The Good Old Days of Ghana... "Bank NIM Decline to Accelerate"

July Loan-Deposit Interest Rate Spread 2.93%... 21bp Decrease from Previous Month
Criticism of Interest Profit and Disclosure System Burden Banks
Increase in Time Deposits and Decrease in Demand Deposits Raise Funding Costs

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] There is a growing outlook that the timing of the decline in banks' net interest margin (NIM) could come sooner than expected. This is attributed to the difficulty in raising loan interest rates amid regulatory criticism of 'interest profiteering' and the introduction of a loan-deposit interest rate spread disclosure system, coupled with the continued sharp decline in low-cost demand deposits.

According to the weighted average interest rate trends of deposit banks in July from the Bank of Korea on the 4th, the interest rate on new savings deposits (excluding demand deposits) was 2.93%, up 52 basis points (1bp=0.01%) from the previous month. Meanwhile, the average loan interest rate during the same period rose by only 31bp to 4.21%. As a result, the loan-deposit interest rate spread narrowed by 21bp compared to the previous month.

The loan-deposit interest rate spread, which peaked in February and turned downward from March, has been increasingly shrinking. From March to May, it fell by 4-5bp each month, but in June it sharply dropped by 17bp. The decline further accelerated in July.

The financial authorities' pressure on 'interest profiteering,' which intensified from May to June, appears to have had an impact. On June 20, at a meeting with heads of commercial banks, Lee Bok-hyun, Governor of the Financial Supervisory Service, stated, “There is a tendency for the loan-deposit interest rate spread to widen during periods of rising interest rates, leading to growing criticism of excessive profit-seeking.” Following this, banks began to introduce measures to reduce interest burdens, such as lowering mortgage loan rates.

Additionally, the loan-deposit interest rate spread disclosure system introduced on the 22nd of last month has added to the pressure. Most banks raised deposit interest rates immediately after the Bank of Korea's Monetary Policy Committee raised the base rate on the 25th of last month. Notably, they increased rates by more than the 0.25 percentage point (p) hike in the base rate. Internet-only banks like KakaoBank and K Bank, which had relatively larger loan-deposit interest rate spreads compared to other banks, raised rates by up to 0.8%p. Major commercial banks such as Woori Bank (up to 0.5%p) and KB Kookmin Bank (up to 0.4%p) also increased deposit interest rates beyond the base rate hike.

As fixed deposit interest rates rise and low-cost deposits such as demand deposits sharply decline, the upward trend in banks' net interest margin (NIM) is expected to slow down faster than anticipated. The balance of demand deposits at the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?plummeted by 50.9843 trillion KRW from 710.6651 trillion KRW in March to 659.6808 trillion KRW last month. Conversely, during the same period, fixed deposits increased by 73.9035 trillion KRW from 694.6399 trillion KRW to 768.5434 trillion KRW. This trend precisely began when the Bank of Korea started consecutive base rate hikes.

Choi Jung-wook, a researcher at Hana Securities, said, “An increase in fixed deposits and a decrease in demand deposits ultimately raise banks' funding costs,” adding, “The future rise in banks' NIM will slow significantly compared to before, and the NIM could turn downward as early as the first half of next year.”

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