Banks Raising Loan Interest Rates, Deposit Preferential Rates Being Cut One After Another

Following Deposit Interest Rate Cuts
Cost Reduction to Improve Profitability

[Asia Economy Reporter Kim Min-young] Following the Bank of Korea's base rate cut, commercial banks that lowered deposit product interest rates in the first half of the year have now made slight adjustments to preferential interest rates. With fixed deposit rates already lowered to the 0% range, banks appear to be cutting costs by also adjusting preferential rates on checking accounts. This contrasts with the recent slight increase in mortgage loan rates under the pretext of funding costs despite the COFIX (Cost of Funds Index) rate cut.

Banks Adjust Preferential Interest Rates

According to the banking sector on the 21st, Shinhan Bank will reduce the preferential interest rates on four checking accounts, including the 'Shinhan Main Future Planning Account,' by 0.25 to 0.50 percentage points starting from the 19th of next month.

These products, while being checking accounts, were popular because they offered preferential interest rates ranging from 1.00% to 3.20% per annum on average balances up to 1 million KRW. For example, the 'Shinhan Ready Go Account' will see its highest preferential interest rate reduced from 3.20% to 2.70%. This product was launched in 2008 and is currently no longer sold. Shinhan Bank will also lower the interest rate on the 'Monthly Savings Account,' which pays interest monthly, from 3.50% to 3.00%, a 0.50 percentage point decrease.

NH Nonghyup Bank also announced that starting from the 27th of next month, it will lower preferential interest rates on checking accounts by 0.40 to 0.50 percentage points.

The preferential interest rate for the 'Magic Tree Account' is currently up to 0.8 percentage points but will be reduced to a maximum of 0.4 percentage points after the change. Benefits such as no application for transaction books (0.30 percentage points), senior preferential rates (for those aged 55 or older at the time of subscription, 0.10 percentage points), and N-generation preferential rates (for those under 25 at the time of subscription, 0.10 percentage points) have been removed.

The 'Haebom N Dolphin Account' and 'Chaeum Smarty Account' will reduce preferential benefits on daily balances up to 1 million KRW from 1.5 percentage points to 0.5 percentage points.

Hana Bank has reduced the preferential items for the 'Challenge 365 Savings,' which offers preferential interest rates based on step counts. Previously, customers with an annual step count of over 3.5 million steps received a preferential interest rate of 2.35 percentage points, but starting from the 1st of next month, this will be reduced to 1.80 percentage points.

Cost-Cutting Efforts Amid Profitability Decline

Banks are removing or reducing preferential benefits as a desperate measure amid shrinking interest margins. They aim to improve profitability by saving every possible cost. A bank official said, "Due to the base rate cut and the low interest rate environment, banks have lowered rates on relatively high-interest products."

The profitability of banks has been deteriorating due to the COVID-19 pandemic and base rate cuts. As of the second quarter, the net interest margin (NIM), an indicator of profitability, recorded historic lows: Shinhan 1.39%, KB Kookmin 1.50%, Hana 1.37%, Woori 1.34%, and Nonghyup 1.67%.

In the first half of the year, major banks collectively lowered interest rates on key deposit and savings products, resulting in customer withdrawals. The balance of demand deposits at the five major banks stood at 523.3725 trillion KRW as of the end of last month, down by 10.8041 trillion KRW from the previous month.

A banking sector official said, "Banks are tightening cost-cutting measures. They will likely continue to reduce preferential rates on products with fewer subscribers or checking accounts and may have to further lower deposit interest rates."

This trend of lowering deposit interest rates contrasts with the recent increase in mortgage loan rates despite the COFIX rate cut. The new COFIX rate recorded a historic low of 0.81% at the end of last month. Although mortgage loan rates were expected to fall accordingly, they instead rose slightly. KB Kookmin set rates at 2.23% to 3.73%, Nonghyup at 2.04% to 3.65%, and Shinhan at 2.31% to 3.56%, each increasing by 0.02 to 0.08 percentage points compared to the previous month. Banks explained this was due to "rising funding costs and changes in internal cost calculation standards."

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