Smaller banks join rush to higher deposit rates

PUBLISHED : Tuesday, 12 June, 2012, 12:00am
UPDATED : Tuesday, 12 June, 2012, 12:00am


Second-tier banks followed major lenders in offering higher deposit rates than the benchmark, boosting competition in the finance sector after a recent move towards interest rate deregulation.

China Minsheng Banking Corp, China Merchants Bank and China Citic Bank were among other joint-stock lenders that raised deposit rates on the weekend on the heels of the biggest lenders - including Industrial and Commercial Bank of China, which on Friday raised one-year deposit rates to near the ceilings allowed by the central bank.

The People's Bank of China said last week that banks could pay depositors an interest rate of up to 10 per cent above the benchmark rate and offer borrowers a discount of up to 20 per cent on the benchmark rate, an important first step on the road to interest rate liberalisation.

'The market rates will become more differentiated,' Professor Guo Tianyong, from the Central University of Finance and Economics, said. 'The banks' pricing ability is now being tested.'

It is the first time mainland banks have set different deposit rates. Premier Wen Jiabao said in April that the top leadership had 'unified thoughts' on breaking the monopoly of the banking sector.

Mainland commercial banks recorded 1.04 trillion yuan (HK$1.27 trillion) of net profit last year, up 36 per cent from a year earlier.

Net interest income usually accounts for 70 to 80 per cent in the lenders' income.

The one-year benchmark lending rate is 6.31 per cent and the deposit rate is 3.25 per cent, leaving a spread of 3.06 per cent.

But, lenders including Huaxia Bank and Shenzhen Development Bank have raised one-year deposit rates to the up-limit of 3.575 per cent, 10 per cent higher than the benchmark.

'The rising deposit rates will have a quick negative impact on net interest margin, while the lending rate decline should be gradual and could be partially mitigated by a loan-mix shift into high-yield lending such as small and medium enterprises,' Barclays Capital analyst May Yan said.

The analyst expects banks' net profit to decline 1.6 per cent this year and 7.1 per cent next year due to the step in interest rate liberalisation.

Deutsche Bank Hong Kong economist Ma Jun said that in the long run, interest rate liberalisation would provide the basis for more efficient financial resource allocation, and form an important condition for capital account liberalisation on the mainland.

'These fundamental reforms will eventually improve the performance of the economy,' he said.