KOFIX and Bank Bonds Rise... The Core of the Sharp Increase in Loan Interest Rates

Rising COFIX Amid Deposit Interest Rate Competition
Household Loan Reduction Expected Due to Bond Market Tightening

[Asia Economy Reporter Minwoo Lee] An analysis suggests that the rise in COFIX (Cost of Funds Index) and bank bond yields is a factor that causes loan interest rates to surge more than the base interest rate hike.

On the 12th, Kiwoom Securities made this assessment. First, it pointed out that at this point, financial stability requires slowing down the speed of market liquidity movement caused by the outflow of low-cost deposits from banks. Last month, low-cost deposits at the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?decreased by 13.6794 trillion KRW compared to the previous month. This follows a 36 trillion KRW decrease in the prior month, indicating a rapid decline. Although seasonal factors are involved, it is interpreted as an effect of the somewhat slowed increase in fixed deposit interest rates. Kiwoom Securities researcher Youngsoo Seo explained, "Considering that the average increase during the same period over the past four years was about 4 trillion KRW, last month's fund outflow is very unusual and excessive."

Competition among banks for deposit interest rates is expected to continue for the time being. As a result, the outflow of bank funds is anticipated to accelerate beyond this month. Researcher Seo said, "Since the Bank of Korea raised the base interest rate last month, market interest rates have been rising sharply due to factors such as exchange rate declines and instability in the fund and bond markets. Additionally, savings banks and Saemaeul Geumgo are expected to aggressively raise rates. In the process of intensified deposit competition, non-bank institutions with poor funding conditions have no choice but to actively raise interest rates."

The bond market is also tightening. Since last month, after the reversal of long-term government bond yields rising, foreign investors have been net sellers of bonds, showing signs of bond market tightening. Seo noted, "Considering that capital companies had difficulty issuing bonds even when foreign investors' net bond purchases eased market tightness, it is highly likely that funding conditions for independent capital companies with low credit ratings will become more difficult for the time being. With the real estate market downturn increasing the risk of real estate project financing (PF) defaults, the prolonged liquidity conditions of savings banks and capital companies that led high-risk PFs will be an important variable for future fund and bond markets."

Ultimately, the competition among banks for interest rates and the rise in bond yields caused by the outflow of low-cost deposits from banks can act as decisive factors increasing the debt risk of domestic economic agents. This is because the competition in deposit interest rates and the rise in bond yields accelerate the increase in COFIX and bank bond yields, which serve as benchmarks for variable-rate loans. In fact, when the base interest rate rose by 1.5 percentage points over one year, COFIX increased by 1.95 percentage points, and the 6-month bank bond yield rose by 2.1 percentage points. As a result, new household loan interest rates rose by 1.54% during the same period, and outstanding loan interest rates, which are reflected with a time lag, also increased by 0.9%.

Researcher Seo diagnosed, "As bond market tightening prolongs, large corporations and high-quality small and medium enterprises are continuously increasing fund procurement through banks, mainly via credit lines, causing banks' risk-weighted assets to increase rapidly and inevitably leading to a reduction in household loans. For borrowers with excessive debt relative to repayment capacity, not only the rise in loan interest rates but also the reduction in bank lending will be a considerable burden."

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