Companies Piling Up Cash in Banks... Fixed Deposits Soar to 7 Trillion Won Despite 0% Interest Rates (Comprehensive)

Commercial Banks' Fixed Deposits Surge by 7 Trillion Won in a Month Despite 0% Interest Rates
Companies "Securing Cash" and Wealthy Individuals "Preferring Safe Assets" Analysis

[Asia Economy reporters Kangwook Cho and Minyoung Kim] Last month, the time deposits at major commercial banks surged by more than 7 trillion won. This marks the second consecutive month of increase following about a 1 trillion won rise in August. This is an unusual surge in the era of ultra-low interest rates, with deposit interest rates falling to the 0% range. In particular, the increase was more pronounced among corporations than individuals, and among individuals, it was centered on high-net-worth individuals. This is interpreted as a result of expanded preference for safe assets due to growing concerns about economic uncertainty amid the prolonged COVID-19 pandemic.

Time Deposits at Five Major Banks Surge Over 7 Trillion Won Last Month

According to the financial sector on the 6th, the balance of time deposits at the five major commercial banks?KB Kookmin, Shinhan, Woori, Hana, and NH Nonghyup?was recorded at 635.7964 trillion won last month. This is an increase of 7.1762 trillion won compared to the previous month (628.6202 trillion won).

The balance of time deposits at the five major banks had shown a continuous decline for four months after reaching 652.3277 trillion won in March. The decline accelerated, with decreases of 2.7079 trillion won in April and 5.8499 trillion won in May, and in June, an abnormal phenomenon occurred with over 10 trillion won withdrawn in just one month (10.6785 trillion won). In July, when the COVID-19 situation somewhat eased, the decrease narrowed to 5.4259 trillion won, about half of the previous month’s decline, but still exceeded 5 trillion won, indicating a continued decline in the attractiveness of time deposits.

Since the beginning of this year, as bank deposit interest rates dropped to an annual rate of 0 to 1%, the appeal of interest income diminished, leading investors to withdraw funds in search of better investment opportunities. The acceleration of the economic recession due to COVID-19 also reduced the surplus funds that could be left idle in time deposits compared to before. Additionally, the craze for investing with borrowed money, such as 'debt investment (debt-to-invest)' and 'all-in investment (pulling together all resources to invest),' also played a role.

Increase Despite 0% Interest Rates "Due to Concerns Over Negative Economic Outlook"

Currently, the annual average interest rate for time deposits at the five major commercial banks is around 0.8 to 0.9%, which is about 0.8 percentage points lower than last year’s 1.65% for the same period. This means that even if you deposit 100 million won in a time deposit, the annual interest earned would be less than 1 million won.

About a month ago, at the beginning of last month, among 51 time deposit products offered by 21 domestic banks, 72.5% were products with interest rates in the 0% range. This is a rapid increase compared to less than 5% at the beginning of this year.

Despite such ultra-low interest rates, the surge of over 7 trillion won in time deposits last month, following the 1 trillion won increase in August, clearly reflects concerns that the economic situation may worsen in the future. Hana Financial Management Research Institute forecasted in its '2021 Economic and Financial Market Outlook' report that the Korean economy will show a sluggish recovery next year, with a gross domestic product (GDP) growth rate of 2.7%. This is below the average growth rate after the financial crisis (2.9% from 2011 to 2019). Considering that this year’s growth rate is in the negative 1% range, the institute expects the average growth rate for this year and next year to be around 0%.

"Securing Cash" Increase Centered More on Corporations Than Individuals

The increase in time deposits was particularly notable among corporations rather than individuals. This is interpreted as companies securing cash to maintain stable operations and prepare future response strategies amid growing uncertainty, rather than making aggressive investments.

An official from Bank A said, "Typically, changes in time deposit balances are influenced more by corporate customers than individuals," adding, "Large corporations, which lack attractive investment options, have subscribed to time deposits with terms of less than one year, and small and medium-sized enterprises are also accumulating cash in preparation for the prolonged COVID-19 situation."

Funds Concentrated Among High-Net-Worth Individuals... Due to Preference for Safe Assets

Among individual customers, funds were concentrated mainly among high-net-worth clients who are key customers of the Wealth Management (WM) division. This is interpreted as an increase in high-net-worth individuals who prefer to keep their surplus funds simply deposited in banks amid the ongoing economic downturn.

An official from Bank B explained, "Time deposit balances increased evenly among individual customers as well as large corporations and small and medium-sized enterprises," adding, "Among individual customers, the increase in time deposits was particularly noticeable among high-net-worth individuals, which seems to reflect a tendency to move from risky assets to safe assets amid increased market volatility."

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