Banks Focused on Easy Money-Making Sales... Interest Income Accounts for Nearly 90%

4 Major Commercial Banks Report Interest Income of 6.1443 Trillion KRW in Q1
Criticism Over Growth Solely Through Loans Without New Business or Overseas Investment
Concerns Raised That Interest-Biased Portfolio May Cause Sharp Decline in Earnings

[Asia Economy Reporter Song Seung-seop] It has been identified that the interest income ratio of major commercial banks is approaching 90%. There are criticisms that instead of boldly expanding new businesses or overseas operations, they are settling for ‘easy business’ centered on loans.

According to the banking sector on the 27th, among the total operating profit of 6.9713 trillion KRW in the first quarter of this year for the four major commercial banks?KB Kookmin, Shinhan, Hana, and Woori?the portion accounted for by interest income was 6.1443 trillion KRW, reaching 88.1%. Although this is a 0.4 percentage point decrease compared to the same period last year, when interest income was 5.757 trillion KRW out of 6.502 trillion KRW, the ratio has been continuously expanding compared to around 82% in 2018.

The Financial Supervisory Service reported that the total interest income of all domestic banks in the first quarter reached 10.8 trillion KRW, marking the 12th consecutive quarter exceeding 10 trillion KRW. The scale also increased by about 700 billion KRW compared to the same period last year. Interest income, excluding costs such as fund contributions and deposit insurance fees associated with loans and deposits, also reached 9.4 trillion KRW, increasing by about 500 billion KRW during the same period. This is analyzed to be due to an approximately 9.7% increase in operating assets such as loan receivables despite a decline in net interest margin (NIM).

The interest income ratio of domestic banks is also high compared to overseas. Major commercial banks in the United States have maintained the 60% range for over 10 years. Banks such as HSBC and Bank of America are in the 50% range. Canadian TD Bank and Japan’s Mizuho also operate within the 50-70% range.

Experts view that a portfolio skewed toward interest income is an easy means when loan demand and liquidity are abundant, but in the opposite phase, it causes a sharp decline in profitability. In April last year, Kim Hoon, then head of the Financial System Analysis Department at the Bank of Korea, also analyzed that "the profit structure of domestic banks is skewed toward interest income, and amid a prolonged low interest rate and low growth phase, profitability enhancement is also constrained."

Despite Huge Interest Income... Deposit Rates Fall While Loan Rates Rise

The expansion of interest income for commercial banks is expected to continue. Due to the ultra-low interest rate trend, deposit rates are falling, and for reasons such as government regulations, preferential rates are often reduced or abolished.

According to the Bank of Korea’s Economic Statistics System, the total deposit interest rate (balance-based), including demand deposits and passbook savings deposits, hit a bottom at 0.68% in March. It has been lowered every month since May 2019 (1.42%).

On the other hand, the total loan interest rate has been frozen since December last year at 2.80%, after a 0.1 percentage point decrease from the previous month. Household loan interest rates have also not decreased since January this year, remaining at 2.76%. In the case of small and medium enterprise loans, the rate actually rose by 0.1 percentage point from 2.86% in February and has been maintained since. The gap with deposit rates reached 2.19%, the largest since April last year.

Banks say this is a natural phenomenon rather than a strategy to maximize profitability. A representative from a commercial bank said, "Liquidity is abundant and the loan-to-deposit ratio has been relaxed, so there is no need to raise deposit rates," adding, "On the other hand, loan rates have risen due to government policies on bond issuance and tightening loans."

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