fengjie added that if the mortgage interest rate is lowered, it is expected that the accompanying reduction in deposit costs will likely offset the pressure on bank interest spreads. According to calculations, in the pessimistic, neutral, and optimistic scenarios mentioned earlier, the deposit costs will decrease by 17, 11, and 5 basis points respectively, which can completely offset the impact of the mortgage interest rate reduction.
China International Capital Corporation believes that considering that the space for adjusting the existing mortgage interest rates in 2024 may be greater than in 2023, the adjustment magnitude of bank liabilities should be at least around 15 basis points. If the adjustment of liability costs is in place, it is expected that the overall effect of adjusting the existing mortgage interest rates on bank interest spreads will be neutral.
To offset the negative impact, the aforementioned bank analysts believe that banks need to further optimize their asset-liability structure, fully utilize the market-based adjustment mechanism of deposit interest rates based on market conditions, increase support for weak areas in the real economy and key emerging sectors, and promote the development of low-capital business, among other things.