Intercity Deposits: Weighing Risk and Return

Investment Blog

Intercity Deposits: Weighing Risk and Return

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January 20, 2025 4

As August rolled in, a notable trend emerged among various small and medium-sized banks: a decline in deposit interest ratesRecently, it was reported that some banks had diminished their five-year fixed deposit rates to below 2%. In stark contrast, a select number of village and town banks, alongside city commercial banks in certain provinces, were still offering attractive rates of up to 4%. This discrepancy has led to a significant phenomenon where depositors are not hesitating to travel to different cities to secure better returns on their savings.

The primary driving force behind this cross-city deposit movement lies in the substantial interest rate differentials that exist between different regions and banksAccording to Dong Xiemiao, the chief researcher at a leading financial institute, several factors contribute to the variability in deposit ratesOne significant reason is the differing self-regulatory pricing mechanisms for market interest rates from one region to another, which can lead to variations in interest rate caps and increases

Additionally, the supply and demand dynamics for deposits vary across regions, influenced by local investment behaviors and saving habits, which consequently affect the overall pricing of deposit ratesMoreover, even within the same banking institution, different branches may experience varying asset-liability conditions and competitive strategies that result in inconsistent deposit pricing.

Yet, in a world where mobile banking apps have become ubiquitous, and the processes of banking have been greatly simplified, the question arises: why are depositors still willing to embark on cross-city trips? While regulations stipulate that commercial banks must maintain their internet savings services strictly on their proprietary platforms, and local banks should primarily serve clients within their established areas, the allure of higher interest rates remains compelling.

Dong Xiemiao highlights that, in general, cross-city depositing is both safe and compliant

However, he cautions depositors to consider two crucial pointsFirst, the costs associated with travel, accommodation, and the time invested should be carefully weighed against the potential interest benefits of cross-city depositsSecond, it's essential to conduct transactions at official bank outlets to avoid participating in any dubious activities.

Interestingly, even within this context of cross-city deposits, there are some instances of unethical practices, such as "scalper" activities aimed at circumventing deposit limitsAs noted by researcher Lou Feipeng at the China Postal Savings Bank, the regulations surrounding cross-city deposits can pose risksDepositing funds in a branch of a different location can lead to complications, especially when needing access to funds quickly, potentially leading to liquidity issues if the required branch lacks presence in the depositor's locality.

Examining the internal dynamics of smaller banks reveals a persistent trend: they generally offer higher deposit rates than larger state banks, primarily due to their acute need to attract deposits

Currently, many smaller banks are taking steps to lower their deposit rates amidst growing inquiries from depositors located out of their service areasLi Yifan, a researcher at the Bank of China, insists that depositors should stay attuned to macroeconomic conditions and shifts in the financial market, cultivating an awareness of wealth planning and risk perceptionBeyond mere savings, individuals should make prudent investment decisions aligned with their specific needs and risk tolerance, promoting a balanced optimization of their financial asset allocation to strike a beneficial risk-reward equilibrium.

The landscape of deposit and lending rates is increasingly sliding downward, putting immense pressure on commercial banks' net interest marginsDespite this, many banks continue to fervently pursue larger market shares and customer bases, perpetuating a cycle of irregularities in deposit attraction practices

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Li Yifan also pointed out that some small and medium-sized banks might resort to excessively high deposit rates or engage in irrational competition to achieve deposit targets, thus exacerbating their cost pressures concerning deposits.

Dong Xiemiao, a recognized authority in the banking sector, emphasizes the critical points that banks must focus on in their operational developmentHe strongly advocates that banks should abandon the longstanding notions of scale and speed when conducting their businessThe 'scale obsession' refers to certain banks' emphasis on the continuous enlargement of their deposit volumes, mistakenly believing that sheer quantity can guarantee a competitive market position, while neglecting the potential hidden risks associated with this expansion and its overarching impact on general operations

Conversely, the 'speed obsession' manifests in the haste to achieve rapid growth in business, focusing narrowly on short-term data increments, without considering whether this fast-paced growth is built on solid fundamentals or aligns with the bank's long-term strategic vision.

While it is crucial for banks to ensure a steady growth in their deposit-related business—given that this is foundational to their operation—the emphasis must also extend to controlling liability costs within reasonable parametersThe level of liability costs can dramatically influence a bank's profitability and operational stability; if costs are excessively high, even a large volume of deposits may not protect a bank from challenges in profitability or expose it to greater operational pressures during market fluctuations or economic downturns.

This insight is especially significant and urgent for smaller banks

These institutions play a vital role in the overall financial system, yet they typically face challenges concerning resources and risk management capabilities compared to their larger counterpartsTherefore, it's imperative for smaller banks to accelerate their shifts in operational philosophies, moving away from traditional methods that might result in narrow-minded pursuits of deposit expansionsMany smaller banks have been historically reliant on established methods that focus predominantly on deposit volume growth, lacking the depth of critical market assessments or agile responses to changing conditions.

In today's market, the mindset of indiscriminate deposit growth is untenableRather, small and medium-sized banks must recognize their unique characteristics and circumstances, prioritizing the improvement of their asset-liability management