Deposit Rate Hikes Narrow Loan-to-Deposit Spread at Major Banks After Four Months

Household Deposit-Loan Interest Rate Spread at 1.46% in September
"Public Cannot Accept Widening Spread," Authorities Warn Just a Month Ago
Banks Raise Deposit Rates in Unison as Market Interest Rates Climb

The interest rate spread between deposits and loans at major commercial banks narrowed for the first time in four months. The upward trend halted just one month after a public warning from financial authorities. This was largely due to most banks raising deposit interest rates in response to rising market rates. Some banks also lowered household loan rates, including for mortgage loans.

According to the Korea Federation of Banks on November 3, the average household deposit-loan interest rate spread (based on new transactions) at the five major banks (KB Kookmin, Shinhan, Woori, Hana, and NH Nonghyup) in September was 1.46 percentage points, down 0.02 percentage points from the previous month.

By bank, the interest rate spread narrowed at four banks except for Woori Bank. Specifically, Hana Bank (1.44 percentage points → 1.37 percentage points), KB Kookmin Bank (1.44 percentage points → 1.42 percentage points), Shinhan Bank (1.50 percentage points → 1.46 percentage points), and NH Nonghyup Bank (1.66 percentage points → 1.60 percentage points) all saw declines. In contrast, Woori Bank’s spread increased slightly from 1.38 percentage points to 1.44 percentage points.

The household deposit-loan interest rate spread is calculated by subtracting the interest rate on savings deposits from the household loan interest rate. The wider the spread, the greater the interest income for banks. The spread at the five major banks had narrowed to an average of 1.35 percentage points in May this year, but reversed course to 1.42 percentage points in June and climbed to 1.48 percentage points in July and August. In early September, Kwon Daeyoung, Vice Chairman of the Financial Services Commission, publicly pointed out, "The deposit-loan margin perceived by the public is higher than expected, and if this continues, it will be difficult for the public to accept."

The narrowing of the spread just one month after the public warning by authorities was mainly due to most banks raising deposit rates in September. According to the Bank of Korea, the average interest rate on time deposits at deposit banks in September was 2.52% per annum, up 0.03 percentage points from the previous month. This marked the first increase in a year. Accordingly, the average deposit rate at the five major banks also rose from 2.49% to 2.52%. By bank, Hana Bank (2.51% → 2.58%) and Shinhan Bank (2.53% → 2.60%) recorded the largest increases of 0.07 percentage points each.

The main reason most banks raised deposit rates was the rise in market interest rates. The average interest rate on one-year bank bonds in September was 2.54%, and on six-month bonds, 2.55%, both up 0.03 percentage points from the previous month. This contrasts with August, when the changes were -0.01 percentage points and 0.01 percentage points, respectively.

Despite the rise in market interest rates, household loan rates, including mortgage loans, remained at the previous month’s level, which also contributed to the narrowing of the spread. According to the Bank of Korea, the average household loan rate at deposit banks in September was 4.17% per annum, and the mortgage loan rate was 3.96%, both unchanged from the previous month. By bank, NH Nonghyup Bank’s household loan rate fell by 0.04 percentage points to 3.95%, while Hana Bank (3.95%) and KB Kookmin Bank (3.95%) remained unchanged. Hana Bank’s mortgage loan rate also dropped from 4.08% to 4.02%.

It is uncertain whether this narrowing trend will continue. Market interest rates continued to rise in October, prompting banks to further raise deposit and savings rates. However, the five-year bank bond rate, which serves as the benchmark for mortgage loans, also rose rapidly. Banks have simultaneously raised their highest deposit rates to 2.60%. However, the five-year bank bond rate, the benchmark for mortgage loans, also increased by 0.09 percentage points in October compared to the previous month. A financial industry official said, "There is a trend toward stronger deposit defense as market rates rise and the year-end approaches," but added, "Given household loan volume management and the continued rise in market rates, mortgage loan rates could also increase."

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