[2022 National Audit] Rep. Kim Sung-joo: "Financial Companies Doubled Interest Income in 5 Years by Widening Loan-Deposit Interest Rate Spread"

Financial Authorities Must More Actively Regulate Interest Profiteering in the Financial Sector

Kim Sung-joo, Member of the Democratic Party of Korea./Photo by Yoon Dong-joo doso7@

[Asia Economy Reporter Sim Nayoung] The interest income of the five major financial holding companies (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) has nearly doubled over the past five years. According to data submitted by the Financial Supervisory Service to Kim Sung-joo, a member of the National Assembly's Political Affairs Committee from the Democratic Party of Korea, interest income increased from 28.4 trillion won in 2017 to 44 trillion won in 2021.

The proportion of interest income within total profits, which combine interest and non-interest income, rose from 81.4% in 2020 to 82.5% in 2021. Rep. Kim stated, "The high proportion of interest income is evidence that financial authorities need to more actively regulate behaviors akin to interest profiteering in the financial sector. Given that banks' profitability can fluctuate significantly due to interest rate changes and loan regulations, it is necessary to redefine the rules for performance-based pay (or compensation), reduce excessive bonuses, and manage the scale of loan loss provisions to maintain them at appropriate levels."

The Increase in Loan Interest Rates Exceeds That of Deposit Interest Rates

Over the past two years, most banks have seen a significant widening of the interest rate spread between loans and deposits (loan interest rate minus deposit interest rate), which is attributed to the increase in loan interest rates being greater than that of deposit interest rates.

Based on data received by Rep. Kim from the Financial Supervisory Service comparing the Bank of Korea's base rate, the third and fourth quarters of 2020 were a period of rate cuts due to the economic downturn caused by COVID-19, with the Bank of Korea lowering the base rate to a historic low of 0.5%. However, domestic banks lowered deposit interest rates more sharply than loan interest rates during this period.

Furthermore, from August 2021, when the Bank of Korea began raising the base rate in earnest, through June of this year, the base rate continued to rise, and deposit banks increased loan interest rates more sharply than deposit interest rates.

With household debt rising due to COVID-19 and higher loan interest rates increasing the risk of bankruptcy and delinquency among ordinary citizens, the five major domestic commercial banks recorded a net income of 7.3 trillion won in the first half of this year alone, and interest income is expected to total 18.6009 trillion won.

Despite Financial Authorities' Recommendations, Banks' Dividend Payout Ratio at 39%

Rep. Kim also pointed out the high dividend payout ratio of banks. While a typical dividend payout ratio is around 20-30% of net income, current banks' payout ratios approach 40%.

Analyzing the dividend status of banks based on data from the Financial Supervisory Service, Rep. Kim found that in 2019 and 2020, despite a significant decrease in net income, banks actually increased their dividends substantially. Last year, financial authorities even recommended temporarily limiting banks' dividend payout ratios to within 20% due to the COVID-19 crisis and global economic fluctuations, but the payout ratio last year reached 38.9%.

Rep. Kim said, "It is problematic that banks have earned stable profits through 'interest profiteering' without fierce competition regardless of economic conditions, so improvements are necessary. For the recently implemented disclosure system on interest rate spreads to be effective, banks' application of interest rates in response to rate changes should be disclosed in more detail and thoroughly supervised."

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