As the year 2024 progresses, a notable shift is observed in the financial landscape, particularly concerning the banking sectorThere has been a gradual improvement in the asset re-pricing pressure, a trend that seems to unfold positively quarter after quarterThis, coupled with a decrease in deposit rates, indicates that banks are beginning to glean some benefits on their liabilities side, significantly supporting their net interest marginsThe adjustment in deposit rates is poised to streamline the competition within the banking sector, especially with the recent prohibition of “manual interest supplements”, aimed at further regulating banks’ deposit attraction strategies, thus lowering overall deposit costs across the industry.

The first half of 2024 has shown that commercial banks achieved a net profit of 12,574 billion yuan, marking a slight annual increase of 0.4%. However, this growth rate reflects a decrease of 0.3 percentage points when compared to the first quarter for the same year

Analyzing the sources of income, both net interest income and non-interest income have exhibited signs of a slowdown, continuing the ongoing pressure on net interest income growth.

In light of issues such as insufficient effective demand in the real economy and regulatory guidance towards optimizing supply, the growth rate of bank asset scales has encountered a persistent decline since the onset of 2024. By the end of June, the total assets of commercial banks had reached 370 trillion yuan, reflecting a year-on-year growth of 7.28%. However, this represents a notable deceleration of 3.68 percentage points compared to 2023 and a decrease of 1.86 percentage points against the first quarter of 2024. It is critical to note that the net interest margin remained unchanged at 1.54% in the first half of the year.

Amidst signs of stabilization in the net interest margin, the contributions from the liabilities side are gradually coming to the fore

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The second quarter of 2024 recorded a net interest margin of 1.54%, with expectations for reduced downward pressure as the contributions from the liabilities side become increasingly apparentThis is especially significant considering the proactive approach toward lowering costs associated with liabilities, driven by declining deposit rates and regulatory enhancements.

As of 2024, the dual pressures on both the deposit and loan sides of the market have prompted considerable downward pressure on bank interest marginsAlthough lending rates continue their downward trend, the point of inflection for deposit costs also appears to be heading downward, creating a conducive environment for some relief in the pressure on interest marginsDemand for loans remains suppressed, indicative of a slow response from banks to adjust interest rates in parallel with the falling lending rates.

An examination of a major bank, such as the Industrial and Commercial Bank of China (ICBC), presents a clearer picture

Since June 2023, the implementation of decreased lending prime rates (LPR) has resulted in projected loan yield declines of varying degrees through the second quarter of 2024 into the first quarter of 2025. The persistently declining interest rates across the credit market are also reflected in the noticeably reduced rates for new personal loans, which have outpaced the reductions in the LPR, suggesting that pricing strategies are being influenced independently of LPR adjustments.

With multiple rounds of interest rate reductions on deposits and high-yield savings products being phased out, banks have entered a downward path concerning their cost of liabilitiesData from the first quarter of 2024 underscores that the average cost of interest-bearing liabilities at listed banks has diminished by 5.4 basis points since the start of the year, with declines among various bank types ranging from 4.2 basis points for major state-owned banks to an impressive drop of 12.4 basis points for rural commercial banks.

Regulatory measures introduced in April, targeting "manual interest supplements", are expected to provide an uplift to the average net interest margins of state-owned and joint-stock banks by approximately 1.5 and 3.7 basis points respectively in 2024. Following another round of LPR reductions in July, banks have proactively initiated another wave of deposit rate cuts, targeting reductions of 5 basis points for regular deposits and 10 to 20 basis points for fixed terms over a year or more

The anticipated benefits to net interest margins from these adjustments are promising, with expectations of further downward movement in the cost of interest-bearing liabilities.

Currently, the enhancement in deposit costs stems primarily from three factors: the regulatory oversight in managing "manual interest supplements", strong rate adjustments in December 2023 and July 2024, coupled with the effectiveness of previous reductions from the 2022 and 2023 periodsThese cumulative elements have finally begun to alleviate the pressure mounted by earlier rounds of deposit interest rate cuts, which had minimally impacted deposit costs due to other economic factors.

Accordingly, the observed improvements in banks’ deposit costs are validated by initial reports from listed banks such as Nanjing Bank, indicating a significant decrease in overall deposit costs in the first half of 2024. The strategic controls over public demand deposits, which had been previously rigid, have particularly benefitted from these regulatory amendments.

As 2024 unfolds, still under the influence of varied factors, banks are expected to navigate through a complex landscape

While the easing of pressures on net interest margins is becoming more evident, they are still poised to remain at low levels due to the weak demand for credit leading to continual decreases in both deposit and lending ratesEnhanced regulatory frameworks fostering orderly competition among banks, alongside a generally improving economic stance towards crucial sectors like real estate, present a cautiously optimistic outlook for the banking industry's future.

While the net interest margins may encounter continued pressures, the coordinated efforts to manage liability costs successfully suggest that the impact may soften over timePending observations on how deposit structures—shifting towards economic recovery and stabilization efforts—will ultimately play a critical role in shaping the banks’ operational frameworks and their resilience against forthcoming economic hurdles must be closely monitored.