Abstract
The market is concerned about the issue of some banks' certificates of deposit (CDs) approaching their limits.
This year, the overall balance of commercial banks' CDs still has a significant margin compared to the approved quota, but there is a considerable divergence among different banks, with some indeed nearing their limits. Historically, the "full stretch" of balance progress has occurred multiple times, so the market may not need to worry excessively.
Why has the balance progress been fully stretched this year?
On one hand, the cumulative value of deposits is weaker than seasonal patterns, and on the other hand, there may be certain discrepancies in lending and deposit operations. State-owned banks do not face pressure to reduce their balance sheets, but they need to issue CDs to supplement their liabilities. Some banks, however, may face structural contraction pressure in their balance sheets, and in response to this contraction, some joint-stock banks have issued CDs close to their limits.
How will banks respond when approaching the limit?
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Theoretically, banks might apply to revise their approved quota when the CD balance approaches the limit, but historically, banks rarely adjust their interbank CD quotas.
We believe that without adjusting the approved quota, state-owned banks will adopt other alternative funds for supplementation, such as increasing offline interbank deposits.
Will the central bank provide corresponding support?
Observing the outcomes, when monetary conditions are loose, the central bank may potentially support with reserve requirement ratio (RRR) cuts, while in times of tight monetary conditions, banks can at most strive for Medium-Term Lending Facility (MLF) support.We believe that the central bank's proposal to lower reserve requirements on September 24th may be similar to 2021, where some large banks' certificate of deposit (CD) balances are approaching their limits. In the current situation where deposit growth is relatively weak, lowering reserve requirements can help commercial banks replenish low-cost liabilities, thereby providing support to the fundamentals.
Furthermore, according to the interpretation by the Financial Times on September 25th, starting from July, the Medium-term Lending Facility (MLF) will be conducted with a fixed quantity and interest rate bidding, with the winning interest rate determined flexibly based on institutional bids. This reflects the differences in medium to long-term funding needs among various institutions and promotes the MLF to return to its role as a medium to long-term liquidity supply tool. From this perspective, the attractiveness of MLF to commercial banks may increase.
How to view the CD interest rates?
The upper limit of the interbank CD interest rate is the MLF rate, and the lower limit is the funding rate. After this round of interest rate cuts, both the upper and lower limits have decreased, and we believe that the downward space for CD interest rates may open up, which can be viewed positively.
Since September, the market has been paying attention to whether the CD balance has reached the filing limit. If it has reached the limit, how will banks respond? What are the expectations for subsequent CD interest rates?
1. How much space is left for CD filing limits?
In 2013, the central bank's "Interim Measures for the Administration of Interbank CDs" stipulated that interbank CDs are filed annually and managed based on balance, with the possibility of updating the filing plan under significant or substantial changes.
"Depositary financial institutions issuing interbank CDs should file an annual issuance plan with the People's Bank of China before the issuance of the first interbank CD of the year."
"Depositary financial institutions can determine the issuance amount and term of each interbank CD within the annual filing limit, but the single issuance amount should not be less than 50 million yuan. The issuance filing limit is managed based on balance, and the balance of interbank CDs at any point during the year should not exceed the annual filing limit."
"Issuers should disclose the annual issuance plan to the market before the issuance of the first interbank CD of the year. If there are significant or substantial changes during that year, issuers should promptly re-disclose the updated issuance plan."According to Document No. 127 published in 2014, the balance of interbank borrowed funds of a single commercial bank shall not exceed one-third of the bank's total liabilities.
In the monetary policy report for the second quarter of 2017, it was mentioned that starting from the first quarter of 2018, the central bank would include interbank certificates of deposit in the assessment of interbank liabilities. Since then, the total of interbank certificate of deposit filing limits and interbank liabilities must not exceed one-third of the bank's total liabilities.
As of September 23, a total of 392 banks have disclosed their interbank certificate of deposit issuance plans for 2024, with a combined filing limit of approximately 26.9 trillion yuan. As of September 23, the cumulative issuance for the year is about 23.1 trillion yuan, the cumulative maturity is about 20.0 trillion yuan, the net financing for the year is about 3.1 trillion yuan, and the current balance is about 17.8 trillion yuan.
