0% Deposit Launch Watch Battle... Expected as Early as Next Week

Interest Rate Products Below 1% Annual Rate Expected as Early as Next Week

[Asia Economy Reporter Kangwook Cho] As early as late next week, major commercial banks are expected to launch fixed deposit products with interest rates in the 0% range. Depositing 10 million KRW for one year would yield only about 80,000 KRW in interest annually. Despite concerns over capital outflow, commercial banks are considering an earlier-than-expected reduction in deposit interest rates due to the large cut in the base interest rate and growing fears that the real economy shock from the COVID-19 pandemic could spill over into the financial sector.

According to the financial sector on the 20th, major commercial banks such as Shinhan, KB Kookmin, Hana, Woori, and NH Nonghyup plan to decide on the timing and extent of deposit product interest rate cuts as early as next week and implement them. Although deposit rates were already lowered earlier this year, the sudden big cut (a 0.5 percentage point base rate reduction) on the 16th was deemed beyond what banks could bear.

Banks determine deposit interest rates based on the Bank of Korea’s base rate, loan-to-deposit ratios, management strategies, and financial market conditions. Typically, banks have been cautious not to lose customers to competitors, so deposit rates have not been lowered quickly. For example, after the base rate was cut by 0.25 percentage points in October last year, major banks only adjusted deposit rates downward in February this year, four months later. However, that adjustment considered factors such as the implementation of open banking, new loan-to-deposit ratio regulations effective this year, and public opinion backlash. The current situation, according to the banking sector, is different.

An anonymous official from a commercial bank said, "A 0.25 percentage point base rate cut is a level banks can somewhat endure, but the impact of the big cut is greater," adding, "Since profitability deterioration is expected this year, deposit interest rates will be lowered sooner than anticipated."

Currently, deposit interest rates at commercial banks are generally in the low 1% range. Typically, when the Bank of Korea cuts the base rate by 0.25 percentage points, deposit rates in the banking sector fall by about 0.2 to 0.3 percentage points. Arithmetically, this 0.5 percentage point base rate cut will reduce deposit rates by approximately 0.4 to 0.6 percentage points.

The timing for lowering deposit interest rates is likely to be right after the financial holding companies’ shareholders’ meeting season ends. Starting with KB Financial and Hana Financial on the 20th, followed by Woori Financial on the 25th, and Shinhan Financial on the 26th, these companies will hold shareholder meetings to handle major agenda items such as appointing outside directors. Therefore, the earliest time for deposit products with interest rates in the 0% range to appear could be late next week.

Another commercial bank official explained, "In previous years, concerns about customer outflow if deposit rates were lowered ahead of others acted as a burden, but this time the situation is different," adding, "The biggest issue now is the risk of future defaults rather than profitability deterioration. It is currently impossible to gauge how much corporate and self-employed loan defaults will spread and cause shocks."

This content was produced with the assistance of AI translation services.