The interest rate for existing housing loans is about to be reduced. As of now, several banks have issued announcements stating that they plan to release specific operational details for adjusting the interest rates on existing housing loans on October 12th, and to complete the batch adjustment of these rates before October 31st.

Industry insiders believe that adjusting the interest rates on existing housing loans will help reduce borrowers' mortgage interest expenses, thereby enhancing residents' consumption and investment capabilities. However, this has also raised market concerns about further pressure on banks' net interest margins.

Changes in the interest rate spread between deposits and loans are the main factors determining the changes in net interest margins. For commercial banks in China, interest margin income is the primary source of revenue, and a narrowing net interest margin directly affects the profitability of commercial banks, posing significant challenges to their operations.

Experts analyze that reducing the interest rates on existing housing loans will have a certain negative impact on the return on bank loan business. However, considering that deposit rates may be adjusted downward simultaneously, the overall negative impact on the net interest margin of the banking industry is controllable. Moreover, in the face of pressure from declining net interest margins and profits, commercial banks should focus on both revenue and costs, leverage their own endowments and advantages, continue to increase support for the real economy, especially small and micro enterprises, optimize the allocation of financial resources, strive to find new business growth points, actively develop intermediary businesses, and strive to reduce the pressure on net interest margins.

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Batch adjustments to existing housing loan interest rates are imminent.

According to incomplete statistics by reporters, as of October 9th, more than 20 banks have issued announcements stating that they will carry out the adjustment of existing housing loan interest rates in accordance with market-oriented and rule-of-law principles, provide convenient services through multiple channels, and conduct the adjustment work in a lawful and compliant manner. They plan to release specific operational details on October 12th and complete the batch adjustment of existing housing loan interest rates before October 31st.

Sun Nannan, a staff member of the personal loan business at China Merchants Bank, told me: "Currently, our bank is carrying out the preparatory work for interest rate adjustment in an orderly manner according to the law, including contract text changes and system upgrades. Subsequent related matters will be announced on official websites, WeChat public accounts, and other channels."

According to the initiative released by the market interest rate pricing self-discipline mechanism, for this batch adjustment of existing housing loan interest rates, for existing housing loans with an added margin higher than -30 basis points based on the Loan Prime Rate (LPR), the added margin will be adjusted to not lower than -30 basis points, and not lower than the current minimum added margin of newly issued commercial personal housing loans in the city (if any).

Specifically, if the housing loan interest rate (excluding Beijing, Shanghai, and Shenzhen) is higher than LPR-30 basis points, it will be uniformly adjusted to LPR-30 basis points; if it is the first housing loan in Beijing, Shanghai, and Shenzhen, and the interest rate is higher than LPR-30 basis points, it will also be uniformly adjusted to LPR-30 basis points; if it is the second housing loan in Beijing, Shanghai, and Shenzhen, and the interest rate is higher than the local housing loan interest rate policy floor, the housing loan interest rate will be uniformly adjusted to the local housing loan interest rate policy floor.

In addition, starting from November 1, 2024, eligible borrowers can negotiate with commercial banks to adjust the added margin of housing loan interest rates in a market-oriented manner, and can also negotiate to adjust the repricing cycle. The restriction that the shortest repricing cycle for housing loan interest rates must be one year is lifted, and the repricing cycle can be annual, semi-annual, quarterly, etc. It should be noted that during a downward interest rate cycle, the shorter the repricing cycle, the sooner borrowers can enjoy lower interest rates, but during an upward interest rate cycle, borrowers will bear higher interest rates sooner.Many industry insiders have indicated that compared to the reduction in mortgage interest rates in the first round last year, the scope and intensity of the current batch adjustment of existing mortgage interest rates are broader and stronger.

Dai Zhifeng, the director of the Zhongtai Securities Research Institute, believes that for individuals, the adjustment of existing mortgage loan interest rates helps to alleviate the pressure of interest expenditure and boost consumption.

Previously, Pan Gongsheng, the governor of the People's Bank of China, stated that the reduction of existing mortgage interest rates by banks is expected to benefit 50 million households and 150 million people, reducing the average annual interest expenditure of households by 150 billion yuan.

Yan Yuejin, the deputy dean of the Shanghai Yiju Real Estate Research Institute, told reporters: "The adjustment of the existing mortgage interest rate policy this time marks the second round of reducing existing mortgage interest rates since last year. It has a very good direction. Although the situations in different regions vary and the degree of burden reduction is different, overall, homebuyers can enjoy a better burden reduction effect. The pressure of mortgage loan monthly payments has been reduced, which has a positive effect on boosting consumption."

The impact on bank net interest spread is controllable.

While the reduction of existing mortgage interest rates helps residents reduce their burden, the pressure on bank net interest spread has caused concerns among many industry insiders.

The change in the interest spread between deposits and loans is the main factor determining the change in the net interest spread. For commercial banks in China, interest spread income is their main source of revenue. The narrowing of the net interest spread directly affects the profitability of commercial banks and poses a significant challenge to their operations.

Industry insiders believe that reducing existing mortgage interest rates will have a certain negative impact on the return on bank loan business. However, considering that deposit interest rates may be reduced synchronously, the negative impact on the net interest spread of the banking industry is overall controllable.

