Bond Stability... COFIX Hits 4%, Expected to Slow Down in December

Regular deposit competition has already slowed since December
Interest rate rise expected to significantly decelerate compared to before
Bank sector NIM anticipated to adjust from the second half of next year

[Asia Economy Reporter Minwoo Lee] The Cost of Funds Index (COFIX), which serves as the benchmark for variable-rate mortgage loans in the banking sector, has surpassed 4%, reaching an all-time high. However, the rate of increase has slowed compared to the previous month, and with regulatory pressure to curb competition in deposit interest rates causing high-interest deposit products to disappear from the market, there are expectations that the upward trend may ease somewhat starting next month.

According to the Bankers Association on the 17th, the COFIX based on new contracts for November, announced on the 15th, rose by 0.36 percentage points from the previous month to 4.34%. This is the highest level since the index was first published in January 2010. However, the increase is smaller than the 0.58 percentage point rise recorded the previous month.

The COFIX based on outstanding balances stood at 3.19%, and the COFIX based on new outstanding balances was 2.65%, each up 0.34 and 0.29 percentage points respectively from the previous month.

COFIX is the weighted average interest rate of funds raised by eight major commercial banks including NH Nonghyup, Shinhan, Woori, SC Jeil, Hana, Industrial Bank of Korea, KB Kookmin, and Citibank Korea. It reflects the interest rates of deposit products such as actual deposits, savings, and bank bonds handled by banks.

However, the upward trend in interest rates is expected to slow from the December COFIX, which will be announced in January next year. Despite the base rate rising by 0.25 percentage points to 3.25% on the 24th of last month, the interest rates on December fixed deposits did not increase. In fact, the 5% range fixed deposits that commercial banks competitively offered have disappeared. With the Bank of Korea’s measures to stabilize the short-term financial market, the corporate bond market has also stabilized, leading to a decline in financial bond interest rates. The 5-year financial bond (unsecured, AAA), which serves as the benchmark for fixed-rate mortgages, rose to 5.467% on October 21 but fell to 4.524% as of the 16th. This is the first time since September 21 that the 5-year financial bond interest rate has dropped to the 4.5% range. Considering this trend, it is analyzed that the rise in COFIX based on new contracts will significantly slow compared to before.

However, since an additional base rate hike is expected in January next year, the upward trend in banks’ net interest margin (NIM) is also anticipated to continue into the first quarter of next year. Lee Byung-geon, a researcher at DB Financial Investment, said, "When the base rate hike stops and the rise in new funding costs halts, the funding costs will rise belatedly, causing NIM to show an adjustment trend. If an adjustment in NIM appears in the second half, banks with a high proportion of fixed deposits, which have seen a sharp rise in NIM so far, are likely to experience a significant adjustment in NIM."

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