What exactly is the impact of interest rate cuts on financial institutions?

The impact of interest rate cuts on financial institutions, especially commercial banks, is mainly reflected in the following aspects:
1. Changes in net interest margin: Interest rate cuts will lead to changes in the spread between banks' lending rates and deposit rates. If the decline in lending rates is greater than that in deposit rates, banks' net interest margins will narrow, affecting their profitability. For example, in Q3 2024, the net interest margin of commercial banks fell to 1.53%, showing a trend of gradually approaching a historical low.
2. Adjustment of asset-liability structure: To cope with the impact of interest rate cuts and narrowing spreads, commercial banks may adjust their asset-liability structure, such as increasing the proportion of interbank liabilities, central bank borrowings, and payable bonds, while increasing financial assets and reducing interbank assets to mitigate the effects of rate cuts.
3. Changes in financial asset valuations: Lowering policy rates may increase the valuation of financial assets held by commercial financial institutions, which has a positive impact on banks' profitability. If commercial banks hold a large amount of bond-type financial assets, a rapid rate cut will boost the valuation of these assets, benefiting commercial banks.
4. Changes in credit demand: After interest rates are lowered, the debt costs of enterprises and residents will decrease, potentially leading to a decline in non-performing asset ratios and an increase in credit demand in a more robust demand environment, which positively impacts bank profitability.
5. Impact of policy rate adjustments on bank earnings: The central bank's technical team, through quantitative analysis, concluded that the impact of interest rate adjustments on bank earnings is neutral, and banks' net interest margins will remain relatively stable.
6. Stimulating consumption and investment: Rate cuts can reduce financing costs, promote credit growth, stimulate consumption and investment demand, and drive a moderate recovery in price levels.
7. Impact on the stock market: Typically, central bank rate cuts immediately affect financial markets, boosting investor confidence, stimulating consumption and investment, and potentially benefiting stock market performance.
In summary, the impact of interest rate cuts on financial institutions is multifaceted, including both direct effects on banks' profitability and indirect effects on financial markets and the real economy. Financial institutions need to adjust their asset-liability structures and business strategies in response to interest rate changes to adapt to market conditions.