The era of low interest rates has quietly arrived, with experts suggesting that this current phase began in 2022. A closer look at the monetary landscape reveals a significant decline: the yield on 10-year government bonds has plummeted by approximately 116 basis points from the end of 2022 to January 2025. Similarly, the rates on loans have also witnessed a retreat; for instance, the five-year Loan Prime Rate (LPR) decreased by 60 basis points from early 2022 to early 2025. Depository institutions have not been spared either, as evidenced by several rounds of interest rate cuts initiated by major banks since the establishment of a market-oriented adjustment mechanism in April 2022. On July 25, 2024, the one-year fixed deposit rates of the six largest banks were lowered by 10 basis points to 1.35%. This ongoing trend of declining rates and narrowing interest margins presents a formidable challenge for commercial banks, especially affecting retail banking, including personal loans, which are vital for maintaining consumer relationships.

In light of these developments, how should banks adapt their retail strategies to navigate this new economic reality? This question has become a focal point of industry discussions

Recent interviews with various industry experts shed light on the evolving retail banking landscape, which is increasingly characterized by a "winner-takes-all" mentality.

At a recent media-sharing event hosted by Boston Consulting Group (BCG), Managing Director and Global Partner Da Yong He pointed out that the retail banking sector is increasingly demonstrating characteristics akin to the e-commerce domain due to the digitization of numerous banking productsMarginal costs have significantly diminished, and this transition has led to limited economies of scaleAs the low-interest environment continues, a more competitive landscape will emerge, where only the strongest players surviveThis pattern has been observed across mature markets such as Japan, South Korea, the United States, and various European countries, where the number of banks and branch networks has been in rapid decline.

He elaborated that during the high-growth era, retail banks made strategic decisions focused on leveraging consumer leverage, including ramping up offerings in consumer loans, credit cards, and mortgages to secure hefty profits

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However, in this new paradigm of low interest and narrow margins, the pivotal factor will be strategic executionThe retail banking sector is fundamentally about cost; banks that can minimize operational and marketing expenditures will gain a competitive edge.

Moreover, BCG's Global Partner Yan Tan observed that the pain of low interest rates is a global phenomenon, not isolated to the Chinese banking sectorSimilar experiences have marked the banking industries of the United States, Europe, and Japan, following their interest rate liberalizationShe pointed out that low interest rates typically influence retail banks in several key ways:

Firstly, there is a push towards diversifying overall business structuresAs credit margins tighten, banks will begin to seek alternative revenue sources such as transactional income and income from intermediary services, which can include consulting services provided to clients.

Secondly, the nature of margin-related businesses is also becoming more refined

Tan noted, "During times of high margins, banks engaged in a range of businesses without much consideration, leading to a homogenization in their operational models." As rates narrow, banks will need to adopt a more selective approach, targeting businesses that have stronger bargaining power.

Furthermore, she emphasized that the current low interest environment is indicative of an international trendMany foreign banks, when faced with narrow domestic interest margins, tend to prioritize "going global" to explore resource allocation opportunities globallyThough this presents significant challenges for retail banking, it remains a key avenue for value creation within the sector.

He also pointed to the existence of opportunities in this low interest landscape for banksFor instance, Japanese banks have found ways to counter the impacts of low rates through internationalization

Despite experiencing smaller reductions in mortgage rates during low-interest times, they shifted efforts towards developing asset and wealth management services to combat shrinking profit marginsThis adaptability reflects the strategic options banks have in the low interest eraHowever, the execution of strategy proves to be more crucial than merely framing oneAs interest margins shrink, the marginal effects of well-executed strategies become pronouncedThe current environment necessitates numerous implementable solutions, with banks needing to enhance their strategic execution capabilitiesConsulting firms can play a critical role by providing actionable solutions and advisory services that empower banks to navigate through the low-interest cycle effectively.

