Banks Trapped in Short-Term Performance... Last Year Also Focused on Easy Interest Business

Domestic Banks' Interest Income Ratio Remains at 80-90% for Several Years
Major Overseas Banks' Interest Income Ratio at 50-70%
Interest Income Increased by Maximizing Loan-Deposit Margin Amid COVID-19
Environment Difficult for Earning Fees and Selling Funds Also a Cause

The bank affiliates, which hold the largest share within financial groups, significantly improved their performance last year through interest-based business. Unlike foreign banks that are expanding their size and increasing non-interest income, domestic banks still heavily rely on interest income. There are criticisms that they have strengthened a ‘business model akin to swimming while holding the ground’ by drastically raising loan interest rates during a period of high funding demand due to COVID-19 to maximize profits.

According to the financial sector on the 14th, the interest income ratio of the four major banks was recorded at 90.3%. This indicator has exceeded 90% for the first time in seven years since 2014.

Compared to foreign banks that realize a significant portion of their revenue from non-interest income, there are concerns that the dependence on interest income is excessively high. The UK-based global bank HSBC focuses on retail banking but maintains non-interest income at around 50% of total revenue. Bank of America (BOA) also typically records a non-interest income ratio in the high 40% range. Canadian TD Bank, Singapore’s DBS, and Japan’s Mizuho Bank generally have interest income ratios in the 50% range, rarely exceeding 70%.

Interest Income Surges Due to COVID-19, Base Interest Rate, and Interest Rate Spread

The background includes massive loan demand driven by COVID-19 and the rapid rise in stock and real estate prices. As COVID-19, which began in 2020, continued for a long time, loans to small business owners and small and medium-sized enterprises increased significantly. In the case of household loans, housing mortgage loans and jeonse (long-term deposit) loans increased as house prices continued to soar until the end of the year, driven by real demand.

In addition, with the base interest rate on an upward trend, loan interest rates were sharply raised, maximizing interest income generation. The Bank of Korea raised the historically low base interest rate of 0.5% twice last year and once this year. Private banks typically preemptively reflect the Bank of Korea’s base rate hikes, so loan interest rates were on the rise from the first half of the year. Meanwhile, deposit interest rates rose slowly while loan interest rates increased rapidly, achieving substantial profits. In August last year, the gap between deposit and loan interest rates was 2.07%, the largest in 11 years. Household loan interest rates rose by 0.37 percentage points over the previous 15 months, while savings deposit interest rates increased by only 0.10 percentage points.

Banks argue that the upward interest rate trend and the impact of financial policies must be considered. They explain that to comply with the total household loan volume set by financial authorities, it was inevitable to reduce preferential interest rates and raise loan interest rates.

Still Difficult to Earn Fees and Sell Derivatives

In the mid-to-long term, a completely different fee structure compared to overseas financial firms is also cited as a cause. In Korea, with the emergence of internet-only banks like Toss and Kakao Bank, commercial banks hardly charge transfer fees. Kwon Heung-jin, a research fellow at the Korea Institute of Finance, explained, "Due to fierce competition among banks, fee income has been absorbed into interest income," adding, "In the U.S., depending on consumer grade, account maintenance fees are even charged."

The derivatives sales market, a key part of the non-interest income sector, is also in a slump. Although regulations on financial firms’ derivatives sales have been significantly relaxed since the Park Geun-hye administration, the series of ‘private equity fund mis-selling’ incidents and the passage of the Financial Consumer Protection Act have made firms cautious.

The short tenure of bank CEOs is also cited as a cause. The term of domestic bank CEOs is typically up to three years, including reappointment. This contrasts with large banks like JP Morgan or Goldman Sachs, which guarantee an average tenure close to six years for their CEOs. Due to the short tenure, there is a tendency to focus on short-term performance, making long-term structural improvements difficult.

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