Summary of Key Points
In the first half of 2026, a counterintuitive phenomenon occurred among listed banks: although the volume of time deposits was increasing (for example, the volume of individual time deposits at Agricultural Bank of China increased by 942.2 billion yuan, and at Industrial and Commercial Bank of China by 1 trillion yuan), the average interest cost of these deposits was significantly declining. The main reason for this is that the high-interest time deposits made by residents and businesses in previous years are now maturing, and the interest rates offered by banks for new deposits are lower than before, which has lowered the overall average cost. However, the bank's key profit indicator, the "net interest margin" (the difference between loan interest and deposit interest), only increased slightly because loan interest rates have also been declining. Whether banks can continue to reduce costs in the future depends on three key factors: whether the maturing funds will be reinvested in long-term deposits, whether new time deposit rates can be further reduced, and whether the volume of demand deposits will increase.
Detailed Analysis
1. The Paradox: More Time Deposits, Yet Lower Interest Costs?
It might seem logical that more time deposits would mean higher interest costs for banks. However, the data for the first half of 2026 shows the opposite:
- Volume: The balance of individual time deposits at Agricultural Bank of China increased to 14.3 trillion yuan, up by 942.2 billion yuan from the end of last year; the average balance of individual time deposits at Industrial and Commercial Bank of China increased to 13.37 trillion yuan, up by 1 trillion yuan year-on-year. Corporate time deposits also increased, with the balance at Industrial and Commercial Bank of China rising by 578.4 billion yuan.
- Cost: The interest rate paid on individual time deposits at Agricultural Bank of China decreased from 2.1% to 1.67%, and at Industrial and Commercial Bank of China from 2.04% to 1.69%. The average interest rate paid on deposits at Ping An Bank even dropped by 38 basis points (0.38%).
Why is this happening? It's not that the volume of time deposits has decreased, but rather the difference in interest rates between older and newer deposits is playing a role. High-interest time deposits (with rates above 3%) that were made in previous years are now maturing, and banks are offering lower interest rates (around 1.6%) for new deposits. Even though the volume of new deposits has increased, the overall average interest cost has still decreased.
2. The Underlying Logic: Maturing High-Interest Deposits Replaced by Lower-Interest Deposits
In previous years, to lock in higher returns, people preferred to make long-term time deposits (e.g., 3 years or 5 years), which became a burden for banks in terms of higher interest costs. In the first half of 2026, this burden began to ease:
- Industrial and Commercial Bank of China reported a reduction in interest expenses of 38.5 billion yuan, mainly due to a decrease in the average interest rate paid on customer deposits by 30 basis points.
- Agricultural Bank of China also mentioned that interest rate factors were a significant reason for the reduction in interest expenses.
Simply put, if you deposited 100,000 yuan in a 3-year time deposit last year with an interest rate of 3%, and this year the deposit matures, the bank will only pay you 1.6% interest. Although you are still making a time deposit, the bank's interest expense has decreased from 3,000 yuan to 1,600 yuan, resulting in a lower overall average cost.
3. Limited Improvement in the Interest Margin
Although the cost of deposits has decreased, loan interest rates have also been falling, so the improvement in the interest margin is not significant:
- The net interest margin of commercial banks in the second quarter of 2026 was only 1.41%, an increase of just 0.01 percentage points from the first quarter.
- There is variation among banks: large banks (such as Industrial and Commercial Bank of China) have seen improvements in their interest margins, while joint-stock banks (such as China Merchants Bank) have seen no change, and foreign banks are still experiencing declines.
Why? The pressure on the lending side has not eased; for example, mortgage and corporate loan interest rates are both declining, reducing the profit margin that banks can earn. The benefit of lower deposit costs is being offset by the decrease in loan interest rates.
4. Whether Costs Can Continue to Be Reduced in the Future Depends on Three Key Factors
The advantage of lower deposit costs will not last forever. Whether banks can maintain this trend depends on three factors:
- Factor 1: Whether maturing funds will be reinvested in long-term deposits. If the funds are converted into short-term deposits (e.g., within 1 year), interest rates will be even lower, potentially reducing costs. If they are reinvested in 3-year or 5-year deposits, costs may increase.
- Factor 2: Whether new time deposit rates can be further reduced. Currently, the interest rates offered by banks are already very low, so it depends on market trends and customer acceptance.
- Factor 3: Whether the volume of demand deposits will increase. The interest rate on demand deposits is very low (e.g., only 0.05% at Industrial and Commercial Bank of China for individual accounts), making them the most cost-effective for banks. Banks need to offer services such as salary disbursement and wealth management to encourage customers to keep their money in demand deposits.
For example, China Merchants Bank has been able to maintain low deposit costs because a large proportion of its deposits are in demand accounts, and customers are willing to use these accounts for financial management and transactions.
5. Banks' Transformation: From Competing for Deposits to Managing Costs and Retaining Customers
In the past, banks focused on attracting as many time deposits as possible. Now, the focus has shifted:
- Step 1: From expanding scale to managing costs. Banks are no longer just concerned with the volume of time deposits but whether the interest rates on these deposits are high.
- Step 2: From managing costs to managing customer relationships. Banks are using services such as corporate salary disbursement and wealth management to encourage customers to keep their money in demand deposits or low-interest products, which is both stable and cost-effective.
In the future, the competitiveness of banks will not lie in the size of their time deposit portfolios but in their ability to attract and retain low-cost demand deposits while attracting new deposits.
In Conclusion
The changes in banks in the first half of 2026 are not about a decrease in the total volume of time deposits but about a shift in the interest rates of these deposits (from higher to lower). To earn more money, banks need to ensure that loan interest rates remain stable and to retain customers by providing valuable services. For individuals, it's important to consider that current interest rates are much lower than before when deciding whether to make long-term time deposits. For banks, relying solely on the reduction in costs from maturing deposits is not enough; they need to find ways to retain customers' money in demand deposits.