Despite Record-Breaking Performance, Bank Profitability Indicators Remain Mid-Level Among OECD Countries

Domestic Banks Achieve Record High Performance... Profitability Indicators Lower Than Other Countries
Loan-Deposit Interest Rate Spread Lower Compared to Other Countries
Household Loans Rapidly Increase, Growing Size Leads to Record Performance

Although domestic banks are posting record-high earnings, their profitability indicators are at a mid-level compared to countries belonging to the Organisation for Economic Co-operation and Development (OECD). Net Interest Margin (NIM) is the figure obtained by dividing the net income earned by financial institutions, including the interest margin between loans and deposits, by the total assets. It is a representative indicator showing a bank's profitability, with a higher value indicating greater bank earnings. Above all, the level of NIM is determined by the bank's interest margin (the difference between loan interest rates and deposit interest rates).

According to the report "The Relationship between Market Concentration and Net Interest Margin of Domestic Banks" released by the Financial Economics Research Institute on the 8th, the NIM of domestic banks was 1.6% as of 2021. This was the 18th lowest among 38 OECD countries. The United States (2.8%), New Zealand (2.1%), the United Kingdom (1.8%), and Australia (1.7%) had higher NIMs than South Korea. Countries with lower NIMs than South Korea included Canada (1.6%), Germany (1.0%), Japan, and France (0.5%).

Researcher Kangwon Lee said, "South Korea's net interest margin was lower than the OECD average of 1.8%," adding, "The net interest margins of domestic banks are not larger than those of major overseas banks."

The relatively low NIM is due to the interest rate spread between loans and deposits being lower than in major countries. Based on data from the International Monetary Fund (IMF), the Financial Services Commission analyzed the average interest rate spread over the past five years (2017?2021), finding that South Korea's was 2.01 percentage points. This was lower than Singapore (5.11 percentage points), Hong Kong (4.98 percentage points), Switzerland (2.98 percentage points), and Norway (2.18 percentage points). The Financial Services Commission evaluated that "the interest rate spread and net interest margin of domestic banks are relatively low compared to major countries."

As of the second quarter of this year, looking at the NIM of the five major commercial banks, KB Kookmin Bank and NH Nonghyup Bank recorded 1.85%. Shinhan Bank had 1.64%, Hana Bank 1.61%, and Woori Bank 1.59%. The interest rate spread between loans and deposits has been shrinking since financial authorities pressured banks. According to the Korea Federation of Banks, the average household interest rate spread for new loans in June among the five major commercial banks was 0.938 percentage points, marking a decline for four consecutive months.

Why can domestic banks achieve such record earnings despite having lower NIM and interest rate spreads than other countries? The financial industry analyzes that it is because the loan volume has increased massively in recent years. According to the Bank of Korea, the annual loan procurement volume of households in South Korea averaged 71 trillion won between 2010 and 2014, increased to an average of 115 trillion won between 2015 and 2019, and expanded to an average of 180 trillion won between 2020 and 2021. Although it decreased to 67 trillion won last year due to rising interest rates, the household debt-to-GDP ratio rose to 105.0% as of the fourth quarter of last year. This is the third highest among 43 major countries, following Switzerland (128.3%) and Australia (111.8%).

A financial authority official said, "Although the interest rate spread between loans and deposits has decreased, the enormous growth in household loans is pushing banks' profits to record highs," adding, "Interest rates have been rising, and as long as there are no defaults, banks' profits this year are expected to exceed those of last year."

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