Small and midsize banks have been raising the issuance rates on large-denomination certificates of deposit, and there is another deeper reason behind this move: these banks have run into obstacles in expanding corporate payroll agency services and fund settlement businesses, which has slowed the pace of optimizing their deposit structures and increasing the share of low-interest demand deposits. As a result, they have opted to issue high-yield deposit products to stabilize funding on the liability side.
Recently, Tang Wei has held multiple discussions with the planning and finance department about whether to raise the interest rate on the 3-year large-denomination CDs planned for issuance in the fourth quarter from 1.8% to 2%. As the head of deposit business at a rural commercial bank in East China, Tang Wei had previously been busy cutting deposit rates to maintain the situation in which the net interest margin has bottomed out and is recovering. "If we do not follow suit and raise the issuance rate on 3-year large-denomination CDs, customer deposits will once again face the pressure of outflow," Tang Wei told reporters.
Tang Wei said that raising the issuance rate on large-denomination CDs will inevitably drag down the net interest margin, but at present the risk of deposit outflow deserves more attention. Affected by factors such as large banks successively issuing large-denomination CDs in August, over the past month his rural commercial bank suffered more than 100 million yuan in retail deposit outflows. If large-denomination CD rates are not raised, the bank's retail deposit outflows in the fourth quarter are expected to exceed 300 million yuan.
Lou Feipeng, a researcher at Postal Savings Bank of China, believes that a major factor behind small and midsize banks successively raising large-denomination CD issuance rates is to ease the deposit outflow pressure caused by large banks launching 5-year large-denomination CDs. In Tang Wei's view, there is another deeper reason for small and midsize banks to raise large-denomination CD issuance rates: they have encountered obstacles in expanding corporate payroll agency services and fund settlement businesses, causing the pace of deposit structure optimization and the increase in the share of low-interest demand deposits to be slow. Therefore, they choose to issue high-interest deposit products to stabilize liabilities.
Raising rates
After several large banks successively issued large-denomination CDs in August, Tang Wei's rural commercial bank decided to follow quickly. Initially, the plan drafted by Tang Wei and the planning and finance department was to issue a 3-year large-denomination CD product with a minimum deposit of 200,000 yuan, an annualized interest rate of 1.8%, and a fundraising amount of 300 million yuan. "Given that the highest annualized interest rate on 5-year large-denomination CDs launched by large banks is 1.6%, we estimated that an annualized rate of 1.8% would be enough to attract customers to roll over their deposits," Tang Wei said.
Recently, Wuxi Rural Commercial Bank and Yongfeng Bank each launched 3-year personal large-denomination CD products with a minimum deposit of 200,000 yuan and annualized interest rates between 1.9% and 2%. When Tang Wei saw this news, he became somewhat restless. On October 8, senior executives of Tang Wei's rural commercial bank convened a meeting of the deposit department, the planning and finance department, and the risk control department to discuss whether to raise the large-denomination CD issuance rate to 2%. A senior executive of the rural commercial bank said that during the holiday, several high-net-worth individual clients took the initiative to ask him whether the bank planned to launch large-denomination CD products with a 2% annualized interest rate in the near future. If not, they intended to move their maturing deposits elsewhere in search of higher deposit interest income.
At the meeting, the planning and finance department initially voted against the proposal, on the grounds that the bank had continuously cut time deposit rates by more than 70 basis points in the second and third quarters, causing the net interest margin to rebound 4 basis points from the bottom. If the large-denomination CD issuance rate were raised in the fourth quarter, it would inevitably increase interest payment pressure on the liability side and could cause the net interest margin to fall again. Tang Wei's stance was that, compared with net interest margin pressure, curbing deposit outflows and stabilizing liability-side funding are currently the more urgent business challenges. Faced with disagreement between the planning and finance department and the deposit department, the senior executive attending the meeting did not make a final decision.
On the morning of October 12, the senior executive of the rural commercial bank found Tang Wei and proposed a "best of both worlds" plan: while raising the large-denomination CD issuance rate to 2%, reduce the fundraising scale by one-third to 200 million yuan. In this way, the bank could stabilize liability-side funding by raising large-denomination CD rates, while also easing interest payment pressure and maintaining the recovery trend in the net interest margin. Tang Wei said that this compromise plan has passed review in the planning and finance department and is being submitted to the local financial regulatory authorities for filing.
Li Bo serves as the head of retail business at a city commercial bank in Central China. He said that small and midsize banks raising large-denomination CD rates or time deposit rates has also affected deposit attraction on their bank's retail side. Over the past week, heads of several branch outlets reported to Li Bo that some high-net-worth individual clients had either switched to large-denomination CDs at large banks or were actively looking for large-denomination CD products at small and midsize banks with rates of around 2%. As a result, the rollover rate of branch retail deposits fell by 6 percentage points from August and September to around 70%. Recently, Li Bo's city commercial bank has also been accelerating the pace of large-denomination CD issuance and plans to raise the large-denomination CD issuance rate from 1.8% to 1.95%.
