The recent round of bank collective decline in deposit interest rates is one of the logic of the recent rise in the banking sector, which is conducive to reducing the cost of banking liabilities.

Next Monday, another policy to protect the cost of bank capital will be implemented.

According to several media reports, the relevant regulatory authorities have issued a document to adjust the self-discipline limit of agreed deposits and notified deposits, in which state-owned banks implement the benchmark interest rate plus 10 basis points, and other financial institutions implement the benchmark interest rate plus 20 basis points. At the same time, notice deposits that do not require customer operation and intelligent automatic rollover will be suspended, and the stock will expire naturally. The self-regulatory cap adjustment will be implemented from May 15.

What is agreement deposit?

Agreement deposits (non-agreement deposits) are one of the types of deposits for public (enterprises and institutions). Deposits in agreement deposits enjoy two interest rates, that is, deposits within the basic limit (such as $100,000 or $500,000) are charged at the demand rate, and those exceeding the basic limit are charged at the Agreement deposit rate.

The benchmark deposit rate was 1.15 percent before the agreement.

What is a call deposit?

A call deposit is a deposit of indefinite maturity, but the depositor must notify the bank in advance before withdrawing it.

The notice period can be 1 day or 7 days. The benchmark interest rate is 0.80% for 1 day and 1.35% for 7 days.

What is the impact?

Some analysts said that these two types of deposits are not mainstream, accounting for a relatively low proportion of bank deposits. Because the proportion is low, the impact is not large, mainly the signal significance of caring for the cost of bank funds.

Wang Yifeng, an analyst at Everbright, reported that since 2019, the regulatory authorities have made a series of efforts to improve the cost of bank liabilities, and the policy has played a certain effect in improving the cost of liabilities of the banking system, but it has not formed effective constraints on innovative current deposits such as agreement deposits and notice deposits, and the interest rate of public current deposits is still high.

In 2022, the interest rate of demand deposits in listed banks will be 1.02%, among which the large banks will be 0.96% and the joint-stock banks will be 1.19%, up 30 and 42bp respectively from 2017, which is significantly higher than the benchmark interest rate of demand deposits.

Wang Yifeng previously expected that the control of deposit costs still has a backhand card, and the "class demand" deposit is an important starting point; It is expected that the future self-regulatory management of deposit pricing includes but is not limited to: the management of innovative demand deposits such as agreement deposits and notice deposits into the self-regulatory mechanism. At this stage, for core time deposits, there are both EPA and MPA constraints, but "demand deposits" lack policy guidelines, and in the future, such products may be regulated compared with demand deposits.

Wang Yifeng said that the interest rate of demand deposits has not changed since 2012, but since 2018, the cost rate of enterprise demand deposits has risen to the high point in 2013 and continues to rise. The calculation shows that: if the interest rate of all enterprises' demand deposits falls to the average level of around 0.70% from 2013 to 2018, the weighted average of the cost rate of demand deposits of listed banks will fall by about 30bp, which will boost the interest spread by about 5.5bp and affect the revenue growth rate of listed banks by 2.3pct.

Another analysis said that the deposit rate cut has a hidden meaning is that if the deposit rate becomes more and more unattractive, it may reduce the high savings rate in China, and may be able to stimulate consumption in our country.

It plays an important role in reducing the cost of bank liabilities

China Merchants Securities said in a research report on Thursday that the current deposit listing interest rate of the four major banks and China Merchants Bank is 0.9%, lower than the benchmark interest rate. The deposit interest rate agreed by some small and medium-sized banks is "base interest rate +35BP" =1.5%, which may be higher for individual banks. From the current point of view, large bank agreement deposits generally do not add much more than the benchmark interest rate.

According to the "21st Century Business Herald" reported that the agreement deposit and notice deposit self-discipline cap: the four major state-owned banks implement the benchmark interest rate plus 10BP, that is, the agreement deposit interest rate cap of 1.25%; Other financial institutions implement the benchmark interest rate plus 20BP, that is, the agreed deposit rate cap of 1.35%.

China Merchants Securities expects that the new rules will generally reduce the agreement deposit and call deposit interest rates of small and medium-sized banks, but the impact on large banks and some equity banks is relatively small; It is estimated that the scale of agreed deposits is 20-30 trillion yuan, accounting for about 10% of total deposits, and it is estimated that the new regulation will reduce the total deposit interest rate of banks by about 2BP.

However, China Merchants Securities believes that the new rules have a greater effect on regulating the order of agreed deposit pricing, reducing the disorderly competition in deposit pricing, and jointly reducing the cost of bank liabilities. Previously, some banks' agreement deposits and call deposits were overpriced, putting pressure on low-priced banks.

At the same time, China Merchants Securities wrote in the report that the pressure to reduce deposit costs is still the trend:

Pressure to reduce deposit costs is still the general trend. Since 2018, due to the periodic deposit, the proportion of demand deposits has decreased significantly, and the deposit interest payment ratio has increased, and the overall deposit interest payment ratio of A-share listed banks will reach 2.02% in 2022.

At the same time, the loan yield fell sharply, and the weighted average interest rate of new loans issued in 22Q4 fell by 182BP compared with 18Q1, which greatly intensified the pressure on the bank's interest margin and made the net interest margin significantly decline.

With some economic recovery in 2023, there is little urgency to further reduce lending rates. However, banks generally make up the price by volume, making the loan price war fierce, and the loan interest rate is difficult to rise.

Taking into account the repricing of stock loans and other impacts, the pressure on bank interest margins will increase in 2023, and controlling deposit costs will become a top priority. Small and medium-sized banks may have the incentive to follow up with a reduction in deposit rates.

In the long run, we believe that the downward trend of deposit rates is still the general trend.