According to the Daily Business News, since June, small and medium-sized banks in Guangdong, Gansu, Henan, Hubei, Guizhou, and other regions have initiated another round of deposit rate cuts, with the rate reduction ranging from 10 basis points to 40 basis points.

The downward trend in interest rates for quasi-deposit products continues. Recently, it has been reported that insurance companies' incremental whole life insurance products with a guaranteed interest rate of 3% will be discontinued on June 30th, and the new product's guaranteed interest rate will be adjusted to 2.75%.

Last year, the guaranteed interest rate for incremental whole life insurance products was already reduced from 3.5% to 3%. More importantly, looking ahead, many opinions suggest that a new wave of interest rate cuts is on the horizon.

In this round of interest rate cuts, it seems there are no winners in the tug-of-war between residents and banks.

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Residents, facing a decline in interest rates, a general lack of good financial management methods in the market, and a decrease in new loan interest rates, have chosen to repay their mortgages early. Banks, seeing little effect after repeated rate cuts, have begun to issue subordinated debt intensively.

Is the wave of early loan repayments coming again?

Following a peak in February 2023, this year has seen two small peaks in the wave of early loan repayments.

The Shanghai Securities News learned from banks in the Shanghai area that the scale of early loan repayments reached a peak during the Spring Festival this year, and then rebounded in April.

Citing a research report released by Guotai Junan in June, Time Weekly pointed out that since February 2024, the index of residents' early repayment rate has accelerated upwards, reaching a historical high of 37% in April (excluding the technical adjustment in October 2023), which has reached a historical high level (June 2009), reflecting a significant increase in residents' early loan repayment behavior.According to Guotai Junan's perspective, before the policy of reducing the interest rates on existing housing loans is implemented, the decrease in the interest rates of new personal housing loans triggers residents to refinance their loans, leading to an increase in the rate of early repayment. Moreover, when alternative low-cost loans (such as consumer loans and business loans) are readily available, they can also induce early repayment behavior among residents.

With local support for housing credit policies, the interest rates for new first and second housing loans have been reduced.

According to China Securities News, as of June 10th, looking at the specific interest rate data, the interest rates for first housing loans in Shanghai and Shenzhen have both decreased by 35 basis points to 3.50%, and the minimum interest rates for second housing loans have been reduced to 3.7% and 3.9% respectively; in Guangzhou, the interest rates for first and second housing loans have both been lowered by 45 basis points to 3.4% and 3.8%.

How much difference is there between the interest rates of new and existing loans?

Zhejiang Commercial Bank's bond investment department calculated that, looking at the current pressures on social financing and loans, the new loans are more than 50 basis points lower than the existing loans, and in some places, it has even reached over 100 basis points.

In addition to the factor of reducing the interest rates of new housing loans, in the current asset market, relatively safe income products such as bank fixed deposits, some deposit-like insurance, and national debt interest rates are also being reduced. Under the premise of residents' overall risk preference tightening, it also constitutes a part of the factors for early repayment.

Banks rely on bond issuance to "transfuse"

Looking at the statistical data from the first quarter, the phenomenon of banks' narrowing interest spreads has not been relieved for the time being. Data from the National Financial Regulatory Administration shows that the net interest spread of commercial banks in the first quarter of 2024 was 1.54%, a decrease of 0.15 percentage points from the end of the previous year.

The downward adjustment of the LPR, loan repricing, adjustment of existing housing loan interest rates, and the regularization of deposits continue to put pressure on banks' net interest spreads. Although banks have adjusted the net interest spread by tightening large-amount certificates of deposit and withdrawing notice deposits, there seems to be no trend of relief for the time being.

China Economic News cited the views of analysts, pointing out that with the implementation of policies such as canceling the national-level lower limit of housing loan interest rates, the continuation of the "price war" for consumer loans, and "promoting the steady and declining trend of loan interest rates," the downward trend of bank loan interest rates has not ended. To maintain the stability of the interest spread, it is highly likely that the deposit interest rate will continue to be reduced.Recently, in order to alleviate operational pressure, banks have begun to supplement their capital by issuing subordinated debt and perpetual bonds.

According to Securities Daily citing Wind data, as of May 20th, this year, commercial banks have issued a total of 31 subordinated debt and perpetual bonds, with an issuance scale exceeding 500 billion yuan, more than double that of the same period last year.

According to the announcement published on the China Bond Information Network, in 2024, 15 commercial banks will face the redemption of perpetual bonds, with a total scale of 569.6 billion yuan; 58 commercial banks and 1 policy bank will face the redemption of subordinated debt (excluding non-redemption bonds), with a total scale of 575.3 billion yuan. Looking at the time distribution, the maturity pressure of subordinated debt is mainly concentrated in the first half of the year, while the maturity pressure of perpetual bonds is mainly concentrated in the second half of the year.

In fact, supplementing subordinated capital is of great significance for the normal operation of banks. Especially under the guidance of regulatory authorities to increase the credit supply of state-owned banks and joint-stock banks. In addition, after the domestic systemically important banks' additional regulatory provisions were introduced in 2021, higher requirements were also put forward for the capital adequacy of related banks.

Generally speaking, there are only two ways for commercial banks to supplement capital: first, profit conversion; second, issuing stocks, subordinated debt, and other methods.

Dongwu Securities believes that since 2023, due to the dissipation of the impact of the "wealth management redemption tide" and the continuous relaxation of the macro environment of liquidity, the situation of "asset scarcity" for institutions has formed again, and the spread of subordinated debt has continued to narrow.

However, as banks act as issuers, due to the constraints of their own industry's "three natures principle" of operation, their overall credit risk is better than that of other credit bond issuers. Coupled with the purpose of issuing subordinated debt to supplement capital, non-redemption has a greater impact on the credit quality of the issuer, so the overall risk of commercial banks' subordinated debt is controllable.

Conclusion

The continuous downward trend of interest rates may be the consensus of the market.

Zhongtai Securities estimates that in the second half of the year, the interest spread and net interest income will gradually stabilize, and the effect of the cost of the liability side on the alleviation of the interest spread has gradually emerged. There is still a possibility of further reduction in deposit interest rates. However, the effectiveness still needs continuous observation.