Hanhwa Investment & Securities: "Temporary Decline in Loan-Deposit Interest Rate Spread... Bank Earnings Improvement Trend Continues"

[Asia Economy Reporter Minji Lee] Despite the decline in the July deposit-loan interest rate spread (NIS), there is an analysis that the banks' net interest margin (NIM) will continue to rise.

According to the financial industry on the 31st, the deposit-loan interest rate spread based on the balance of deposit banks in July was 2.38%, down 2bp (1bp=0.01 percentage point) from the previous month. This was largely due to the re-determination of deposit interest rates following the 50bp base rate hike last month, and seasonality causing a 5.2% decrease in low-cost deposits compared to the previous month.

However, the decline in NIS is considered a temporary factor, and it is expected to rise again in August and September. Baek Doosan, a researcher at Korea Investment & Securities, said, “This is because the upward trend of major indicators that serve as the base rates for loans continues,” adding, “The average 3-month bank bond and CD rates for the third quarter rose by 79bp and 72bp respectively compared to the second quarter average, and the COFIX based on new transaction amounts and new balances in July are 83bp and 30bp higher than the previous quarter average.”

Accordingly, the upward trend in NIM (net interest margin) is expected to continue. The third-quarter NIM is projected to rise by 6?7bp compared to the previous quarter, and the annual NIM is expected to improve by 20bp this year and 11bp in 2023.

In the market, expectations for an increase are lowered due to debates over the peak of market interest rates, expansion of time deposits, reduction of loan spread, and the full-scale repricing of funding costs, but these concerns are considered premature. Researcher Baek explained, “Concerns about a long-term decline in market interest rates are premature, and short-term market interest rates, which have a greater impact on NIM than long-term rates, have significant room to rise,” adding, “The degree of profitability deterioration due to deposit and loan competition is smaller compared to the positive effect of rising market interest rates.”

As the NIM rise continues, the attractiveness of banks' earnings improvement is expected to be highlighted. Banks have a sensitivity where NIM rises by 3?4bp for every 25bp increase in interest rates, and the actual interest rate hike in the third quarter is expected to be between 75?100bp. Researcher Baek said, “Even considering the expansion of time deposits and the decline in loan spread, the expected NIM increase of 6?7bp in the third quarter is a sufficiently conservative figure,” and added, “Attention should be paid to earnings improvement centered on NIM and the high dividend yield of 7?9%, rather than concerns about the peak of interest rates.”

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