China Merchants Bank, large-denomination certificate of deposit

Some high-yield medium- to long-term large-denomination certificates of deposit (CDs) have been put on hold by China Merchants Bank. This move is attributed to the bank's growing demand for time deposits and the increasing pressure on net interest margins.

Recently, the news of China Merchants Bank suspending the issuance of 3-year and 5-year large-denomination CDs has cast a further shadow on the already declining deposit market.

In recent years, large-denomination CDs, with their long terms and high returns, have been highly sought after by investors. "Which bank offers the highest interest rate for large-denomination CDs?" "Strategies for buying large-denomination CDs" and "The difference between large-denomination CDs and time deposits" have all been hot topics on social media. Last year, cross-provincial purchases of large-denomination CDs became popular due to the varying interest rates offered by the same bank in different regions.

In the eyes of some financial professionals, China Merchants Bank has been relatively successful in controlling its cost of liabilities. The decision to suspend the issuance of large-denomination CDs reflects the significant pressure faced by the entire banking industry in terms of the interest rate spread. On the other hand, in terms of the current policies aimed at stimulating consumption, excessive "defensive savings" by individuals, with a large amount of funds flowing into the medium- to long-term deposit side of banks, is not conducive to the development of the economy and the recovery of the consumption market. Furthermore, the high interest rates offered by banks on medium- to long-term large-denomination CDs are also contradictory to the current monetary policy.

They have expressed that there are many other ways to ensure investment returns, and it is not necessary to be completely fixated on large-denomination CDs.

01 Suspension of some large-denomination CDs

Currently, on the China Merchants Bank app, the highest term for large-denomination CDs is only 2 years, with a minimum deposit of 200,000 yuan and an interest rate of 2.15%. 3-year products can only be found in the secondary market, with the highest interest rate being 2.29%, which is a far cry from the 2.90% rate for 2023.

The wealth management manager of China Merchants Bank told "Market News," "The large-denomination certificates of deposit with 3-year and 5-year terms were indeed sold out in April. There should be more available in May." Implicitly, the removal of the large-denomination certificates of deposit by China Merchants Bank is temporary rather than permanent.

Despite this, the slightest movement by China Merchants Bank has caused a huge reaction in the financial industry. Many have reposted and commented, saying, "If even China Merchants Bank can't hold on, other banks are likely to follow suit. Get ready to accept the reality of future low interest rates."

Ordinary people are more concerned about the possibility of their deposit interest being compressed in the future. One investor lamented, "This means they want us to withdraw our deposits from the bank!"

Upon hearing the news of the removal of the large-denomination certificates of deposit, Xiao Yi secretly felt relieved. In March of last year, just after entering into marriage, she wanted to save some money for her married life and bought a 3-year large-denomination certificate of deposit with an interest rate of 3.55% for 300,000 yuan at a Sino-foreign joint venture bank, expecting to receive 31,950 yuan in interest at maturity. At that time, she felt that interest rates would continue to decline in the future. Sure enough, when she checked again recently, the interest rate for the same product had dropped to 2.8%, and many banks couldn't even get the 3-year term products.

So, what is the situation of large-denomination certificates of deposit in the market? On April 17th, "Market News" summarized the situation of large-denomination certificates of deposit from 10 banks, including 3 state-owned banks, 4 joint-stock banks, and 3 city commercial banks. The conclusion drawn was that only Industrial and Commercial Bank of China displayed a 5-year large-denomination certificate of deposit product with an interest rate of 2.4%, but it showed as sold out when attempting to purchase.

Among the state-owned banks, China Construction Bank, Agricultural Bank of China, and Industrial and Commercial Bank of China still have 3-year large-denomination certificate of deposit products with an interest rate of 2.35%. Among the non-state-owned banks, the interest rates for 3-year large-denomination certificate of deposit products from Minsheng Bank, Everbright Bank, Shanghai Pudong Development Bank, and Shanghai Bank range from 2.55% to 2.70%.

Some banks have imposed restrictions on large-denomination certificates of deposit. For example, the 1-year large-denomination certificate of deposit with an interest rate of 2% from Shanghai Pudong Development Bank is a product exclusively for new customers. Shanghai Bank's 18-month high net worth product offers an interest rate of 2.25%, but requires a minimum deposit of 1 million yuan, while the interest rates for 2-year and 3-year terms are 2.45% and 2.7%, respectively, also requiring a minimum deposit of 1 million yuan. The 3-year term is only available for purchase by users in Hangzhou and Beijing.

In addition, Bank of Communications is the most extreme, as its app currently shows no large-denomination certificates of deposit for sale, only those available for transfer.

Compared to last year, the overall level of interest rates for large-denomination certificates of deposit has seen a significant decline. For example, the 1-year interest rate for state-owned banks was 2% overall last year, but has now dropped to 1.8% to 2.05%. The 3-year interest rate has seen an even larger adjustment, dropping from 2.9% overall last year to 2.35% this year, moving further away from the 3% mark. Last year, commercial banks were able to offer interest rates of over 3% for large-denomination certificates of deposit, but this year, they have disappeared altogether. For instance, the 3-year interest rate at China Everbright Bank dropped from 3.15% last year to 2.6% this year, a decrease of 17%.

Some internet banks or local banks, due to their weaker influence and ability to attract deposits compared to large and medium-sized banks, are currently offering large-denomination certificate of deposit products with higher interest rates than the banks mentioned above.

