Last Year Interest Income Hits 35 Trillion Won... Banking Sector Profits Soar Due to Sharp Rise in Net Interest Margin

Bank of Korea Base Rate Hike Expected to Sustain Earnings Rally This Year

[Asia Economy Reporter Minwoo Lee] Amid the prolonged COVID-19 situation, banks achieved record-breaking earnings last year. While deposit and savings interest rates remained largely unchanged, loan interest rates rose significantly, resulting in substantial profits.

According to the financial sector on the 13th, the combined net profit of the four major financial groups?KB Financial, Shinhan Financial Group, Hana Financial Group, and Woori Financial Group?reached 14.5429 trillion KRW last year. This represents an increase of over 34% compared to the previous year and is the highest since 2019. The net profit of the four major banks alone amounted to 10.031 trillion KRW.

The strong performance is attributed to interest income. The four major financial groups recorded interest income of 34.7 trillion KRW last year. This is interpreted as a result of the significant rise in loan interest rates. In particular, not only the simple base rate hikes but also the government's loan regulations were effective. Due to the government's stringent loan management pressure, banks raised the additional interest rates while lowering preferential rates, resulting in an actual increase in loan interest rates.

On the other hand, increases in deposit and savings interest rates were modest. Banks announced last month that they would raise interest rates on deposit products such as savings by about 0.3 to 0.5 percentage points (p) in line with the Bank of Korea's base rate hike. However, most increases were limited to 0.2 to 0.25 p, and products with the maximum increase were rare.

As this trend continued, the gap between loan interest rates and deposit interest rates widened to the largest in two years and four months. According to the Bank of Korea, the difference between the total loan interest rate and total deposit interest rate based on bank balances was 2.21 p in December last year.

This year is also expected to see a record-breaking earnings streak. Since further base rate hikes by the Bank of Korea are anticipated, profitability indicators such as net interest margin (NIM) are expected to improve further.

According to financial information analysis firm FnGuide, as of this date, the market consensus for the combined net profit of the four major financial groups this year is 16.0369 trillion KRW. This represents a 10.3% increase compared to last year. Even Woori Financial Group, the smallest among them, is expected to approach a net profit of 3 trillion KRW this year.

Although household loans are not expected to increase significantly this year due to financial authorities' debt service ratio (DSR) regulations, the Bank of Korea's base rate hikes are anticipated. There are forecasts that the Bank of Korea may raise rates two to three more times this year, with the year-end base rate possibly reaching up to 2%. Market interest rates are also on the rise. According to the Korea Financial Investment Association, the 3-year government bond yield surged from 1.798% at the end of last year to 2.343% on the 11th. Therefore, loan interest rates are expected to continue rising, and the four major financial groups are projected to maintain their record-breaking earnings streak this year as well.

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