When Loan Interest Rates Fall Below 3%

Credit: Visual China

BEIJING, August 29 (TiPost) — “XX loans mid-year promotion, with interest rate starting from 3.6%. Limited-time interest rate coupons have been distributed, with interest rate at 3.45%.”

A woman from Jiangsu province recently sought to get a car loan. After communicating with the client manager of an urban commercial bank, she obtained a credit limit of 100,000 yuan (the interest rate at 3.9%). Soon after, she received a loan discount message from another joint-stock bank. She clicked on the link and applied for a loan of 100,000 yuan at an interest rate of 3.45% through the bank’s app, thus giving up the previously negotiated 3.9% interest rate loan.

Previously, the client manager of that urban commercial bank told her that the 3.9% interest rate is already close to the bottom line.

The above case is a microcosm of the recent “price war” in consumer loan interest rates among banks. Since the beginning of the year, limited-time promotions have been in full swing. During the limited-time promotion in August, some bank consumer loan interest rates can be as low as 3%.

It is not only consumer loans that are gradually decreasing, but also operating loans.

Client managers from some joint-stock banks in Guangzhou told TiPost, “A 3.0% interest rate is not uncommon in the market. In order to achieve performance targets, some high-quality customers applying for operating loans can obtain an annualized interest rate of 2.9% in the second half of the year.” A client manager from a joint-stock bank in Shenzhen stated that the bank’s three-year operating loan has an annualized interest rate ranging from 3.2% to 4.2%, but each customer’s interest rate is different and is determined based on their qualifications.

However, some banks have chosen to increase loan interest rates against the trend. A client manager from a rural commercial bank in East China told TiPost, “We have recently slightly increased interest rates. Quoting at the bottom-line interest rate is not profitable, and not every bank can make money through intermediary income.”

Behind the credit price war is a comprehensive challenge to the whole industry.

Why is there a price war?

The credit price war is not a regional event.

The data from Rong360 Digital Technology Institute shows that the average interest rate for consumer loans in national banks in July was 3.57%. Several state-owned banks and joint-stock banks, including some urban commercial banks that are active in the personal consumer loan field, have set their lowest interest rates for consumer loans below the 1-year Loan Prime Rate (LPR) (which was 3.55% in July).

The price war in credit has also contributed to an increase in the scale of credit. The statistical report on the lending of financial institutions in the second quarter released by the central bank shows that the growth rate of household consumer loans rebounded, and operating loans maintained a fast growth rate. In the first half of the year, personal operating loans increased by 2.3 trillion yuan, an increase of 759.3 billion yuan compared to the same period last year. Personal short-term consumer loans increased by 300.9 billion yuan, an increase of 401.9 billion yuan compared to the same period last year.

Take China Construction Bank (CCB) as an example. As of the end of June, personal consumer loans amounted to 368.802 billion yuan, an increase of 73.359 billion yuan from the end of the previous year, with a growth rate of 24.83%. Personal operating loans amounted to 608.865 billion yuan, an increase of 193.521 billion yuan from the end of the previous year, with a growth rate of 46.59%.

However, the interim reports that have been disclosed so far also directly reflect the decline in asset yield caused by the decrease in loan pricing.

• CCB: The average annualized yield for personal loans and advances is 4.59%, compared to 4.89% in the same period last year;
• Everbright Bank: The average yield for retail loans is 5.91%, compared to 6.10% in the same period last year;
• Bank of Ningbo : The yield for retail credit is 6.53%, compared to 6.97% in the same period last year;
• China Merchants Bank: The average yield for retail loans is 5.16%, compared to 5.54% in the same period last year.

In fact, it is not only the retail end that is engaged in a price war, the prices of corporate loans are also gradually declining. The latest average yield for corporate loans at China Merchants Bank is 3.8% (down 1.3% compared to the same period last year), and at CCB, the average yield for corporate loans is 3.56% (down over 10% compared to the same period last year).

So how did the price war emerge?

“The price is determined by the supply and demand and inter-bank competition,” said a person in charge of a bank’s credit department. The market’s effective credit demand was still recovering in the first half of the year. In a fully competitive market environment, loan prices naturally decrease, leading to some banks attracting customers with “ultra-low-interest loans”. He said that there is currently an excessive competition in some markets, mainly due to the issue of whether customers are willing to borrow rather than whether the loans are expensive.

“Surviving the harsh winter”

“Strengthen cost control, and survive in the harsh winter.” This is how Ji Guangheng, the Secretary of the Communist Party of China at Ping An Bank, described the challenges currently faced by the banking industry at the bank’s mid-year performance conference.

