Mainland China's recent move to allow homeowners to negotiate lower interest rates on existing mortgages will squeeze banks' net interest margins.
Authorities announced a series of stimulus measures in late September to support the housing sector, which has experienced a multiyear downturn. A week after the US Federal Reserve pivoted toward lower rates on Sept. 18, mainland China's government said homeowners could negotiate with their banks to bring down interest rates on their mortgages.
Separately, the People's Bank of China (PBOC) reduced lenders' reserve requirement ratio by 50 basis points (bps). The down payment requirement on second homes was also reduced to 15% from 25%, bringing it on par with that needed for first homes.
Homeowners "can renegotiate their mortgage rate with their original bank, so the banks don't need to compete with others," said Chen Zheng, China policy research analyst at Hong Kong-based brokerage CLSA. "[A] price war [among lenders] is unlikely to happen under that situation."
The aggregate balance of retail mortgage loans at mainland China's listed banks decreased for two consecutive years to 34.07 trillion yuan in the second quarter of 2024, according to S&P Global Market Intelligence data. Retail mortgage loans as a percentage of total loans declined to 19.86% from 26.12% in the second quarter of 2020.
As of Sept. 23, state-owned lenders had the highest exposures to home mortgages. Postal Savings Bank of China Co. Ltd., the fifth largest state-owned bank in the country by assets, led the rankings with 27.27% of its retail and corporate loan portfolio made up of retail mortgage loans. China Construction Bank Corp., one of the country's Big Four banks, ranked second with a ratio of 24.80%, according to Market Intelligence data.
Industrial and Commercial Bank of China Ltd., the world's largest bank by assets, ranked fourth with a 22.15% ratio. The rest of the Big Four banks, Bank of China Ltd. and Agricultural Bank of China Ltd., were also among the top five on the list.
Mainland China's 5-year loan prime rate (LPR) hit an all-time low at 3.85% after the PBOC cut the benchmark rate for new housing loans by 10 bps in mid-July. The rate is now 100 bps lower than five years ago, according to Market Intelligence data. CLSA expects the central bank to trim the 5-year LPR by another 20 bps.
As of the end of 2023, the average rate on existing mortgages was 4.27%, according to the PBOC's Monetary Policy Execution Reports. The weighted average rate on new mortgages was 3.45% in June 2024.
"The impact on NIM, which worries most people, will also be limited as the accompanying reduction of reserve requirement ratio and deposit rates partly offset the harm from the cut on existing mortgage rates," said Zheng. There could be a contraction of only 6 bps to the system net interest margin (NIM), Zheng said.
In the second quarter of 2024, aggregate NIM in mainland China's commercial banks was 1.54%, according to NFRA, unchanged from the prior quarter and 20 bps lower than a year ago.
The stimulus measures could reduce banks' NIM by about 20 bps, Ming Tan, director of Financial Institution Ratings at S&P Global Ratings, wrote in a Sept. 24 note. "This would hit Chinese lenders' returns on assets by about 14 bps."
"The average deposit rate would need to fall by about 25 bps to neutralize the impact," Tan wrote. "We expect banks to lower deposit rates to cushion the impact from lending rate cuts."
Real estate, local government debt, and small and medium financial institutions were among the main concerns for the authorities, according to a report on the work of the government delivered by Premier Li Qiang in March.
