Impact of Rising Interest Rates on Bank Soundness

[Asia Economy Reporter Song Hwajeong] As interest rates continue to rise, borrowers' burdens are expected to increase, raising concerns about the negative impact on banks' soundness. However, it is analyzed that borrowers' interest repayment burdens are more sensitive to the economy than to interest rates, and the current interest rates are not high enough to burden banks' soundness.

According to SK Securities on the 21st, since 2001, the correlation between the fixed non-performing loan ratio of domestic banks and interest rates (government bonds) has been low. Although there were occasional periods when the two indicators moved together, such as in 2004, 2009, and 2013-2014, no significant trend was observed. Koo Kyunghoe, a researcher at SK Securities, explained, "The correlation between delinquency rates and interest rates was also not high," adding, "Above all, the fixed non-performing loan ratio and delinquency rates of domestic banks have steadily declined, so there was little possibility of being affected by interest rates."

Recently, borrowers' interest burdens are expected to increase due to rising interest rates. The newly issued amount-based COFIX, which serves as the benchmark for variable-rate mortgage loans, rose by 0.02 percentage points from the previous month to 1.72% last month, leading major commercial banks to raise their variable mortgage loan rates by 0.02 percentage points from last week. Following the Bank of Korea's increase of the base rate from 1.25% to 1.5% on the 14th, further hikes are expected throughout the year, continuing the upward trend in interest rates. Researcher Koo said, "Most Korean borrowers have variable interest rates, so theoretically, rising interest rates increase the burden of interest repayment," adding, "Therefore, many think that non-performing loans will increase when interest rates rise, but delinquency does not necessarily increase during periods of rising rates." He continued, "Interest rate hikes also signal economic recovery, so even if borrowers' interest repayment amounts increase during such periods, their repayment capacity often improves," emphasizing, "Borrowers' interest repayment burdens are more sensitive to the economy than to interest rates."

Delinquency rates of domestic banks are also at historically low levels. At the end of February, the delinquency rate on won-denominated loans at domestic banks stood at 0.25%, remaining in the 0.2% range. The historically low delinquency rate was influenced by a distortion effect due to maturity extensions and repayment deferrals for small business loans. Researcher Koo stated, "Even if some loans that were classified as normal during the pandemic due to delinquency deferrals are reclassified as non-performing loans, it is not a significant issue that would cause a change in the trend."

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