State-owned major banks such as ICBC and ABC have taken action, marking the beginning of a new round of deposit rate cuts

In the early morning of Thursday, July 25th Beijing time, according to the Industrial and Commercial Bank of China (ICBC) website, ICBC lowered its deposit benchmark interest rates. It is worth noting that the benchmark interest rate is the deposit rate announced by the bank on its official website, and the actual effective interest rate may not be equal to the benchmark interest rate.

Specifically, ICBC lowered the one-year, two-year, three-year, and five-year Renminbi fixed deposit rates to 1.35%, 1.45%, 1.75%, and 1.8%, respectively, down from 1.45%, 1.65%, 1.95%, and 2.00% previously. This translates to a 10 basis points reduction for the one-year fixed deposit rate, and a 20 basis points reduction for the two-year, three-year, and five-year terms.

On the evening of Wednesday, July 24th Beijing time, as disclosed by the Economic Daily News, a major bank will lower its deposit benchmark interest rates on July 25th, "with the current deposit rate down by 5 basis points, one year and below down by 10 basis points, and two years and above down by 20 basis points."

The report also stated, "According to the bank's official website, the most recent benchmark interest rate adjustment was on December 22, 2023, with rates of 0.2% for current deposits, 1.15% for three months, 1.35% for six months, 1.45% for one year, 1.65% for two years, 1.95% for three years, and 2.0% for five years." Various signs seem to be consistent with the actions of ICBC in the early morning.

Following ICBC, another state-owned major bank, Agricultural Bank of China (ABC), also announced a reduction in deposit benchmark interest rates, with one-year, two-year, three-year, and five-year Renminbi fixed deposit rates lowered to 1.35%, 1.45%, 1.75%, and 1.8%, respectively, down from 1.45%, 1.65%, 1.95%, and 2.00% previously. This equals a 10 basis points reduction for the one-year term, and a 20 basis points reduction for the two-year, three-year, and five-year terms, mirroring ICBC's actions.

On Monday, July 22nd, the market saw the second interest rate cut of the year. The National Interbank Funding Center authorized by the People's Bank of China announced that the 1-year and 5-year LPRs (Loan Prime Rates) have both been reduced by 10 basis points.

On Wednesday, Beijing Business Daily reported that the Bank of Communications lowered its three-year fixed deposit effective interest rate from 2.6% to 2.5%. At that time, other five major state-owned banks including Bank of China, Agricultural Bank of China, ICBC, China Construction Bank, and Postal Savings Bank had not made any adjustments, "with the three-year fixed deposit rate still at the 2.35% standard. The effective interest rate refers to the final deposit rate determined by the bank after adjustments, which may differ from the benchmark interest rate."

However, later media reports found that after the Bank of Communications took the lead in lowering rates this week, it first lowered the three-year deposit rates in Beijing, Shanghai, and other regions. Although it fired the "first shot" among major banks, it does not mean that a new round of deposit rate cuts has officially begun, as it was only a regional adjustment of deposit rates, with varying pace and extent of adjustments However, following the official announcement of the comprehensive reduction of deposit benchmark interest rates by ICBC and ABC, the trend of "collective reduction of deposit benchmark interest rates led by state-owned major banks" seems to have fully formed, which is also in line with analysts' expectations.

For example, Dai Zhifeng, Chief Analyst of Bank at Zhongtai Securities, pointed out that based on the recent adjustments of LPR and deposit rates, "every time the central bank lowers LPR twice, major banks will subsequently lower the benchmark deposit rates twice." On one hand, the liability side adjusts to the asset side's reduction, while also creating room for further reductions on the asset side. Since 2024, the central bank has lowered LPR twice, but major banks' benchmark rates have not been lowered since 2024. Following this pattern, a reduction in benchmark deposit rates may be expected in the near future.

