China’s biggest lenders raised deposit rates hours after the central bank lowered its benchmark and gave them more freedom over pricing, underscoring the competition for funds and driving their shares lower.
Industrial & Commercial Bank of China Ltd. and its four biggest rivals set the rate on demand deposits at 0.44 percent, according to their websites. That’s the maximum allowed under new rules that let them pay 1.1 times the 0.4 percent policy rate. The People’s Bank of China yesterday lowered the key one-year deposit and lending rates by 0.25 percentage point.
ICBC fell to the lowest in more than five months in Hong Kong trading, leading lenders down on concern the interest-rate liberalization will undermine profitability by raising the cost of funds. China is trying to bolster credit growth and change the way it sets borrowing costs, ensuring capital in the world’s second-largest economy is distributed on market terms.
“The changes in the lending and deposit rate bands will accelerate bank competition and squeeze net interest margins,” May Yan, a Hong Kong-based analyst at Barclays Plc, wrote in a note. After the change in regulation, investors “may start to see differentiated bank business models and performance, which could be long-term positive.”
Demand deposits account for about 40 percent of the nation’s 67 trillion yuan ($11 trillion) in household and corporate savings as of April, according to data from the central bank. The five banks set rates for term deposits below the permitted maximum.
The PBOC yesterday said banks may pay as much as 10 percent more than the benchmark on deposits, the first time a premium is being allowed. Lenders are also permitted to offer a 20 percent discount on borrowing costs, wider than the previous 10 percent, effective today. The extra leeway banks will get to determine rates at variance from the official setting was called a “milestone” by UBS AG.
ICBC dropped 4.5 percent to HK$4.28, its lowest since Nov. 30, at 2:55 p.m. in Hong Kong. That was the worst performer on the city’s Hang Seng Index, which declined 0.9 percent. China Construction Bank Corp., the nation’s second-largest, fell as much as 4.4 percent, the most in about six months, before trading 4 percent lower at HK$5.28.
Chinese policy makers are stepping up efforts to combat a slowdown as Europe’s debt crisis threatens global growth. The one-year lending rate declines by a quarter percentage point today to 6.31 percent, the People’s Bank of China said in a statement yesterday. The one-year deposit rate drops the same amount, to 3.25 percent.
China this week also said it would delay tightening bank capital rules to the beginning of next year, signaling support for loan growth. That followed three cuts since November to the amount of cash that banks are required to set aside as reserves. The government is propping up credit after new bank loans in April dropped 33 percent from March, missing economists’ forecasts, as demand for China’s exports dropped.
“Interest-rate cuts are bad for profitability of the banks but good for valuations,” Mike Werner, a Hong Kong-based analyst at Sanford C. Bernstein & Co., wrote in a note, recommending investors buy ICBC, Construction Bank and Bank of China. “The largest overhang on the Chinese bank stocks is the risk of a deteriorating credit cycle. An interest rate cut should mitigate these concerns, resulting in upside to the stocks.”
— With assistance by Jun Luo, and Dingmin Zhang