The ongoing trend of declining interest rates in the banking sector throughout this year has particularly garnered attention, especially with the active participation of numerous small and medium-sized banks adjusting their deposit rates downwardIn recent weeks, various banks across several provinces, including Guangdong, Guangxi, Henan, Hubei, Guizhou, Harbin, Shanxi, and Shenzhen, have made significant cuts to their deposit interest rates, with reductions reaching up to 60 basis points.

As we entered June, speculation surrounding further cuts to deposit rates by banks intensifiedParticularly notable is the role played by smaller banks, specifically rural commercial banks, which have emerged as key players in this wave of rate reductions.

Understanding the backdrop of these widespread deposit rate cuts among smaller banks involves a look at multiple factors:

Firstly, macroeconomic policy orientation plays a significant role

Amid global economic fluctuations, the People’s Bank of China (PBOC) has adjusted its monetary policy to stabilize domestic economic growthCutting deposit interest rates is a crucial facet of this strategy, as it aids in lowering the financing costs for the real economy and encourages the flow of capital into productive sectors.

Secondly, the banking industry has been grappling with increased operational pressuresIssues such as declining asset quality and narrowing net interest margins pose substantial challenges for banksIn response, financial institutions need to lower their funding costs to enhance profitabilityThus, reducing deposit interest rates becomes a feasible avenue for decreasing liabilities.

When examining the specific instances of these rate cuts among smaller banks, several key details stand out:

1. The range and frequency of the reductions have been striking

• Rethinking Inflation: New Perspectives Emerge
• Embracing Long-Termism in the Age of AI
• Interest Rate Changes and the Economy
• AWS Powers Generative AI Implementation
• Surge in Global Oil Prices Doubles Gasoline Costs

Recently, numerous small and medium-sized banks adjusted their listed deposit rates, with declines varying from 5 to 60 basis pointsThe frequency and scale of these adjustments have surpassed those seen in previous years, highlighting the urgent need for banks to reduce their costs.

2. The adjustment trends have revealed some common features across these institutionsPrimarily, rural commercial banks have spearheaded these changesMany of these banks have adopted a similar approach, notably decreasing interest rates on demand deposits while witnessing instances of "inverted" rates for medium to long-term fixed deposits.

The implications of these ongoing adjustments are multifaceted:

For depositors, the recent declines in interest rates translate to diminished returns on savingsWith significant cuts to long-term deposit rates, the financial outcomes for savers are notably affected, leading many to rethink their savings strategies.

From the perspective of the banking sector, while lowering deposit rates aids in decreasing operational costs and potentially enhancing profitability, it also risks compressing net interest margins even further, presenting a challenge to overall profitability

Moreover, the decline in deposit rates may push some customers to explore alternative financial products or investment avenues, which could adversely affect the deposit business of banks.

Wider ramifications extend into the financial markets as wellThe push to decrease deposit rates aims to facilitate the transition of capital into the real economy, alleviating financing costs amid a delicate recovery phaseSimultaneously, this effort could foster greater diversification within the financial market, providing investors with a richer array of optionsHowever, it must be noted that increased competition may also strain the profitability of financial institutions.

Furthermore, there remains scope for further reductions in deposit ratesRecently, a notice issued by the PBOC and three other departments emphasized the importance of promoting a stable decline in loan interest rates while maintaining the functionality of market-driven deposit rate adjustments

The goal remains to ensure that the net interest margin for commercial banks remains relatively stable while collectively reducing the comprehensive financing costs for society.

For investors, yield has become an increasingly critical criterion influencing their asset allocation strategiesAfter nearly two years of multiple interest rate cuts, finding fixed-term deposits yielding above 3% has become exceedingly rareEven small banks, once known for attracting deposits with high rates, have begun to experience a steady decline in their deposit interest rates since the beginning of this yearThis series of cuts is widely viewed in the industry as a necessary following action to the reductions made by larger, national banks.

Observing the current state of the banking sector, it is apparent that the trend towards lower deposit rates is likely to persist, and the adjustments are far from over

A multitude of persistent challenges continue to plague banks in the short term.

In the first quarter, banks reported a net interest margin of 1.54%, a statistic that has become familiar across various platformsThis represents a decrease of 0.15 percentage points since the end of last year and a drop of 0.2 percentage points year-on-yearMany may not fully grasp the significance of this figure.

To simplify, this metric serves as a barometer for bank profitabilityGiven that banks operate as commercial entities, they must ensure that they earn a profit margin on their lending practicesThus, maintaining a healthy interest margin is essential for survival.

To sustain this margin, banks ideally should lend significantly while limiting their intake of depositsHowever, the current environment demonstrates the opposite trend, resulting in increased pressure on net interest margins.

In the first five months of this year alone, banks have added a remarkable 9 trillion yuan in deposits, with household loans increasing by 7.13 trillion yuan