Transitioning to large banks' responses: it has become critical to effectively balance growth, structure, profitability, risk, and capital amidst declining interest rates

As the interest rate center in China continues to lower, the banking industry is expected to face a "triple low and a high" scenario—low-interest rates, low growth, low returns, and increased risksAccording to Sheng Liuyong, Chief Financial Officer of China Construction Bank, lessons from international experiences in the U.S., Europe, and Japan indicate that banking strength is notably diminished during low rate periods, leading to trends of declining net interest margins and increased operational risksGiven that Chinese banks account for over 90% of the financial system, it's imperative for state-owned major banks to act as stabilizers in maintaining financial stability.

Regarding asset quality, Liuyong believes that large banks should strive to continuously optimize their asset structuresThey need to judiciously increase the stakes in credit assets and bond investments, all while ensuring liquidity security to accommodate the demands of the real economy

He highlighted that retail loans have relatively higher yields and lower capital occupations; hence, major banks should seize the resurgence of the consumer market by pushing forward with retail loan expansions, diversifying housing finance and consumer finance product services, all the while maintaining a reasonable proportion of retail loansThey must balance the need to lower financing costs for the real economy with ensuring long-term sustainability, adhering to fundamental risk pricing principles, and keeping loan pricing levels reasonableIt's essential to revitalize existing resources, enhance the efficiency of fund utilization, and consistently deliver superior financial services to critical strategies, strategic areas, and vulnerable segments—thus effectively mitigating risks of fund circular arbitrage and elevating the quality and effectiveness of service to the real economy.

In terms of liability quality, Liuyong advised that major banks strengthen measures for stable resource acquisition and liability quality management, keenly expanding stable short-term deposits, especially those linked to transaction services

They must also manage high-interest deposits carefully, rigorously control interest costs, and ensure the stability of their liability sources, diversification of liability structures, reasonable asset-liability matching, proactive liability acquisition, appropriateness in cost, and authenticity in liability projectsThe overall development of deposits in terms of volume, price, and structure must be balanced and coordinated effectively with proactive liability experiences.

In contrast, it’s noteworthy that amidst low interest rates, small and medium-sized banks face even more significant challenges in their retail operationsFor these institutions, the question of enhancing capability takes center stageZhaolian's Chief Researcher Dong Ximiao, in an interview, stated that commercial banks, especially smaller ones, should capitalize on their inherent advantages to strengthen support for the real economy, particularly for small and micro enterprises

This approach involves optimizing the allocation of financial resources and focusing their efforts on creating fresh avenues for growth through balancing the aspects of volumes and prices to enhance net interest incomeAlso, they should aim to enhance their capabilities for attracting core deposits, improving customer loyalty through comprehensive service offerings.

Moreover, in addition to boosting net interest income, they should actively expand intermediary businesses such as wealth management, which could provide significant additional revenue and act as an effective support mechanism against declining net interest margins.

Tan further revealed several strategies smaller banks could implementWhile these banks have geographic limitations compared to their larger counterparts, it encourages them to dig deeper into their local marketsBy understanding local residents' and businesses' financial needs and customizing financial products and services, these banks can enhance customer loyalty and retention.

Additionally, it is crucial for their retail operations not to function in isolation; they need to adopt a collaborative approach, termed "GBC," which integrates government (G), business (B), and customer (C) resources to amplify operational synergy

For example, partnering with local governments on community projects can help gather customer bases; likewise, collaborating with businesses to offer financial services to their employees can further expand the retail footprint.

Lastly, small and medium-sized banks should harness their advantages to pursue differentiation in their competitive strategiesBy leveraging their proximity to customers, they can enhance their risk management capabilitiesThey should explore niches that larger banks are reluctant or unable to service, such as targeted credit services for local small businesses or tailored financial products aimed at specific consumer demographics within the localityBy doing so, these banks can carve out a defensible position in the fiercely competitive landscape and steadily develop their retail businesses to overcome the challenges posed by the low interest rate environment.