Banks push up deposit rates after rate cut

Big mainland banks yesterday responded to an official cut in lending rates by raising deposit rates, underscoring intensifying competition as the central bank edges towards interest rate deregulation.

In the first rate cut since 2008, the People's Bank of China on Thursday cut the benchmark one-year lending and deposit rates by 25 basis points, effective from yesterday.

The central bank also allowed banks to offer borrowers a discount of up to 20 per cent on the benchmark rate, and to pay depositors an interest rate up to 10 per cent higher than the benchmark rate, an important first step on the road to interest rate liberalisation.

This effectively narrows the gap between the rate at which banks can borrow and the rate they can charge customers.

As a result, the benchmark one-year lending rate dropped yesterday to 6.31 per cent from 6.56 per cent, and the one-year deposit rate fell to 3.25 per cent from 3.5 per cent.

The Industrial and Commercial Bank of China and its four biggest rivals responded by setting the rate for on-demand deposits at 0.44 per cent and one-year deposits at 3.5 per cent, the maximum allowed under the new rules and the same levels before the interest rate cut.

Mainland bank shares closed lower yesterday, reflecting investor concerns about the impact on banks' margins. In Hong Kong, ICBC closed down 4.9 per cent, Agricultural Bank of China lost 3.8 per cent, China Construction Bank lost 4 per cent and Bank of China fell 3.2 per cent, outstripping a 0.9 per cent fall in the benchmark Hang Seng Index.

Ken Wong, an equity portfolio strategist at the asset management firm State Street Global Advisors, said the impact on the largest banks would be limited in the short term.

'Bank earnings may be squeezed, but major banks do not really depend so much on net interest margin any more, as they derive profits by selling funds and insurance products,' said Wong.

However, he said that in the long run interest rate deregulation would allow more competition in the banking sector, as a step towards breaking the monopoly profits enjoyed by the banking giants. Deposit competition has already increased.

As the China Banking Regulatory Commission allows banks to lend only a maximum 75 per cent of deposits, lenders have to attract as many deposits as possible before they can make loans. May Yan, an analyst at Barclays Capital, said: 'After this major first step, we may get more visibility towards the long-term interest rate deregulation overhang.

'We may also see differentiated bank business models and performances, which could be positive for [the] banking sector in the long run.'

The benchmark lending rate cut was positive for property developers in the short term, analysts said.

8.2%

The World Bank urged China to introduce stimulus measures after saying growth this year would be this figure, the lowest since 1999