"Making Money Easily"... Interest Income Accounts for 90%, but Interest Rate Gap Hits Record High (Comprehensive)

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

[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 increasing considering it was in the 82% range 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 above 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 banks. Major commercial banks in the United States have maintained the 60% range for over 10 years. Banks like 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 heavily weighted toward interest income is an easy means when loan demand and liquidity are abundant, but it causes a sharp decline in profitability in the opposite phase. Kim Hoon, head of the Financial System Analysis Department at the Bank of Korea, analyzed, “As the profit structure of domestic banks is skewed toward interest income, profitability enhancement is also constrained amid a prolonged low-interest and low-growth phase.”

The expansion of interest income for commercial banks is expected to continue in the future. This is because, under the ultra-low interest rate policy, deposit interest rates are decreasing, and due to government regulations and other reasons, preferential interest rates are often reduced or abolished.

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

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-sized enterprise loans, the rate actually increased by 0.1 percentage point from 2.86% in February and has been maintained since. The difference with deposit interest 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 explained, “Liquidity is abundant and the loan-to-deposit ratio has been relaxed, so there is no need to raise deposit interest rates. On the other hand, government policies on bond issuance and loan tightening have caused loan interest rates to rise.”

Banks maintain that this is a natural phenomenon rather than a profitability maximization strategy. A representative from a commercial bank explained, “Commercial banks usually launch special promotions at the beginning of the year to secure deposits and then adjust the loan-to-deposit ratio accordingly. Currently, the loan-to-deposit ratio standards have been relaxed due to COVID-19, so there is no reason to secure deposits with high deposit interest rates.”

He added, “As the government increased bond issuance to raise funds, interest rates rose, and preferential interest rates were reduced in line with loan tightening policies, causing loan interest rates to rise in the opposite direction.”

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