Central Bank Encourages Commercial Banks to Maintain Reasonable Profit Levels and Net Interest Margins
In its monetary policy implementation report for the second quarter of 2023, the central bank has emphasized the need for commercial banks to maintain a reasonable level of profit and net interest margin to ensure stable operations and prevent financial risks. This is the first time that the central bank has explicitly stated its concern about the interest margin level of banks.
Analysts from brokerage firms have praised the regulator’s stance, noting that it demonstrates its understanding of and support for the bank’s profit levels. They also predict that if the Loan Prime Rate (LPR) is lowered in August as scheduled, it may lead to a new round of reductions in bank deposit rates in order to stabilize interest rate spreads.
The central bank’s report highlights the importance of banks maintaining a certain level of profit growth to replenish their capital from internal sources, as foreign aid channels for capital replenishment are relatively limited for A-share banks. Analysts interpret this as a positive signal that suggests regulators may reduce constraints on banks’ performance and allow them greater autonomy.
Analysts also express optimism about the restoration of bank valuations and expect the banking sector to benefit from improved risk ratings and lower risk-free rates. They believe that the central bank’s acknowledgment of the rationality of banks’ profits, coupled with expected macro-stimulus policies and improved performance, will contribute to the recovery of bank stocks.
Furthermore, the report indicates that the process of reducing mortgage interest rates is expected to accelerate. The central bank has been actively discussing adjusting existing personal mortgage rates and encouraging banks to negotiate new loan agreements with borrowers. Analysts believe that this will contribute to a steady decline in residents’ credit costs.
The report also highlights the effectiveness of the Loan Market Quotation Rate (LPR) reform and the market-based adjustment mechanism for deposit rates. Major banks have voluntarily lowered their listed interest rates for some term deposits based on market conditions and their own operating needs. This has led to a new round of active adjustments in deposit listing interest rates.
Overall, the central bank’s report underscores the importance of maintaining reasonable profit levels and net interest margins for commercial banks. It signals the regulator’s support for banks’ profit growth and their ability to maintain stable operations. This has generated optimism among analysts who expect a positive impact on bank valuations and the banking sector as a whole. Additionally, they anticipate further reductions in mortgage and deposit interest rates in the coming months.