Indeed, the pressure on interest income has also weighed down the banks’ revenue performance along with the overall decline in asset yield.

Data shows that China Construction Bank’s revenue was 400.255 billion, a slight decrease of 0.59% year-on-year. Ping An Bank’s revenue was 88.61 billion, a decrease of 3.71% year-on-year.China Merchants Bank’s revenue was 178.46 billion, a decrease of 0.35% year-on-year. Everbright Bank’s revenue was 76.52 billion, a decrease of 2.47% year-on-year. Shanghai Bank’s revenue was 26.36 billion, a decrease of 5.66% year-on-year.

The industry’s net interest margin has also hit a new low.

According to information released by the China Banking and Insurance Regulatory Commission, the net interest margin of commercial banks in the second quarter of this year was 1.74% (the lowest value on record), which is the same as the first quarter. Among them, the net interest margin of large banks and joint-stock banks continues to decline, with figures of 1.67% and 1.81% in the second quarter, respectively, down 0.02 percentage points from the first quarter. The net interest margin of city commercial banks remains stable, while that of private banks and rural commercial banks has rebounded.

Compared to small and medium-sized banks, state-owned banks have the advantage of lower funding costs and larger asset size, enabling them to rely on the expansion of asset size to compensate for price with quantity and maintain profit growth. Jimentioned, “In the first half of this year, half of the loans were from the six major state-owned banks, and less than 10% of the loans were from joint-stock banks.”

Smaller banks face greater survival pressure.

Several account managers from small and medium-sized banks have told TiPost that since the beginning of this year, both sides of deposits and loans have been squeezed by large state-owned banks. A customer manager from a city commercial bank bluntly stated that they have been quoting at the upper limit, and they are no longer making money and cannot compete with large banks. Previously, state-owned banks did not pay much attention to the county market, but now they are investing heavily in this market.

Liao Zhiming, Chief Analyst of CMB International Securities, said that bank profitability mainly depends on volume (interest-bearing asset size, i.e. whether loans can be issued), price (net interest margin), and credit cost (asset quality). Profitability (return on equity, ROE) mainly depends on net interest margin and credit cost. Due to the significant decline in net interest margin and high credit cost, the profitability of small and medium-sized banks has weakened and the pressure to make a profit has increased.

A new round of deposit interest rate cuts to be triggered

Since the beginning of this year, the narrowing of the interest margin in the banking industry has been repeatedly scrutinized by regulators.

It was proposed for the first time in the monetary policy report released in the first quarter of this year to maintain a reasonable and moderate level of interest rates. It was proposed for the first time to maintain a reasonable level of profit and net interest margin in the monetary policy report released in the second quarter. The central bank also pointed out that due to factors such as price-to-book ratio, the ability of A-share banks to supplement capital through external channels is relatively limited, so maintaining a certain level of profit growth is an important way to supplement capital from internal sources.

The People’s Bank of China, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission jointly held a television conference on August 18, proposing financial support for the real economy, focusing on price and sustainability and regulating the pricing order of loan interest rates, taking into account the relationship between incremental, stock, and other financial product prices.

A banking industry analyst told TiPost that currently, the net interest margin of state-owned banks is really too low, which has substantially affected their sustainable development.

Industry insiders believe that in terms of the pricing mechanism, deposit interest rates are mainly anchored to the 1-year LPR rate and the 10-year government bond yield. This month, the 1-year LPR rate and the 10-year government bond yield have also clearly declined. Based on the interest rate transmission mechanism, a new round of deposit rate cuts may be initiated. This will alleviate the pressure on banks’ narrowing net interest margins and continue to reduce the financing costs of the real economy.

Some signals of deposit rate cuts have already begun to emerge.

After visiting some bank branches in Beijing, Securities Daily reported last Thursday that the interest rates for 6-month, 2-year, and 3-year fixed-term deposits have decreased slightly compared to last month, with a decrease ranging from 5 to 10 basis points. The interest rates for other terms remain unchanged: for a minimum deposit of 10,000 yuan, the interest rate for a 2-year fixed-term deposit is 2.6%, for a minimum deposit of 50,000 yuan, the interest rate for a 3-year fixed-term deposit is 3.15%, and for a minimum deposit of 10,000 yuan, the interest rate for a 3-year fixed-term deposit is 3.1%.

Other media have also reported that the 2-year and 3-year fixed-term deposit rates of Guangzhou Bank have dropped by about 5 basis points compared to last month.

A new round of deposit rate cuts may be on the way.

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