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 bank 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 the 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 growth in effective credit demand, 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, cost pressure eased

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 December last year, 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, lowering some deposit product rates.

Notably, in this round of adjustments, some maturity rates showed an “inverted” phenomenon. After adjustments, Shanghai Huarei Bank’s one-year to five-year fixed deposit rates were 1.50%, 1.95%, 2.00%, and 1.95%, with the five-year rate 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 due to the dual effects of internal operational pressures 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 situation,” indicating that this rate adjustment is a coordinated action under industry self-discipline. 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 over a period of time.

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 “receded,” while small and medium-sized banks, such as rural commercial banks, have taken their place 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 had net purchases of 28.5 billion yuan and 9.3 billion yuan of 30-year government bonds, respectively, with February 25 showing particularly high buying volume. Because the trading strategy of small and medium-sized banks often features “buying more when prices fall”—when interest rates rise significantly, bond allocation becomes more valuable—comparing historical data, a net buy of 28.5 billion yuan in a single day is considered a “huge volume.” Therefore, it can be preliminarily judged that some small and medium-sized banks had a clear over-allocation behavior on February 25.

The team further analyzed that this behavior is driven by the backdrop of rising bank deposit-loan spreads, with institutions “seeking yields 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 more willing to allocate bonds 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, the “buying spree” of ultra-long bonds by small and medium-sized banks is more about seeking yields in a fluctuating market environment, i.e., “seeking yields from interbank.”

A senior staff member from a bank’s fund operation center warned 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 that since March, the widespread deposit rate cuts by small and medium-sized banks, following the decline in liability costs, have shifted their focus toward 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 low-risk, low-weight assets such as government bonds and interbank 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.”