An "interlude"
Tang Wei said that the planning and finance department's "relenting" on raising the large-denomination CD issuance rate came with conditions. Early on the morning of October 13, the head of the planning and finance department found him and did the math: since the beginning of this year, the weighted average loan interest rate of this rural commercial bank had fallen to 3.8%. If the bank continued to issue large-denomination CDs at a 2% annualized rate to attract deposits, then after deducting expenses such as operations, risk control, and provisions for overdue bad debt write-offs, the bank's net interest margin would fall to around 1.36%, not only below the average net interest margin of commercial banks, but also continuously weakening the bank's profitability. Therefore, the planning and finance department proposed that raising the large-denomination CD issuance rate could only be a "phased measure" and not a "long-term tool."
Tang Wei said this move is an expedient measure to cope with the current pressure of deposit outflows, and he also does not want to see the bank rely on high-interest deposit products for a long time to stabilize liability-side funding. Miao Jinchun, a professor at Soochow University Business School, believes that the core deposit base of small and midsize banks is relatively weak, and at certain stages they have no choice but to issue high-interest deposit products to attract deposits. However, given the pressure to stabilize and recover the net interest margin and regulatory constraints on banks' liability-side costs, it is difficult for small and midsize banks to issue high-interest deposit products for a long time.
After the National Day holiday, senior executives of Li Bo's city commercial bank convened a meeting of heads of multiple business departments. When discussing whether to follow suit in raising rates, the senior executives specifically emphasized that, in an environment of continuously declining loan interest rates, the key for banks to maintain relatively high profitability and net interest margin lies in continuously optimizing deposit structure and reducing liability-side financing costs. Raising the large-denomination CD issuance rate this time is an "interlude" in preventing deposit outflows at the current stage.
Li Bo told reporters that at the meeting, bank executives also emphasized that the bank must never continue to rely on issuing high-interest deposit products to "attract deposits." Deepening refined customer service and expanding and strengthening settlement businesses such as corporate project payment agency services and payroll agency services are the "fundamental solution" for sustainably stabilizing liability-side funding and increasing the share of low-interest demand deposits. Tang Wei admitted that senior executives of his rural commercial bank are also well aware that the key to stabilizing and recovering the bank's net interest margin lies in actively expanding businesses such as corporate payroll agency services and fund settlement to increase the share of low-interest demand deposits and further reduce liability-side financing costs.
Comprehensive customer expansion
At the beginning of this year, senior executives of Tang Wei's rural commercial bank required the corporate business team to make every effort to expand businesses such as corporate payroll agency services, supply chain fund settlement, and project payment agency services, striving to raise the share of demand deposits from 22% at the end of last year to 32%. Tang Wei admitted that achieving this target is not easy. In the first three quarters of this year, Tang Wei accompanied bank executives many times to visit heads of local large and midsize enterprises to promote products such as payroll agency services, supply chain fund settlement, and project payment agency services. But he found that these enterprise heads were more willing to hand such businesses to large banks.
"Large banks are stronger than the vast majority of small and midsize banks in branch layout, response speed, comprehensive financial service capabilities, and customized product service design, so enterprise heads naturally have their preferences," Tang Wei admitted. Heads of corporate business at branch outlets also lamented at internal business exchange meetings that local large banks had already "packaged" corporate credit, payroll agency services, fund settlement, and corporate cash management to provide local large and midsize enterprises with one-stop financial service solutions, making it even harder for small and midsize banks to "find a gap."
As of the end of the third quarter of this year, the share of demand deposits at Tang Wei's rural commercial bank had only just crossed the 27% mark, still somewhat short of the 32% target. Recently, Tang Wei's rural commercial bank conducted a business review to identify its own shortcomings. "Through the review, we found two problems in our work: first, we focused too much on local large and midsize enterprises and neglected the fund settlement needs of local small and micro merchants; second, in dealing with enterprises, we focused only on communicating with enterprise heads and lacked the establishment of good trust relationships with enterprise finance and accounting personnel to address the latter's actual fund receipt and payment needs in their work," Tang Wei told reporters.
In fact, enterprise finance and accounting personnel also have a significant say in choosing which bank's payroll agency services, supply chain fund settlement, and project payment agency products to use. Tang Wei said the bank quickly adjusted its corporate business strategy for the fourth quarter, requiring corporate account managers at branch outlets to visit 10 local enterprise finance and accounting personnel and small and micro merchants each week, and to report on Fridays the specific fund receipt and payment needs of the visited enterprises in areas such as payroll agency services and supply chain fund settlement, with the bank's product department coordinating to provide corresponding financial products and services. "The bank also plans to focus on assessing corporate clients' service satisfaction and give special awards to corporate account managers ranked high in customer satisfaction," Tang Wei said.
Li Bo told reporters that since the beginning of this year, his city commercial bank has been continuously promoting business synergies to expand customers and develop business. The so-called business synergy customer expansion and business development mainly means that personnel from different business departments of the bank visit enterprises together to comprehensively understand the differentiated financial service needs of enterprises and employees and provide integrated financial services. For example, corporate and retail business account managers visit enterprises together. After the corporate business account manager promotes payroll agency products, the retail business account manager introduces multiple payroll wealth management products, thereby connecting the entire financial service loop from payroll agency services to employee wealth management and retaining more payroll-related demand deposits for the bank.
Li Bo told reporters that bank executives have repeatedly asked about the specific results of business synergy customer expansion and business development, while also emphasizing that the era of "competing on interest rates" to attract deposits has passed. In the future, competition among banks for deposits will test their refined customer service capabilities.
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