Public information shows that since the establishment of the market-oriented adjustment mechanism for deposit rates in 2022, commercial banks' benchmark deposit rates have collectively been reduced in four rounds. Although small and medium-sized banks and state-owned major banks have a certain time lag in pace, the overall trend remains unchanged:

In summary, the collective adjustment of benchmark deposit rates by state-owned major banks is often seen as the starting point of a new round of deposit rate reductions. The last round of collective deposit rate cuts occurred on December 22nd last year, when many state-owned major banks such as ICBC, CCB, BOC, ABC, PSBC adjusted their benchmark deposit rates, leading to adjustments by many national joint-stock banks and small and medium-sized banks.

According to China Fund News, recently, small and medium-sized banks in Yunnan, Guangxi, and other regions have started to supplement the reduction of deposit rates. The adjusted product types not only include medium to long-term deposits such as three-year and five-year terms, but also various short to medium-term deposits, with rate cuts ranging from 5 to 40 basis points. However, this does not mark the beginning of a new round of deposit rate reductions, but rather follows the previous round of rate cuts by small and medium-sized banks.

Currently, the market's consensus expectation is that there is still room for further reduction in bank deposit rates:

Overall, despite multiple reductions in deposit rates by commercial banks in recent years, given that the banking industry still faces pressure on net interest margins, the market believes that there is still some room for further reduction in deposit rates in the future.

For example, Zhou Maohua, a researcher at the Macro Department of the Financial Markets Department of Everbright Bank, pointed out that in recent years, factors such as macroeconomic fluctuations, banks continuously supporting the real economy, fluctuations in financial asset prices, have led to a continuous narrowing of net interest margins for banks, with some banks facing significant pressure. At the same time, there is a structural imbalance in the domestic deposit market:

"Some banks are fully utilizing the market-oriented deposit rate adjustment mechanism to reprice deposits reasonably, which, on one hand, can alleviate the pressure on net interest margins and enhance the stability of bank operations, and on the other hand, can provide space for banks to further reduce the financing costs of the real economy."

The new round of deposit rate "cuts" will still be led by large banks adjusting first, followed by medium and small banks in a step-by-step manner to ensure the stability and orderliness of the deposit market. However, the magnitude of the deposit rate cut is expected to remain relatively moderate."

Wang Yifeng, Chief Analyst of Financial Industry at Everbright Securities, believes that after this round of LPR rate cuts, it may open a new cycle of deposit rate cuts, thereby driving down the overall spectrum of deposit and loan interest rates. Lu Zhengwei, Chief Economist of Industrial Bank, also stated that considering the stable interest spread, it is still necessary to further lower deposit rates while optimizing LPR quotations. Wang Qing, Chief Macro Analyst at Orient Securities, stated that with the July LPR quotation cut, according to the market-oriented adjustment mechanism of deposit rates, bank deposit rates should be linked to the 1-year LPR quotation and the 10-year national bond yield. This means that the bank deposit rates will comprehensively start a new round of cuts, which will help stabilize the bank's net interest margin.

According to Securities Times, on Tuesday morning, Industrial and Commercial Bank of China, Bank of China, and Yangtze Power and other heavyweight stocks collectively hit historic highs. Among them, Industrial and Commercial Bank of China rose nearly 20% last year, and this year's increase is also close to 35%, while Bank of China has risen for three consecutive years. Analysts interpreted the surge in bank stocks as rumors of a deposit rate cut, with market expectations of stable bank interest spreads:

"Analysts believe that the sharp decline in bank stocks on Monday was due to the central bank's interest rate cut, as everyone expected the bank interest spread to narrow. However, after the market closed on Monday, news of a potential deposit rate cut surfaced again, causing a change in market expectations, and the bank interest spread may remain stable, thus triggering the rise of bank stocks on Tuesday."

Specifically, on July 23, the banking sector rose against the trend, with a sector increase of 0.68%. Qilu Bank led the rise in bank stocks with an increase of 4.02%; followed by Industrial and Commercial Bank of China with a 2.91% increase; Bank of China, Agricultural Bank of China, Chongqing Rural Commercial Bank, and China Construction Bank all saw increases of over 2%. Among them, shares of Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, and other banks hit new historic highs