Narrowing Loan-Deposit Interest Rate Gap Expected to Continue Slowing Next Year

[Asia Economy Reporter Song Hwajeong] Due to the disclosure of loan-deposit interest rate spreads and other factors, the interest rate spreads between deposits and loans at banks are gradually narrowing. This slowdown trend is expected to continue next year.

According to the Loan-Deposit Interest Rate Spread Comparison Disclosure on the Consumer Portal of the Korea Federation of Banks on the 21st, as of last October, the household loan-deposit interest rate spread (loan interest rate - savings deposit interest rate) excluding policy low-income financial products (Sunshine Loan Bank, Sunshine Loan 15, Safety Net Loan) of the four major commercial banks?KB Kookmin, Shinhan, Hana, and Woori Bank?narrowed to the 0% point (p) level for the first time since the disclosure in July. The spreads were 0.94%p for Hana Bank, 0.89%p for Shinhan Bank, 0.77%p for Woori Bank, and 0.67%p for KB Kookmin Bank.

The loan-deposit interest rate spreads of banks have been continuously slowing down this year. According to the Bank of Korea, the loan-deposit interest rate spread based on new transactions at banks decreased steadily from 1.8%p in January to 1.28%p in July. Although it rebounded to 1.54%p in August, it fell again to 1.33%p in September within a month.

The disclosure of loan-deposit interest rate spreads, which began in July, has influenced the reduction of these spreads. The average household loan-deposit interest rate spread of the four major banks slightly increased from 1.30%p in July to 1.31%p in August but then decreased for two consecutive months to 1.24%p in September and 0.82%p in October, falling into the 0%p range.

Considering the interest rate environment, it is difficult for the loan-deposit interest rate spread to widen again. According to NH Investment & Securities, the base rate hike and the rise in market interest rates simultaneously increase loan interest rates and funding costs. Since the loan repricing cycle is faster than that of deposits and savings (funding), the loan-deposit interest rate spread initially widens during the early stages of interest rate hikes, improving the net interest margin (NIM). However, recently, as the interest rate rise trend continues, funding costs such as bank bond rates and fixed deposit rates have risen rapidly, while loan interest rates have slowed in their increase due to loan regulation environments and social conditions. Junseop Jeong, a researcher at NH Investment & Securities, said, "This means a weakening of the loan-deposit interest rate spread and a slowdown in the rise of the net interest margin (NIM). Under the current interest rate environment, meaningful improvement in the loan-deposit interest rate spread seems difficult, and the weakening trend observed since the second half of this year is expected to continue next year."

After the disclosure of loan-deposit interest rate spreads, banks competitively raised deposit interest rates to reduce the spread, but recently, authorities have requested banks to refrain from raising deposit interest rates, which is expected to affect future loan-deposit interest rate spreads. According to the financial sector, financial authorities have urged banks to restrain competition in raising deposit interest rates due to concerns about fund concentration in banks. Recently, fixed deposits with interest rates in the 5% range have been appearing one after another at commercial banks. As deposit interest rates rise, the scale of fixed deposits at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) exceeded 800 trillion won as of the end of October. Minseok Kang, head of the Real Estate Research Team at KB Financial Group's Management Research Institute, said, "Under pressure to reduce the loan-deposit interest rate spread, commercial banks are responding by raising deposit interest rates rather than lowering loan interest rates, narrowing or even reversing the interest rate gap with secondary financial institutions such as savings banks. Due to liquidity deterioration in savings banks and mutual financial institutions that supply funds for real estate project financing (PF), responding to PF risks is becoming difficult."

[Image source=Yonhap News]

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