Continued Increase in Loan-Deposit Interest Rate Spread... Bank Sector Expected to Show Strong Performance in 1Q

Loan-Deposit Interest Rate Spread Based on January Balance at 2.24%
Up 3bp from Previous Month... Highest Since July 2019
"Clear Increase in Interest Income Expected in Q1"

[Asia Economy Reporter Minwoo Lee] The gap between deposit and loan interest rates in the banking sector has been on the rise since hitting a low at the end of 2020. It is expected that the increase in interest income will be evident in the first quarter of this year as well.

According to the Bank of Korea on the 6th, as of January, the balance-based interest rates for banks were 0.88% for deposits (based on total deposits) and 3.12% for loans, rising by 0.05 percentage points (p) and 0.08 p respectively from the previous month. This is attributed to the Bank of Korea's second base rate hike in November last year and the market interest rate increase following the Federal Reserve's tightening signals earlier this year.

With loan interest rates rising further, the balance-based loan-to-deposit interest rate spread for banks in January increased by 3 basis points (bp; 1bp=0.01%) from the previous month to 2.24%, the highest since July 2019. It has been steadily rising since the fourth quarter of 2020. Kyunghoe Koo, a researcher at SK Securities, predicted, "Considering that bank interest rates lag behind market interest rates, the loan-to-deposit interest rate spread for banks is expected to widen throughout the first quarter."

The sharp rise in new loan interest rates appears to be due to mortgage loans. In January, banks' new standard deposit interest rate was 1.65% (based on savings deposits), down 0.05 p from the previous month, while the loan interest rate rose 0.20 p to 3.45%. As a result, the spread between new loan interest rates and new savings deposit interest rates widened by 25 bp compared to the previous month. The new loan interest rates have generally continued to rise, with corporate loan rates and household loan rates increasing by 16 bp and 25 bp respectively. In particular, the interest rate increases for unsecured loans, mortgage loans, and group loans were significant. Researcher Koo analyzed, "Judging by the results alone, this is a very favorable change for banks, but since the scale of new loans and deposits is small, it appears to be an outlier from the normal trend."

Due to this trend, there are forecasts that banks will show strong performance in the first quarter. The balance-based loan-to-deposit interest rate spread is expected to rise further, leading to a clear increase in banks' interest income in the first quarter results. Eun-gap Kim, a researcher at IBK Investment & Securities, explained, "Since the interest rate increase was significant, even without an increase in loan growth rate, performance improvement can be shown solely through the net interest margin (NIM) increase," adding, "Expectations for further NIM increases after the first quarter may also continue."

Although household loan regulations may change after the presidential election, loan growth rates are not expected to change significantly. Researcher Kim forecasted, "It seems more likely that household loan regulations will be somewhat eased or maintained rather than strengthened," and added, "Even if regulations are somewhat relaxed for actual demanders, it will not be enough to significantly change the loan growth rate in the banking sector."

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