On the 20th of last month, amid a decrease in the loan prime rate (LPR) in China, small and medium-sized banks followed state-owned banks in significantly reducing loan and deposit interest rates. Small and medium-sized banks, which have attracted customers with high-interest deposits, are now losing customers as they lower rates, creating a dilemma where increasing expenses are needed to retain clients. Some small and medium-sized banks are seeking to attract external capital for survival.
According to Chinese local media Yicai Global on the 17th, small and medium-sized banks in Guangdong and Sichuan provinces are sharply lowering deposit interest rates. Some have reduced the interest rate on three-year fixed-term deposits to 1.2%, which is not only a record low but also 0.05 percentage points lower than large banks.
This implies that, as loan interest rates decrease, banks' revenue from loan interests is also decreasing, increasing the burden of interest payments on high-interest deposit products. As a result, small and medium-sized banks, which have attracted customers with high-interest deposit products, have found that 'high interest' was their only weapon in competition with large banks. However, facing a survival crisis, they had to give this up.
According to the Chinese economic media Shanghai Securities Journal, in the case of Agricultural Commercial Bank (农商银行), the net interest margin (NIM) in the first quarter of this year has decreased by 0.15 percentage points compared to the previous quarter, indicating significant profitability pressure. The net interest margin is the yield after subtracting expenses from major operating revenue and is one of the indicators of a financial institution's profitability. Generally, even a 0.1 percentage point drop can have a significant impact on a bank's annual revenue.
As the attractiveness of deposits declines, funds are flowing into asset management products or the bond market outside of banks. As of the end of May, the balance of yuan deposits increased by 8.1% compared to the same period last year, with non-financial institution deposits increasing by more than 1.2 trillion yuan (approximately 228 trillion won) in just one month, reaching the highest level in the last 10 years. This suggests that depositors are seeking financial products with higher yields instead of traditional deposit products.
Some small and medium-sized banks are seeking external capital as it has become difficult to secure sufficient capital from interest revenue. According to Securities Daily, small and medium-sized banks are recently attracting external investors, converting convertible bonds, and increasing capital through equity offerings. According to the China Banking and Insurance Regulatory Commission, Zhejiang Chouzhou Commercial Bank (浙江稠州商业银行), Zhejiang Mintai Commercial Bank (浙江民泰商业银行), Yantai Bank (烟台银行), Zhangjiakou Bank (张家口银行), Baoding Bank (保定银行), Shizuishan Bank (石嘴山银行), and Zhejiang Pingyang Agricultural Commercial Bank (浙江平阳农村商业银行) have received approvals for capital increases or changes in registered capital in recent months.
Tian Li-hui, a professor at Nankai University's Department of Finance, told Securities Daily that small and medium-sized banks are currently under pressure for endogenous capital accumulation, with limited external funding options and relatively low investor confidence, placing them in a structural crisis. He noted that for small and medium-sized banks facing a strong demand for capital reinforcement, increasing capital and paid-in capital are feasible and effective means of fundraising.
Meanwhile, the Central Bank, the People's Bank of China, will decide on the June LPR on the 20th. The market believes that since China proactively lowered interest rates last month to stimulate the economy, it is likely that this month's rates will remain unchanged.