Bank Net Interest Margin Drops Sharply Despite High Lending Rates... Why?

Average NIM of Four Major Banks Drops to 1.55% in Q2
Down 0.04 Percentage Points Year-on-Year
Net Interest Margin Shrinks Amid Rising Funding Costs
Commercial Banks Accelerate Expansion of Non-Interest Income

The Net Interest Margin (NIM), a key profitability indicator for banks, is now in a clear downward trend. Although the benchmark interest rate is declining, funding costs remain high, leading to deteriorating profitability. With additional rate cuts expected in the second half of the year, a further contraction of NIM appears inevitable. In response, banks are seeking breakthroughs by expanding their non-interest income.

According to the financial sector on August 20, the average NIM for the four major commercial banks (KB Kookmin, Shinhan, Hana, and Woori) in the second quarter was recorded at 1.55%. This represents a decrease of 0.04 percentage points from the same period last year (1.59%), with all banks except Hana Bank showing a decline.

By bank, KB Kookmin Bank posted the highest NIM at 1.74%, followed by Shinhan Bank at 1.55%. These figures represent decreases of 0.11 percentage points and 0.07 percentage points, respectively, compared to the same period last year. Woori Bank's NIM was 1.45%, down 0.03 percentage points over the same period. Hana Bank was the only one to record an increase, with its NIM rising by 0.02 percentage points to 1.48% compared to 1.46% in the previous year.

NIM, considered a representative profitability indicator for banks, is calculated by subtracting interest expenses from interest income and dividing the result by total assets. A higher NIM means the banking sector has generated greater profits, while a lower NIM indicates deteriorating profitability.

The simultaneous decline in NIM across the banking sector, despite the maintenance of high lending rates in the face of falling benchmark rates, is attributed to shrinking loan margins and rising funding costs. The funding cost incurred from interest-bearing liabilities at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) last year was 58.1039 trillion won, up 6.10% from the previous year (54.761 trillion won).

The decrease in demand deposits, a major low-cost funding source for banks, has also contributed to the decline in NIM. Demand deposits at the five major commercial banks fell from 656.6806 trillion won in June to 639.1914 trillion won in July, a decrease of 17.4892 trillion won. As demand deposits-characterized by low funding costs-decline, banks are forced to rely more on bank bonds, which carry higher costs. In fact, the volume of bank bonds issued increased from 13.702 trillion won in June to 18.14 trillion won last month.

There are also forecasts that the trend of NIM contraction will intensify with further rate cuts ahead. This is due to the continued policy direction of lowering the benchmark rate and strengthening household debt management in the second half of the year. Nam Inwook, a researcher at DB Securities, analyzed, "With market interest rates continuing to fall and additional rate cuts expected in the second half, downward pressure on NIM is likely to persist for the time being."

Jeon Baeseung, a researcher at LS Securities, predicted, "While the decline in NIM may not be significant, a slowdown in interest income is inevitable," adding, "The drop in NIM is expected to be larger in the fourth quarter than in the third quarter."

Banks are already accelerating efforts to expand non-interest income in preparation for rate cuts. In fact, in the first half of the year, Hana Bank's non-interest income reached 740.6 billion won, up 74.4% from the same period last year. Shinhan Bank followed with 673.2 billion won, growing 65.7% over the same period, while Woori Bank increased by 7.8% to 660 billion won. KB Kookmin Bank posted 540.2 billion won, a 145% surge over the same period.

An official from a major commercial bank explained, "Banks are making multifaceted efforts, such as strengthening the WM (Wealth Management) division, to defend profitability in anticipation of benchmark rate cuts," adding, "Despite the contraction in NIM, the banking sector achieved record results in the first half of the year because it diversified its sources of non-interest income."

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