Before the ban on manual interest supplementation in April, the balance of joint-stock banks increased rapidly. After the ban on manual interest supplementation, the issuance of interbank certificates of deposit by state-owned banks accelerated, and the balance increased rapidly.
Overall, compared to the filing limit, there is still a large space in the total balance of banks this year, but there is a significant differentiation among different banks, and some banks are indeed approaching the limit.
The six major state-owned banks have a combined filing limit of about 7.2 trillion yuan for 2024. As of September 23, the balance of certificates of deposit of state-owned banks is about 5.9 trillion yuan, accounting for about 82.04%.
Joint-stock banks have a combined filing limit of about 8.3 trillion yuan for 2024. As of September 23, the balance of certificates of deposit of joint-stock banks is about 5.7 trillion yuan, accounting for about 68.75%.
Among them, the limits of Agricultural Bank of China, Bank of China, China Construction Bank, and Bohai Bank have been basically used up, and many other banks also have a high proportion of limit usage.
2. Can the planned limit change when the balance progress is full?
Observing the state-owned and joint-stock banks with high current balance progress, the "full" balance progress has appeared many times in history.Upon careful observation, the balance progress of Industrial and Commercial Bank of China (ICBC) and Postal Savings Bank of China has long been maintained at a relatively low level. Among the remaining four state-owned banks, it is most common for the balance progress to rise in the years 2020 and 2021.
The situation of using the full filing limit is quite common. According to the "Interim Management Measures," the issuance plan can be modified under the condition of "significant or substantial changes." However, the vast majority of state-owned banks tend not to modify the filing limit within the year, but prefer to increase the filing limit in the following year; historically, state-owned banks have never adjusted the issuance plan within the year.
Reviewing the historical issuance plans, only some banks have modified the filing limit, such as Ping An Bank, which adjusted the filing limit from 500 billion yuan to 650 billion yuan in 2020, Standard Chartered Bank (China) adjusted from 10 billion yuan to 25 billion yuan in 2022, and Hainan Bank adjusted from 16 billion yuan to 19 billion yuan in 2022.
3. Why is the issuance of certificates of deposit (CDs) close to the limit?
According to the issuance plan statements of China Merchants Bank over the years, when issuing interbank CDs, the first quarter often considers the development of asset-liability business; the second and third quarters usually consider the growth of proprietary deposits; the fourth quarter requires enhanced forward-looking management of liquidity at key points such as the end of the year, the Spring Festival, and the last month of the following quarter. The process also needs to comprehensively consider the future interest rate trends and the current interest rate levels.
The increase in CD issuance in the third quarter of 2020 may be related to the return to a neutral monetary policy after the impact of the pandemic. "China Merchants Bank 2021 Interbank CD Issuance Plan": "In the second quarter, due to the reasonable abundance of liquidity in the interbank market and low issuance demand, the issuance progress accounted for 10% of the total. In the third quarter, the large maturity volume, coupled with the strengthening trend of interest rates returning to neutrality, correspondingly increased the issuance efforts, with the issuance progress accounting for 42%. In the fourth quarter, considering the overall stability of liabilities and the relatively high level of issuance interest rates, the issuance progress remained stable with a slight decrease."
In 2021, the cumulative value of new deposits continued to be weaker than seasonal, which may be affected by factors such as the crackdown on structured deposits. After comprehensively considering the cumulative value of loans, the loan and deposit business brought certain matching pressures to the bank's assets and liabilities, and the bank needed to increase the issuance of interbank CDs to supplement liabilities.
In 2024, on the one hand, the cumulative value of deposits is weaker than seasonal, and on the other hand, there may be certain differences in loan and deposit business, so the balance progress of interbank CDs is also higher than seasonal.
In 2024, the cumulative value of new deposits has been continuously lower than the level of recent years since April, possibly due to the prohibition of manual interest supplementation and the reduction of deposit interest rates, leading to some deposits being diverted to non-bank financial institutions. The deposit outflow caused by the prohibition of manual interest supplementation is most evident in state-owned banks. Credit收支表 data shows that in April, the current deposits of domestic small and medium-sized banks decreased by 8.82% month-on-month, while domestic large banks decreased by 10.07%, and the four large banks decreased by 11.40%. State-owned banks do not have the pressure of shrinking their balance sheets, but they need to issue CDs to supplement liabilities.
