(Yicai) Oct. 30 -- Some foreign banks in China are offering relatively high-yielding Chinese yuan-based certificates of deposit to attract and retain customers and secure funding despite the backdrop of generally low interest rates in the country. Pressure on net interest margins will make this strategy hard to sustain in the long run, a banking industry analyst said.

Local branches of HSBC, Standard Chartered Bank, and DBS Bank have launched yuan-denominated CDs with maturities of less than one year, while Bank SinoPac and Bank of East Asia have opted for longer-dated products offering higher rates.

Standard Chartered Bank China began issuing a number of large-denomination yuan CDs this month, with maturities of one, three, six, and 12 months, according to the lender’s website. Two of them require a minimum initial deposit CNY500,000 (USD75,060) and pay annual interest rates of 1.2 percent for both the six-month and one-year terms.

Since last month, Bank SinoPac has brought out three three-year CDs on three occasions, with each carrying an annual interest rate of 1.92 percent. Bank of East Asia also issued a three-year CD with 1.9 percent annual interest last month.

By comparison, three-year large-denomination yuan CDs issued by China's big state-owned commercial banks generally offer rates of between 1.5 percent and 1.6 percent. Rates at joint-stock commercial banks are typically higher, ranging from around 1.6 percent to 1.75 percent.

Foreign banks are offering these CDs mainly to secure a stable funding base for their cross-border payment and settlement services, trade finance operations,  and wealth management businesses, Ai Yawen, a senior banking and consumer finance analyst at the Rong360 Digital Technology Research Institute, told Yicai.

Their relatively limited branch networks and higher customer acquisition costs put them at a disadvantage in retail banking, Ai noted. CDs carrying comparatively high interest rates can help offset this weakness and reduce the risk of losing high-net-worth customers, she said.

Still, net interest margins at commercial lenders ultimately constrain their ability to sustain high-cost funding, Ai pointed out, adding that with margins already at low levels, continuing to attract deposits through above-market interest rates will further erode profits.

Moreover, given the constraints on the scale of foreign bank operations in China, expanding this type of high-cost funding is unlikely to be a viable long-term strategy, Ai said.

The average NIM at foreign banks in China fell to 1.28 percent in the second quarter, which was narrower than that of Chinese state-owned banks, according to data from the National Financial Regulatory Administration.

So this wave of relatively high-yielding CDs is more of a tactical response to near-term business needs, rather than the start of a sustained new industry trend, according to Ai.

Editors: Tang Shihua, Futura Costaglione