Small and medium-sized banks' asset-liability rebalancing: lowering deposit interest rates on one side while purchasing long-term bonds on the other

Source: 21st Century Business Herald Author: Yu Jixin

Since the beginning of March, the small and medium-sized banking sector has quietly been undergoing an important asset-liability rebalancing process.

On the liability side, many small and medium-sized banks, mainly rural commercial banks and village banks, have launched a new round of deposit rate cuts. Banks are lowering interest rates on various deposit products, including demand and fixed-term deposits, with some maturities entering the “1” percent range.

This means that the pressure on the liability side for some small and medium-sized banks has temporarily eased to some extent.

As the cost pressure on the liability side begins to ease, the latest adjustments in banks’ asset allocation strategies have also come into view. The decline in liability costs provides favorable conditions for more active long-term asset allocation. Recently, many securities analysts have observed that rural commercial banks are quietly becoming the main buyers in the bond secondary market, especially showing strong purchasing power for ultra-long-term rate bonds.

In response, a senior staff member from a coastal region bank’s fund operation center told 21st Century Business Herald that the recent enthusiasm of small and medium-sized banks for bond purchases is a natural investment pursuit after the initial easing of bank interest margin pressures, shifting toward seeking returns on the asset side. With declining funding costs and still-existing room for effective credit demand growth, rural commercial banks are more inclined to “stretch duration,” i.e., extend the duration of assets to increase investment returns.

Liability side: Intensive deposit rate cuts ease cost pressures

Since March, many small and medium-sized banks have announced deposit rate reductions.

For example, Jingfa Village Bank in Pukou, Nanjing, announced that starting March 2, the interest rates for three-year and five-year fixed deposits for both corporate and individual customers would be lowered from 2.2% to 1.88%. Songjiang Fuming Village Bank in Shanghai also announced that from March 1, the one-year fixed deposit rate was reduced to 1.85%; from March 10, the seven-day notice deposit rate was lowered to 1.30%. Compared to the end of last December, the one-year fixed deposit rate at this bank has decreased by an additional 5 basis points.

Additionally, institutions such as Huarei Bank in Shanghai, Heilongjiang Youyi Rural Commercial Bank, Yunnan Shiping Beiyin Village Bank, Chiping Hunan Rural Commercial Bank, and Liaoning Zhenxing Bank also issued similar notices in early March, indicating reductions in some deposit product rates.

Notably, in this round of adjustments, some “inverted” phenomena appeared in certain maturities. After adjustment, Huarei Bank’s one-year to five-year fixed deposit rates are 1.50%, 1.95%, 2.00%, and 1.95%, with the five-year rate being lower than the three-year rate.

Industry insiders believe that the core reasons for the widespread deposit rate cuts among small and medium-sized banks are twofold: pressures from their own operations and macro policy guidance.

The reporter notes that, on one hand, many banks mentioned in their announcements that the adjustments were made “in accordance with national interest rate policies and market rate self-discipline mechanisms, combined with our actual circumstances,” indicating that this rate adjustment was a coordinated industry self-discipline action. On the other hand, the persistent narrowing of net interest margins in commercial banks continues to exert pressure, prompting some small and medium-sized banks to take measures to control liability costs in order to ease profit pressures and maintain stable operations.

Asset side: Small and medium-sized banks “buying up” long-term rate bonds

In response to the easing of funding costs, on the asset side, small and medium-sized banks have been active in the bond secondary market since the start of 2026, becoming the main buyers of medium- and long-term rate bonds for a period.

According to CNEX bond divergence index observations, during the strong trading phase from late February to early March, bonds representing medium- and long-term rates were particularly active. From the perspective of institutional trading, banks remain the main buyers contributing funds. However, analysts generally point out that the configuration efforts of large banks have “retreated,” while rural commercial banks and other small and medium-sized banks have replaced them as the main buyers.

Guohai Securities fixed income team mentioned in a recent report that first, large banks are still mainly allocating bonds with maturities of 10 years or less, but their buying intensity of 7- to 10-year government bonds has slowed; second, small and medium-sized banks are aggressively “buying up” 30-year government bonds, with allocations totaling 38.6 billion yuan in 20- to 30-year bonds, significantly increasing their previous efforts.

Analyzing the market and net purchase data, the team pointed out that on February 25 and 26, small and medium-sized banks net bought 28.5 billion yuan and 9.3 billion yuan of 30-year government bonds, respectively, with February 25’s purchase being particularly notable. Due to the “buy more when prices fall” strategy often employed by small and medium banks—where bond allocation value further increases when interest rates rise sharply—the 285 billion yuan net buy on February 25 can be considered a “massive” volume. Therefore, it is preliminarily judged that some small and medium-sized banks had significant over-allocation on that day.

The team further analyzed that this behavior is driven by the rising bank deposit-loan spread, with institutions seeking to “earn from interbank.” As of January 2026, the deposit-loan growth gap for small and medium-sized banks had risen to 4.2%, reflecting a significant easing of overall liability pressure. After the bond market adjustment in 2025, bond allocation has become more cost-effective. Consequently, banks have been quite active in bond allocation since the beginning of the year. In a non-unilateral correction market environment, “buying on dips” remains a preferred strategy. If the bond market remains volatile, small and medium-sized banks’ “buying ultra-long bonds” is more about seeking returns in a volatile environment, i.e., “earning from interbank.”

A senior person from a bank’s fund operation center pointed out to the reporter that this may lead to some degree of maturity mismatch risk for city and rural commercial banks. If local small and medium-sized banks lack sustained motivation for credit expansion, excessive reliance on bond investments could lead to market risk accumulation.

Luo Feipeng, a researcher at China Postal Savings Bank, analyzed for 21st Century Business Herald that since March, the widespread deposit rate cuts by small and medium-sized banks, following the decline in liability costs, have shifted their focus to increasing holdings of medium- and long-term government bonds and interbank assets to boost returns. This is a passive choice under the background of narrowing interest margins and “asset scarcity,” helping to temporarily ease profit pressures.

From the liability side, deposit rate cuts directly ease interest margin pressures but also push banks to seek higher-yield assets; on the asset side, credit demand and high-quality corporate lending still have room for growth.

“Faced with capital constraints, banks tend to allocate government bonds, interbank assets, and other low-risk, low-weight assets. This approach can improve short-term returns but may also exacerbate maturity mismatches and interest rate risks, pushing down government bond yields and increasing activity in the interbank market,” Luo Feipeng said. “At the same time, this also indicates that the monetary transmission mechanism still has room for further improvement, and the industry should continue to monitor potential risks such as capital misallocation.”