Loan rate cut weighs on Chinese banks’ interest margins, profits 

China Construction Bank, ICBC, and CITIC Bank will be most negatively affected.

China’s decision to trim its five-year loan prime rate (LPR) by 25 basis points will lead to banks’ interest margins to contract, and any increase in demand won’t be able to offset this.

On 20 February, China made its largest cut yet to the five-year LPR, setting it at 3.95%, reportedly its largest cut ever. The one-year LPR remained unchanged at 3.45%.

The cut will hurt banks such as China Construction Bank (CCB) and Industrial and Commercial Bank of China (ICBC) the most– banks with more mortgage and long-term corporate loans in their books, says UOB Kay Hian analyst Kenny Lim Yong Hui.

“We foresee the banks’ net interest margins contracting by 3.9 basis points, equivalent to 4.3% of total net profit, assuming 50% of five-year LPR linked loans will be repriced in 2024 and ceteris paribus,” Lim wrote in a report.

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CCB, ICBC, CITIC most impacted; CMB to fare better
Under a scenario where they reprice half of the five-year LPRs loans, CCB and ICBC will have their net interest margins (NIMs) fall by 4.5% and 4.7% in 2024, respectively. Net profit will also be impacted by a 3.3% and 3.9% contraction, respectively, during the same scenario.

CITIC Bank will see its NIM contract by 5.8% and its net profits fall by 5.8%; Bank of China (BOC)’s interest margin will fall by 4.5%, and its profits by 3.8%, should it reprice 50% of its five-year LPR learns.

Meanwhile, a bank such as China Merchants Bank (CMB) who has less exposure to corporate loans will be more limitedly impacted. Should half of five-year LPR loans be repriced, CMB will register a 2.9% decline in NIMs and a 1.5% in net profits– much lower than other banks.

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Deposit rate cut needed
Banks’ margins are further expected to continue hurting through 2025, warned Lim. “Given the current loan yield environment and the recent LPR cut, we might see a delayed and lower NIM turnaround if regulators do not implement measures to alleviate banks' funding cost pressures,” he said.

A deposit rate cut could immediately reduce banks’ interest exposures compared to a time deposit rate cut, due to the longer repricing period of the latter, Lim said.

Even with the lower interest, households are expected to remain cautious about buying houses in the near future, a result of the uncertain economic outlook and the lack of confidence in the property market.