Banks Lower Preferential Interest Rates as a Last Resort Amid Shrinking Loan-Deposit Margins (Comprehensive)

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% annual range, banks appear to be cutting costs by also adjusting preferential rates on checking and savings accounts. This contrasts with the recent slight increase in mortgage loan rates, citing funding costs, despite the reduction in COFIX (Cost of Funds Index) rates.

Banks Adjust Preferential Interest Rates on Checking and Savings Accounts

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

These products, while being checking and savings accounts, were popular because they offered preferential interest rates ranging from 1.00% to 3.20% annually 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 discontinued. Shinhan Bank will also lower the interest rate on the 'Monthly Interest Savings Account' from 3.50% to 3.00%, a 0.50 percentage point decrease.

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

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 passbook (0.30 percentage points), senior preferential rate (for those aged 55 or older at the time of subscription, 0.10 percentage points), and N-generation preferential rate (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' account, which offers preferential interest rates based on step counts. Previously, an annual step count of over 3.5 million steps earned a preferential interest rate of 2.35 percentage points, but starting from the 1st of next month, only 1.80 percentage points will be given.

Cost-Cutting Efforts Amid Profitability Decline

Banks are eliminating 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 stated, "Due to the base rate cut and low interest rate environment, we 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. The net interest margin (NIM), an indicator of profitability, recorded historically low levels in the second quarter: 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, accepting the risk of losing deposit customers. 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 inevitably reduce preferential interest rates on products with fewer subscribers or checking and savings accounts one by one and may 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 at the end of last month hit a record low of 0.81%. While mortgage loan rates were expected to decrease 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 as due to "rising funding costs and changes in internal cost calculation standards."

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