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affected by multiple factors including rising expectations for a reduction in existing mortgage interest rates and the continued shrinking of mortgage balances, the a-share banking sector has continued to fall since september.

as of the latest closing date (september 10), although the banking sector has rebounded slightly, the csi bank index (399986.sz) has fallen by 2.74% in the month, with more than 70% of stocks falling, including china merchants bank, which has fallen by more than 6%. the market value of the 42 listed banks has shrunk by about 282.7 billion yuan, which is equivalent to losing half of the market value of bank of communications (about 431.3 billion yuan) based on the closing price of the day.

industry insiders believe that lowering the interest rates on existing mortgage loans will have an impact on the interest income of listed banks in the short term, thereby squeezing their profit margins. however, in the long run, the scale of housing mortgage loans, which has continued to shrink due to the high early repayment rate, is expected to stabilize and further grow after the interest rates on existing mortgage loans are lowered.

the banking sector fell nearly 3% this month

entering september, the a-share market continued to adjust, with the shanghai composite index falling 3.45% this month, exceeding the decline of the whole month of last month. the banking sector, which accounts for about one-tenth of the a-share market value, also suffered a heavy blow in this round of decline. as of the close of the 10th, the csi bank index fell 2.74% this month, with 32 stocks in the sector recording declines, among which xiamen bank, ningbo bank, suning bank, and china merchants bank all recorded cumulative declines of more than 6%.

as a result, the market value of the banking sector has shrunk significantly. as of the close of the 10th, the total market value of the sector has shrunk by 282.7 billion yuan.the industrial and commercial bank of china saw the largest decline, with a decrease of about 110.3 billion yuan.china construction bank and bank of communications also shrank by approximately 43.8 billion yuan and 28.2 billion yuan respectively.

the market value of many large joint-stock banks also shrank significantly. china merchants bank saw the largest decline, with its market value falling by about 54.1 billion yuan to 744.6 billion yuan. it should be noted that the bank's market value once reached 912.4 billion yuan this year, approaching the trillion yuan mark. china citic bank, industrial bank, ping an bank, and china zheshang bank all saw their market value decline to varying degrees.

following the sudden drop at the end of august, the banking sector has been on a downward trend since september, with the capital flow rate significantly faster than in the previous period. many interviewees told reporters that the recent decline in bank stocks is related to the market's expectations of a reduction in interest rates on existing mortgages. yan yuejin, deputy director of the shanghai e-house real estate research institute, said that overall, the expectations of a rate cut on existing mortgages have had a certain impact on the recent performance of bank stocks. "if the reform of converting existing mortgage loans to mortgages is confirmed, it will be bad news for the entire sector."

in fact, the scale of housing mortgage loans, which are high-quality assets of banks, is shrinking continuously. according to the semi-annual report, wind data shows that the balance of personal housing loans of 42 listed banks in the first half of this year was about 34 trillion yuan, a decrease of 1.97% from the same period last year. among them, the balance of personal housing loans of the six major banks was 26.12 trillion yuan, a decrease of about 654.8 billion yuan from the same period last year. this is not difficult to explain why many state-owned banks have fallen the most in this round of decline in the banking sector.

in addition, the shrinking net interest margin has also impacted the stock price performance of the banking sector. according to data released by the regulator, as of the second quarter, the net interest margin of commercial banks was 1.54%, a year-on-year decrease of 20 basis points, the lowest level since statistics were available. among them, the net interest margin of large banks in the second quarter was 1.46%, a year-on-year decrease of 21 basis points, also the lowest level since statistics were available. the semi-annual report shows that except for postal savings bank of china, the net interest margin of the other five major banks has declined year-on-year.

how much potential is there for lowering existing mortgage rates?

whether and how the interest rates on existing mortgage loans will be lowered will affect the market's judgment on the subsequent development of banks' housing mortgage loan business, and in turn affect the stock price trend of the entire sector.

at present, it is an indisputable fact that the gap between new mortgage rates and existing mortgage rates continues to widen. since the beginning of this year, new mortgage rates have been continuously lowered, and many cities across the country have cancelled the interest rate floor. in some cities, the first home loan interest rate has dropped to around 3.2%, and the highest interest rate gap with existing mortgages has reached 150bp. at the same time, many residents choose to repay their loans in advance. according to data disclosed by cicc, the current bank mortgage early repayment rate is still at a high level of around 14%.

against this backdrop, there have been calls in the market for a reduction in the interest rates on existing mortgages. it is generally believed that the widening gap between new and existing mortgages has led to a higher rate of early repayment by residents, and there is potential for a reduction in the interest rates on existing mortgages.

he fan and guo yuwei, senior researchers at the macro market department of industrial bank research, analyzed that on average, the margin of existing mortgage loans may be reduced by 70-80bp. in terms of the scale of loans involved, the scale of existing mortgage loans at the end of the second quarter of 2024 was 37.8 trillion yuan, accounting for about 11% of the bank's interest-bearing assets. the above reduction in the interest rate of existing mortgage loans will have an impact of 8-9bp on the bank's asset yield.

among the paths to lower the interest rates on existing mortgages, the most popular options are to switch mortgages and re-price them. however, no matter which method is adopted, banks will face a significant reduction in profits, and the extent of the reduction will test their ability to withstand pressure.the market estimates that the interest rate of existing mortgage loans will be reduced by 40-70 bp.。

a report from cicc estimates that if all mortgage loan interest rates are lowered to the new interest rate level through mortgage transfer and self-adjustment, the interest rate will drop by 60bp, which is expected to save borrowers about 240 billion yuan in interest expenses each year, exceeding the interest rate cuts for existing mortgage loans in 2023. this will lead to a 7bp narrowing of the bank's net interest margin, a 4% drop in operating income, and a 7% decrease in net profit.

in another scenario, if the refinancing is only applicable to first mortgage loans (accounting for 90% of existing mortgage loans), the interest rate is expected to drop by 54bp, saving borrowers about 200 billion yuan per year. this will lead to a 6bp reduction in the bank's net interest margin, a 3% drop in operating income, and a 7% decrease in net profit.

there is also a view that the reduction of the interest rate of existing mortgage loans will help the scale of bank housing mortgage loans stabilize and recover, and in the long run, it can further maintain the net interest margin. dai zhifeng, chief analyst of the banking industry at zhongtai securities, analyzed that the current suppression of the growth of mortgage scale is not the scale of investment, but the high rate of early repayment. if the interest rate of existing mortgage loans is reduced, the scale of bank mortgage loans will stabilize on the basis of the actual recovery of investment. in the long run, it will help ease the growth of the bank's retail asset side and the repayment pressure of residents, further optimize the bank's asset structure, maintain the interest margin, and optimize the asset quality of the retail side.

"assuming that the interest rates on existing mortgages are lowered, although it will suppress bank stock price performance in the short term, it also means the early release of medium-term risks." lin yingqi, a banking analyst at cicc, also believes that the adjustment of the interest rates on existing mortgages will affect the bank's interest margin. the large state-owned banks have a higher proportion of mortgages than small and medium-sized banks, and are more affected. however, assuming that the liability costs are adjusted synchronously, the overall impact on the interest margin is expected to be neutral.