(Yicai) May 9 -- The latest monetary policy package introduced by the People’s Bank of China will not have a large impact on commercial banks’ net interest margins, according to industry analysts.

The policy package, which includes cuts in the reserve requirement ratio, loan prime rate, and interest rates, will affect lenders’ asset-related returns but also ease their liability cost pressure, balancing off the impact on net interest margins, analysts explained to Yicai.

On May 7, the PBOC unveiled a monetary package that included lowering the interest rate on seven-day reverse repurchase operations, the one- and five-year LPR, the RRR for financial institutions, the interest rate of individual housing provident fund loans, and interest rates of time and demand deposits.

“With the LPR reduction, lenders will experience a constraint on interest income growth, as newly issued loans will have lower rates,” a senior banking analyst told Yicai. “This, in addition to the pressure on their assets from existing loans undergoing repricing cycles affecting their interest income, will severely impact their net interest margins.”

A 10-basis-point cut to both the one- and five-year loan prime rates will drag the net interest margins of state-owned, joint-stock, city commercial, and rural commercial banks by 2.7 bps, 3 bps, 2.4 bps, and 2.1 bps, respectively, this year, said Ni Jun, a banking analyst at GF Securities.

However, the 0.5-percentage-point cut in the RRR is expected to release about CNY1 trillion (USD138.3 billion) in long-term liquidity into the banking system, easing the liability pressure on lenders by lowering funding costs.

The cut in deposit rates will increase the amount of funds available for lending, reduce funding costs for financial institutions, and lower their liability costs, thus partially mitigating the pressure on declining net interest margins, the above banking analyst said.

“The CNY1 trillion of long-term liquidity released to the market, combined with market-driven deposit rate adjustments, could lower banks’ funding costs by around CNY22 billion (USD3 billion),” said Zhang Jun, chief analyst at China Galaxy Securities.

Commercial banks’ net interest margins are at historic lows. According to official data, Chinese lenders’ average net interest margin was 1.52 percent at the end of last year, far below the 1.8 percent warning threshold set by market-based pricing mechanisms.

Analysts believe that the pressure on net interest margins will persist in the short term, but they are unlikely to experience large contractions.

Editor: Futura Costaglione