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Fitch Bohua: Interest Rate Cut for Existing Mortgages Will Have Controllable NIM Impact on Commercial Banks
According to Fitch Bohua, a wholly owned subsidiary of Fitch Ratings, China's macroeconomic growth has been declining in recent years under the influence of complex internal an...
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Fitch Bohua: Interest Rate Cut for Existing Mortgages Will Have Controllable NIM Impact on Commercial Banks
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According to Fitch Bohua, a wholly owned subsidiary of Fitch Ratings, China's macroeconomic growth has been declining in recent years under the influence of complex internal and external environments. The expansion of residential credit has slowed down significantly, with the spreads between the interest rates for new and existing mortgages continuing to widen as a result of repeated LPR cuts, while the early repayment of personal mortgages impacted the balance sheets of banks. In June, the growth rate of personal housing mortgage loans turned negative for the first time since 2015, which had a negative impact on the scale of banks' housing-related credit and net interest margins.

Fitch Bohua noted that the current round of deposit rate cuts is also in line with market expectations, as the continuation of the trend of deposit regularisation since 2023 has led to a marginal increase in the cost of deposits for commercial banks, further squeezing their spreads in the downward trend of lending rates.

Under the 3 forecasted scenarios of Fitch Bohua, the interest rate cut for existing mortgages is expected to drag down the net interest margins of listed banks by 3 bps to 6 bps, while the reduction in deposit rates will push the spreads back up by 3.7 bps. Fitch Bohua expected that the reduction in early loan repayment would have a certain supporting effect on interest margins. Therefore, from the perspective of both deposits and loans, the impact of the reduction in deposit mortgage rates on commercial banks' net interest margins and profit levels will be controllable.

In terms of bank types, the negative impact on large banks was the greatest, followed by joint-stock banks, while the impact on regional city commercial banks and agricultural and commercial banks was relatively limited. Some of the city banks and agricultural banks may see their interest rate spreads rebound as a result of lower deposit rates, while those with strong retail businesses and good deposit customer bases will also benefit.

Fitch Bohua believed that the net interest margins of listed banks as a whole will still decline somewhat after the current round of deposit and lending rate cuts. In the future, commercial banks' lending rates will continue to decline to a certain extent in order to support the recovery of demand in the real economy and the process of local government bond alleviation. In order to reduce the pressure on banks' interest rate spreads and profit levels, it is imperative to reduce deposit costs from the liability side, and there is still room for cost reductions in PBOC's policy in the future.

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