Some banks may face structural contraction pressure in their balance sheets, such as joint-stock banks, which is the reason why some joint-stock banks issue CDs close to the limit.4. How will commercial banks respond when the certificate of deposit (CD) balance approaches the limit?
When the CD balance approaches the limit, theoretically, banks might apply to revise the filing quota. However, historically, banks rarely adjust the interbank CD filing quota.
We believe that without adjusting the filing quota, state-owned banks may adopt alternative funding sources, such as increasing offline interbank deposits or striving for central bank open market injections.
Furthermore, we believe that banks may extend the maturity of CDs within the filing quota and appropriately increase the issuance ratio of 9M and 1Y CDs to meet regulatory requirements.
5. Will the central bank provide corresponding support? For example, reserve requirement ratio (RRR) cuts, Medium-term Lending Facility (MLF), etc.
In the second half of 2020 and 2021, many state-owned banks also faced the situation where the CD balance approached the limit. In the second half of 2020, the net injection of MLF significantly increased, while in the second half of 2021, the net withdrawal of MLF occurred, with the central bank injecting long-term liquidity through RRR cuts.
In 2020, on the one hand, after the impact of the pandemic, monetary policy gradually returned to normalization; on the other hand, commercial banks noticed that monetary policy would return to normalization, so they increased the issuance of CDs when the CD interest rates were low in the third quarter, preparing for liquidity in advance, leading to a decrease in CD issuance demand in the fourth quarter, and the CD progress did not further increase.
In 2021, the central bank conducted RRR cuts in July and December. After the RRR cuts, the central bank explained in response to reporters' questions:
"Maintaining a reasonable and sufficient liquidity while effectively increasing the long-term stable funding sources for financial institutions to support the real economy, and enhancing the ability of financial institutions to allocate funds."
Clearly, from the results observed, when monetary conditions are loose, the central bank may possibly support through RRR cuts, and when monetary conditions are tight, at most, MLF can be sought.From the perspective of commercial banks, on the one hand, banks consider the gap between the MLF (Medium-term Lending Facility) interest rate and the certificate of deposit (CD) interest rate. On the other hand, MLF requires collateral in the form of government bonds, which cannot improve the bank's liquidity regulatory indicators. Logically, MLF does not have a comparative advantage.
Of course, the decision-making power lies with the central bank.
We believe that the central bank's proposal to lower reserves on September 24th may be similar to 2021. Currently, some large banks' CD balances are close to their limits, and they cannot further supplement their liabilities by issuing CDs due to weaker new deposits. Lowering reserves allows commercial banks to replenish low-cost liabilities, thereby supporting the fundamentals.
Furthermore, according to the Financial Times' interpretation on September 25th, starting from July, MLF will be conducted with a fixed amount and interest rate tendering, with the winning interest rate determined flexibly based on institutional bids, reflecting the differences in medium- to long-term funding needs among various institutions, and promoting MLF to return to its role as a medium- to long-term liquidity supply tool. From this perspective, the attractiveness of MLF to commercial banks may have increased.
6. What is the view on CD interest rates?
The correlation between CD interest rates and funding interest rates is quite strong, and funding interest rates can be seen as the lower limit for CD interest rates. Historically, there have been deviations only at the end of some years, such as from November 2023 to March 2024, when there was a clear deviation. Since April, CD interest rates have further aligned with funding interest rates.
The upper limit for CD interest rates is most likely still considered in relation to the MLF interest rate, especially after the fixed amount and interest rate tendering for MLF, the significance of the upper limit may become more prominent.
Based on this, considering the future reduction of the 7-day reverse repo rate from 1.7% to 1.5%, along with a 0.5 percentage point reserve requirement reduction and the possibility of further reserve requirement reductions within the year, funding interest rates may follow the interest rate corridor to move lower, while MLF has already been adjusted to 2.0%.
We believe that the downward space for CD interest rates may open up, and it can be viewed positively.
Risk WarningHistorical patterns may not necessarily apply, policies are uncertain, and market trends are unpredictable.
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