Drying Up of Low-Cost Deposits at Commercial Banks Amid Interest Rate Hikes

Will It Also Affect the Interest Rate Spread on Loans and Deposits?

[Asia Economy Reporter Yu Je-hoon] Due to the impact of the base interest rate hike, low-cost deposits, known as the ‘core deposits’ of commercial banks, are drying up. As the neutral interest rate (theoretically appropriate base interest rate) is predicted to reach 2.25~2.50% by the end of this year, the outflow of these core deposits is expected to continue.

According to the financial sector on the 3rd, the balance of demand deposits at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) as of the end of last month was 703.6123 trillion won. This is an increase of 929.6 billion won compared to the previous month. Although this is a relatively good performance compared to the previous month’s decrease (about 8 trillion won), the recovery is minimal. Among these, the balance of savings deposits with frequent withdrawals and deposits (MMDA) decreased by 5.4762 trillion won to 115.5332 trillion won.

Low-cost deposits, which have the nature of idle funds in the market or reserve funds for investment, are classified as core deposits because their deposit interest rates are only around 0.1%. Since funds can be raised at a much lower interest rate compared to other deposit products or bond issuance, it significantly affects the interest margin, which is a major source of income for commercial banks.

With the base interest rate hike causing a downturn in asset markets such as real estate, securities, and virtual assets, customers are reducing their reserve funds for investment and subscribing to savings and installment savings products that guarantee higher interest rates than before. For example, during the same period, the balance of fixed savings and installment savings products offering annual interest rates of 2~3% increased by 19.9374 trillion won. Recently, internet-only banks and secondary financial institutions have also been competing for deposits by offering deposit products or parking accounts with high interest rates around 3%.

According to Kiwoom Securities, from January to April, low-cost deposits increased by only 2.1 trillion won, whereas trusts (40.2 trillion won), money market funds (MMF, 27.9 trillion won), and fixed deposits (17.1 trillion won) far exceeded this level. This trend differs from the steady increase in low-cost deposits over the past few years.

Some expect that as the base interest rate hike is likely to continue in the second half of the year, the interest margin between loans and deposits, which has supported bank earnings so far, may gradually narrow. Seo Young-soo, director at Kiwoom Securities, said in a recent report, "If the outflow of low-cost deposits accelerates after the second quarter, the increase in banks’ loan-deposit interest margin may reverse and decline after the second half."

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