China's Stimulus Plans: A Double-Edged Sword for Megabanks

China's economic slowdown has led to a series of stimulus measures aimed at boosting growth, but these policies are having unintended consequences for the country's megabanks. The combination of mortgage rate cuts and reserve requirement ratio (RRR) reductions is squeezing the net interest margins (NIM) of these financial institutions, raising concerns about their profitability.

The recent cuts in deposit rates by Chinese megabanks, following government stimulus, are likely to squeeze their NIM in the short term. According to CreditSights, NIM for state-owned banks could contract by 15-25 basis points in 2024, with a further decline expected in early 2025. This is due to the time lag between banks lowering loan rates and deposit rates, which can only be repriced upon maturity. In the long term, banks may need to lower deposit rates by around 25 basis points to neutralize the impact, but this could challenge banks with a weaker deposit base or lower funding and liquidity regulatory buffers.



The reduction in mortgage rates on existing home loans, by 0.5 percentage points on average, will slow prepayments and reinvigorate investment demand. This could help stabilize banks' mortgage balances, benefiting their capital ratios. However, if housing prices continue to fall, lower downpayment ratios could stress asset quality, particularly for second-home buyers in lower-tier cities.

Stimulus measures, such as mortgage rate cuts and reduced downpayments, may reinvigorate investment demand, but they also slow prepayments and strain banks' asset yields. This could lead to lower profitability and diminished asset quality, particularly for regional banks in lower-tier cities with exposure to weaker property markets. However, the unemployment rate, household income, and savings are more relevant than property prices in affecting residential mortgage loan performance. Banks' underwriting ability will be tested, especially on second-home buyers in lower-tier cities, potentially stressing asset quality if housing prices continue to fall.



To mitigate the impact of stimulus measures on their profitability, Chinese megabanks can employ several strategies. First, they can diversify their loan portfolio, reducing exposure to sectors like real estate that are negatively affected by stimulus policies. Second, they can improve their risk management practices, enhancing their ability to identify and mitigate potential risks. Third, they can optimize their cost structure, reducing expenses and improving operational efficiency. Lastly, they can explore new revenue streams, such as wealth management and digital financial services, to offset the impact of lower net interest margins.

In conclusion, China's stimulus plans, while intended to boost economic growth, are putting pressure on the profitability of its megabanks. Net interest margins are expected to decline, with analysts predicting a 15-25 basis points contraction in 2024 for state-owned banks. This is due to lower mortgage rates and weak credit demand, as households and businesses remain cautious. The central bank's RRR cut and interest rate reductions will further squeeze margins, but banks may mitigate this by lowering deposit rates. In the long term, investors should consider banks with strong deposit bases and liquidity buffers, as well as those actively managing their loan portfolios to mitigate risks from falling asset prices and unpayable debt. Additionally, banks that focus on consumption and income redistribution may benefit from policy shifts towards higher consumption.