Dong Ximiao, the chief researcher at China United, believes that the current concentrated reduction of existing mortgage interest rates will inevitably affect commercial banks, especially large commercial banks with a higher proportion of mortgage business. According to calculations, if the existing mortgage interest rate is reduced by 50 basis points, it will cause the bank's net interest spread to narrow by 7 basis points, operating income to decrease by 3%, and net profit to decrease by 6%. Moreover, if the LPR decreases by 20 basis points, the interest rates for existing and new mortgages will further decrease.

"However, since this year, with the continuous downward trend of deposit interest rates and the policy effect of rectifying manual interest supplements, the funding cost of commercial banks has been reduced to some extent. At the same time, comprehensive reserve reduction, policy interest rate reduction, and promoting the continued decline of deposit interest rates will further reduce the funding cost of banks. It is expected that the net interest spread of commercial banks is expected to remain basically stable." Dong Ximiao told reporters.Dai Zhifeng stated that for banks, lowering the interest rates on existing mortgage loans will have a short-term drag on net interest margins and performance, but in the long run, it will help stabilize the scale and reduce risks associated with housing loans. "Mortgage loans, as the cornerstone of banks' retail assets, are currently not growing in scale due to the amount of loans issued, but due to the high prepayment rates," said Dai Zhifeng. Combining data disclosed by the central bank, he indicated that although the volume of mortgage loans issued by banks has warmed up in recent years, the high prepayment rates have dragged down the scale growth, with the underlying reason being the relatively high interest rates on existing mortgages. If the interest rates on existing mortgages are lowered, on the basis of the recovery of mortgage loan issuance, the scale of bank mortgage loans will stabilize, which will help alleviate the growth pressure on the retail asset side of banks in the long run. Currently, residents are under considerable pressure to repay loans in advance, and lowering the interest rates on existing mortgages will help stabilize the quality of banks' retail assets.

The research team of Huatai Securities predicts that the adjustment of existing mortgage loan interest rates this time will have a negative impact of 6 basis points on banks' net interest margins. The reduction of existing mortgage loan interest rates may affect the investment sentiment of bank stocks in the short term, but it will reduce the interest burden on residents and alleviate the pressure to repay loans in advance. Considering the comprehensive impact of reserve requirement ratio cuts and deposit rate reductions, it is expected that the overall impact of the reduction in existing mortgage loan interest rates on banks' net interest margins is controllable.

A variety of measures to reduce interest margin pressure

The continuously narrowing net interest margin poses challenges to the operation of commercial banks, prompting them to actively lower deposit rates to alleviate pressure.

Liu Yu, Chief Economist of Huaxiang Securities, introduced that in recent years, the net interest margin of commercial banks in China has been declining. Data shows that from the end of 2021 to the end of the second quarter of 2024, the net interest margin of commercial banks nationwide fell from 2.08% to 1.54%. Looking at the specific structure, the net interest margins of state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks fell from 2.04%, 2.13%, 1.91%, and 2.33% to 1.46%, 1.63%, 1.45%, and 1.72%, respectively.

On July 25 this year, the six major state-owned banks actively adjusted the deposit挂牌 rates. This is the first time in 2024 that large banks have collectively lowered deposit挂牌 rates, and it is also the fifth time since the establishment of the deposit rate marketization adjustment mechanism in 2022. In the context of the net interest margin falling to a historical low, it helps banks save on liability costs.

To maintain the net interest margin within a reasonable range, the Bank of China Research Institute expects bank deposit rates to continue to be lowered. The reduction of deposit rates is both an inevitable requirement for commercial banks to cope with the narrowing of the net interest margin and a reflection of the effective functioning of the deposit rate marketization adjustment mechanism. On September 24, the People's Bank of China announced that while lowering policy interest rates this time, it will guide deposit rates to be lowered synchronously. It is expected that the next step will be to lower deposit rates by 0.2 to 0.25 percentage points.

To fundamentally solve the problem of banks' net interest margins, Liu Yu believes that efforts need to be made from both the revenue and cost sides. However, against the backdrop of the current weak credit demand and the ongoing shortage of fixed-income market assets, it is difficult to promote the recovery of banks' revenue capabilities, and the breakthrough for the recovery of the net interest margin may lie in the cost side.

Liu Yu said: "In the past three years, the entire banking system has made considerable efforts from top to bottom. For example, on the incremental side, it has significantly reduced the interest rates on new deposits; on the existing side, it has eliminated unreasonable cost expenditures by prohibiting manual supplementary interest. Looking forward, suppressing the expansion of deposit regularization may be the top priority for banks."Dong Xiaomiao suggests that in the face of pressure from narrowing net interest margins and declining profits, commercial banks should strive to explore new business growth points, increase net interest income through a volume-for-price approach; they should actively develop intermediate businesses, such as expanding wealth management services, further increase the proportion of intermediate business income, and form an effective support for total operating income.

Experts such as Li Ying, General Manager of the Financial Institutions Rating Department at S&P Global Ratings, believe that the change in the spread between the Loan Prime Rate (LPR) and deposit rates is the main factor determining the change in net interest margins. On the one hand, the yield on the asset side is expected to decline further in the next 12 months, with an estimated 20 to 25 basis points of downward space for the LPR in the fourth quarter of this year; on the other hand, due to the high probability of deposit rates moving downward in tandem, the net interest margin will end the faster downward trend of the past two years and instead show a state of stability with a slight decline.