(Yicai) July 26 -- Chinese banks have started to sell bonds at a lower interest rate than the yields they offer on deposits. Lenders may issue more bonds or lower deposit rates further to control costs and expand business, industry insiders said.

Chang’an Bank has just issued CNY1 billion (USD138 million) of three-year bonds with a coupon rate of 2.14 percent, less than the Xi’an-based lender’s three-year fixed deposit rate of 2.35 percent. And the Bank of Suzhou is selling its CNY3 billion of three-year bonds at a yield of 2.12 percent, lower than the interest rate on fixed deposits of the same time period at 2.15 percent.

Last month, time deposit rates continued to slide but they are still much higher than the rates of recently issued bonds at around 2.507 percent, according to the Rong360 Digital Technology Institute.

Banks’ net interest margin, or the difference between what a bank earns in interest on loans and the amount it pays in interest on deposits, continues to narrow as lending rates tumble. The net interest margin contracted 0.15 percentage point in the first quarter from the end of last year to 1.54 percent, lower than the 1.8 percent acceptable to regulators, according to data from the National Financial Regulatory Administration.

Therefore, to ease pressure, banks will continue to issue more bonds in the medium and long term, industry insiders said. By lowering the interest rate of bonds, lenders can raise funds at a lower cost and offset the shrinking net interest margin.

Bank debt yields have fallen sharply this year, said Li Yishuang, a fixed-income analyst at Cinda Securities. In the second half, many long-term bonds will mature and banks may issue more debt than in the first half.

Lenders’ net interest margin will continue to be under pressure this year, Bank of Shanghai said recently. Banks will follow the interest rate trend, issue bonds at appropriate times and reduce the cost of liabilities.

Deposit yields will likely continue to slide. Zheshang Bank is trimming the interest rate on deposits and optimizing the structure of personal deposits to reduce its interest payments, the Hangzhou-based lender said in its annual report.

Bank of China, Industrial and Commercial Bank of China, Agricultural Bank of China, and Bank of Communications cut their deposit rates this week, slashing the rate for one-year deposits by 10 basis points and that for two-year and longer-term deposits by 20 basis points. As national deposit rates continue to drop, some small and medium-sized banks may offer deposit yields that are higher than bond rates.

Editor: Kim Taylor