Real estate market is difficult, Chinese banks prepare to make new moves

The current reduction in mortgage rates is expected to put pressure on the net interest margins of China's banking industry.

Thị trường bất động sản khó khăn, ngân hàng Trung Quốc chuẩn bị có động thái mới

China's total mortgage loans stood at 38.6 trillion yuan ($5.29 trillion) at the end of June 2023, accounting for 17 percent of banks' total outstanding loans. (Source: NYtimes)

Some Chinese state-owned banks will soon cut interest rates on existing mortgage loans, sources familiar with the matter said, as the government steps up efforts to revive the property sector and shore up a cooling economy.

The reduction could be as high as 20 basis points in some cases, according to the sources, who asked not to be identified because the information is private. If implemented, the extent of the reduction in existing mortgages would vary for different types of customers and in different cities.

The mortgage rate cut comes as the government has announced a number of measures to support property markets, the economy and other sectors in recent weeks, as concerns grow about the health of the world's second-largest economy.

Observers had expected banks to cut interest rates on existing mortgages after the People's Bank of China (PBoC, the central bank) said earlier this month it would instruct commercial banks to do so.

The PBoC's rate cut proposal comes after a wave of early mortgage repayments, aimed at reducing interest costs for home buyers and boosting consumption in a slowing economy.

China has been cutting new mortgage rates since last year to boost sales in its struggling property market. But the result so far has been households rushing to pay off existing mortgages, squeezing banks’ profits.

The current drop in mortgage rates is expected to put pressure on the banking sector’s net interest margin, a key measure of its profitability, which had already fallen to a record low at the end of the second quarter of 2023, official data showed.

China's total mortgage loans stood at 38.6 trillion yuan ($5.29 trillion) at the end of June 2023, accounting for 17 percent of banks' total outstanding loans.

Citigroup said in a recent note that the repricing of existing high-yield mortgages will add further pressure to Chinese banks' net interest margins, reducing their profitability and lending capacity.

To ease the impact on profits, China’s major state-owned banks will also cut interest rates on some fixed-term deposits, three sources said. The cuts will range from 10 to 25 basis points.

One of the sources said that cutting deposit rates could help banks maintain appropriate net interest margins.

Analysts said the Chinese government last week opted against a broad interest rate cut that would have further squeezed banks’ already shrinking net interest margins. Instead, Beijing delayed banks from cutting deposit rates and made room for cheap mortgages.

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