The Interest Rate Spread on Loans and Deposits Widens Further

Highest in 3 Years and 10 Months... Continued Expansion in the First Half Positively Impacts Banks' Earnings

[Asia Economy Reporter Song Hwajeong] As the interest rate spread between deposits and loans at banks has widened to the largest extent in 3 years and 10 months, the spread is expected to further expand this month as well.

According to the Bank of Korea on the 2nd, the difference between the total loan interest rate and the total deposit interest rate based on outstanding balances in April was 2.35 percentage points, an increase of 3 basis points (1bp=0.01%p) from the previous month. This is the largest gap in 3 years and 10 months since June 2018 (2.35 percentage points). This widening of the interest rate spread is due to rising interest rates. Last month, the average interest rate on household loans at banks exceeded 4%, reaching the highest level in 8 years. The interest rate spread based on new transactions recorded 1.70%, down 6bp from the previous month due to an increase in deposit interest rates on new transactions. However, the interest rate spread based on total outstanding balances widened further as existing loan interest rates rose significantly despite the increase in new deposit interest rates.

The interest rate spread has been steadily expanding. The spread, which was 2.21 percentage points in December last year, has continued to widen this year, surpassing 2.3 percentage points in March. The spread is expected to widen further in the first half of the year. Kyung-Hoe Koo, a researcher at SK Securities, said, "The interest rate spread has expanded by a total of 0.24 percentage points over the past nine months," adding, "Considering that market interest rates have steadily risen and bank interest rates tend to lag behind market rates, the interest rate spread at banks is expected to widen further at least during the first half of the year."

With the expansion of the interest rate spread based on outstanding balances, which is related to banks' profits, the banks' second-quarter earnings are also expected to be favorable. According to financial information provider FnGuide, the combined net profit forecast for the four major financial holding companies in the second quarter of this year is 4.3041 trillion KRW, expected to increase by 4.3% compared to the same period last year. Eun-Gab Kim, a researcher at IBK Investment & Securities, analyzed, "Recently, several banks have continued to raise deposit and savings interest rates, so the interest rate spread based on new transactions is likely to shrink further in the future. However, even if the spread based on new transactions shrinks, the spread based on outstanding balances is expected to continue expanding in the second quarter," adding, "Banks' net interest margin (NIM) will also rise compared to the first quarter, maintaining the trend of increasing interest income, and banks' favorable earnings will continue."

As the widening of the interest rate spread between deposits and loans at banks continues, disclosure of the interest rate spread is scheduled to be implemented from the fourth quarter of this year. According to the financial sector, financial authorities and major banks recently held a non-public meeting to discuss plans for disclosing the interest rate spread. It is known that in this meeting, banks and financial authorities reached a broad agreement to disclose the interest rate spread by bank monthly on the Bankers Association consumer portal site based on borrowers' personal credit scores. Considering the time required for revising related enforcement rules and system upgrades, it is expected that the disclosure can be implemented as early as the fourth quarter of this year.

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