Financial Sector Faces Emergency as Core Deposits and Other Inflows Decline

Banks Retry 'Moim Tongjang'... Secondary Financial Institutions Counter with Higher Deposit Rates

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Due to the decline in market interest rates, the financial sector is struggling with the outflow of deposit funds such as core deposits. Banks are competing to secure deposits from corporations and local governments, while secondary financial institutions like mutual savings banks are responding by raising deposit interest rates to attract funds.

According to the Bank of Korea on the 23rd, as of the end of last month, the balance of demand deposits in domestic banks was 858.8 trillion won. This represents a decrease of about 1.7% (14.8 trillion won) compared to the previous month and 14.6% (147.3 trillion won) compared to the previous year.

Demand deposits, which typically offer an interest rate of 0.1?0.3% annually, are considered core deposits by banks. Considering that the 1-year AAA-rated bank bond interest rate is 3.774% and the interest rate for 1-year fixed deposits is in the low to mid-3% range, banks can raise funds at a relatively low cost, which significantly impacts the net interest margin (NIM).

Looking at the trend of demand deposits in the banking sector this year, after a record decrease of 59.5 trillion won in January, there was an increase in February (21.4 trillion won) and March (12.5 trillion won), but the trend turned downward again entering April. Last year, the sharp rise in the base interest rate and deposit interest rates led to a steep outflow of core deposits, and this year the downward trend continues. The biggest cause of the decrease in core deposits is seasonal factors. It is a period of high corporate cash demand due to dividend payments and value-added tax payments, and local governments have also increased their expenditures, which had a significant impact.

Another factor is the emerging 'money move' phenomenon, where idle funds previously held in banks are flowing into asset markets such as stocks and real estate due to the decline in market interest rates. A Bank of Korea official explained, "For households, the fluctuation in demand deposits is not yet significant," but added, "As the interest rates on demand deposits and the returns on various investment products diverge, there is a trend of funds moving into stocks, funds, and deposits."

Secondary financial institutions such as savings banks are also expressing difficulties due to the outflow of deposit funds. According to the Bank of Korea, as of March, the deposit balance of mutual savings banks was 116.0431 trillion won, a decrease of 2.9098 trillion won compared to the previous month (118.9529 trillion won). The deposit balance of savings banks has been steadily declining since January this year.

The deposit balance of mutual financial institutions also showed a slight increase as of the end of March, reaching 472.3636 trillion won compared to the previous month, but there were significant differences by institution. In particular, Saemaeul Geumgo, which had been subject to crisis rumors, saw more than 3 trillion won withdrawn in one month. Saemaeul Geumgo's deposit balance as of the end of March was 262.1427 trillion won, down 3.1273 trillion won from the previous month (265.2700 trillion won).

Financial Sector Fighting for Deposit Attraction

Since the outflow of core deposits is likely to lead to a decline in NIM, commercial banks are focusing on attracting core deposits. A financial sector official said, "If low-cost deposits decrease, NIM will inevitably shrink, so banks are concentrating on attracting funds from corporations and local governments to secure core deposits."

Banks are reattempting 'group accounts,' which were previously the domain of internet-only banks. KB Kookmin Bank launched the 'KB Kookmin General Affairs Service,' allowing existing accounts to be used as group accounts, and Hana Bank has completed the trademark application process for 'Hana Group Account.' Woori Bank is also reportedly preparing to launch a related service.

Secondary financial institutions are maintaining high interest rate competitiveness to prevent deposit outflows. While major commercial banks in the primary financial sector have gradually eliminated deposit products with interest rates in the 4% range since early this year, secondary financial institutions continue to offer high rates. OK Savings Bank offers up to 4.31% (12-month basis) on its OK Safe Fixed Deposit, and Welcome Savings Bank's e-Fixed Deposit offers up to about 4.20%. Additionally, Daol Savings Bank and Pepper Savings Bank have launched 'Fi Asset Management Account' and 'Pepper Parking Account 3,' respectively, which are parking accounts offering up to 3.8% annual interest. According to the Korea Federation of Savings Banks, the average deposit interest rate for 12-month maturity products was 3.95% as of the 22nd.

The situation in mutual financial institutions is similar. According to the Bank of Korea, the average interest rate for 12-month fixed deposits in mutual financial institutions was about 4.17% as of March. Saemaeul Geumgo offered 4.54%, and credit unions offered 4.43%. Even last month, when the representative deposit products of the four major banks had interest rates around the base rate (3.5%), Saemaeul Geumgo's average fixed deposit interest rate (12-month basis) was about 4.4%. A mutual financial institution official said, "We maintain relatively high-interest products compared to commercial banks, and as various crisis rumors have subsided, we expect to gradually recover the average deposit balance to normal levels in May."

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