For example, WeBank is currently issuing a 2-year large-denomination certificate of deposit with an interest rate of 2.5%; XWBank offers a 2-year large-denomination certificate of deposit with an interest rate of 2.70%; and Tianfu Bank offers a 2-year large-denomination certificate of deposit with an interest rate of 2.9%, which was sold out instantly on April 17th.

In terms of rural commercial banks, Shanxi Wenxi Rural Commercial Bank is vigorously promoting a 3-year large-denomination certificate of deposit with an interest rate of 2.95%; Jiangsu Taicang Rural Commercial Bank offers a 2-year large-denomination certificate of deposit with an interest rate of 2.7%, which requires purchasing by appointment at the bank counter, with a subscription deadline of April 30th; Shandong Wenshang Rural Commercial Bank offers a 3-year large-denomination certificate of deposit with an interest rate of 3.0%, and the bank has announced that "the quota is limited, first come, first served!" Shandong Weifang Bank also announced, "A good place for deposits, Weifang Bank is selling large-denomination certificates of deposit starting from 1 million at 2.6%."

"In the past 3-4 years, we have witnessed the interest rates for large-denomination certificates of deposit drop from over 4% to below 3.5%, and then below 3%. Let's cherish what we have!" suggested a financial manager, advising people to keep an eye on the transfer section of various banks' large-denomination certificates of deposit, as it is possible to find slightly higher interest rates there.

What signal is being sent?

In theory, large-denomination certificates of deposit, with a minimum deposit of 200,000 yuan, have extremely strong deposit-gathering capabilities and attract wealthy individuals with relatively abundant funds. They also have considerable value in exploring user value. So why are major banks, led by China Merchants Bank, tightening the issuance of large-denomination certificates of deposit?

Xue Hongyan, deputy director of the Star Map Financial Research Institute, analyzed to "Shijie" that based on the experience of the past two years, commercial banks mainly offset the pressure on interest rate spreads by significantly reducing deposit interest rates, striving to increase the proportion of demand deposits, and continuously optimizing the loan structure. "Recently, the suspension of large-denomination certificate of deposit issuance by banks is another attempt to control the cost of liabilities and stabilize net interest margins."

Data released by the China Banking and Insurance Regulatory Commission shows that in the fourth quarter of 2023, the net interest margin of commercial banks was 1.69%, a decrease of 4 basis points (1 basis point is 0.01%) compared to the previous quarter and a decrease of 22 basis points compared to the same period last year. Among them, China Merchants Bank's net interest margin dropped from 2.59% at the end of 2019 to 2.15% in 2023. The key reason for this is that deposits are growing faster than loans.

According to the annual report, the total deposits of China Merchants Bank (CMB) in 2023 were approximately 81.6 trillion yuan, an increase of 8.22% compared to the end of the previous year. The rapidly growing retail and corporate term deposits amounted to as much as 3.68 trillion yuan, doubling from three years ago. Many residents and businesses cannot find good investment products, so they can only deposit large amounts of money into banks. This poses a sweet dilemma for CMB.

By the end of 2023, CMB's total loans increased by 7.56% compared to the end of the previous year, reaching 6.51 trillion yuan. However, the year-on-year growth rate at the end of the third quarter of 2023 was 7.84%. Among them, the balance of real estate loans at the end of 2023 was 2907.42 billion yuan, a decrease of 42.973 billion yuan from the end of the previous year. This led to a loan interest income of 268.2 billion yuan for CMB in 2023, an increase of only 0.99% year-on-year, while deposit interest expenses soared to 128.8 billion yuan, a sharp increase of 21.71% year-on-year.

Since deposits are liabilities for banks, the trend towards term deposits and long-term deposits will increase the bank's costs. If the willingness of residents and businesses to borrow cannot match the growth rate of liabilities, the net interest margin of banks will tighten even further. It is no wonder that Wang Liang, the president of CMB, proposed a "tight and strict" requirement at the 2023 annual performance release conference.

In fact, CMB's deposit cost ratio (the ratio of total cost and expense to average deposit balance) is relatively low among joint-stock banks, standing at 1.62% in 2023. Meanwhile, Ping An Bank, Industrial Bank, and Minsheng Bank were 2.2%, 2.24%, and 2.31% respectively during the same period, with Everbright Bank as high as 2.32%. Now, CMB has taken the lead in reducing large-denomination certificates of deposit to lower deposit costs, indicating that the banking industry is indeed facing a difficult period.

Colin, a licensed financial analyst and director of a private equity fund, told "Market Border" that from the perspective of banks, there is an urgent need to reduce the cost of capital, especially long-term capital costs, and to compress deposit funds into short-term periods.

"From the overall macroeconomic environment, reducing long-term high-interest deposits will also help stimulate consumption. Currently, excessive 'defensive savings' by residents have led to a large amount of capital flowing into the long-term deposit side of banks, which is not conducive to the development of the economy and the recovery of the consumer market."

It is worth noting that according to the March financial statistics report from the central bank, RMB deposits increased by 11.24 trillion yuan in the first quarter, of which household deposits increased by 8.56 trillion yuan. Calculated based on China's population of approximately 1.4 billion, each person added an average of about 6114 yuan in deposits to banks in the first quarter of 2024.

In the eyes of bank employees, the banking market has completely changed. "In the past, if we didn't meet the deposit target, we would be fined. Last month, we were fined for not meeting the loan target. Please, stop giving money to the bank, and borrow some money from the bank instead."