Deposit Rates on the Decline

Several major South Korean banks, including Hana Bank, Woori Bank, and Shinhan Bank, have initiated reductions in deposit interest rates this week.These adjustments reflect broader economic pressures and regulatory scrutiny concerning household loan management.

Hana Bank,as an example,has lowered the base interest rate on specific deposit products,such as the 369 regular deposits (12 months) and Happy Knowhow pension deposit (12 months or more to 24 months),by 0.30 percentage points, bringing the rate down from 2.80% to 2.50% annually.

Woori Bank implemented similar changes on March 24th, decreasing the interest rate for their first-time deposit product. Rates for terms of 6 to 24 months were adjusted from 2.30% to 2.0%, while rates for 24 to 36 months were lowered from 1.9% to 1.8% per year.

Shinhan Bank followed suit, planning to reduce interest rates on a range of deposit products by up to 0.25 percentage points starting March 28th.This encompasses 14 types of deferred deposits (regular deposits), two market deposits, and 21 reserve deposits.

Banks Cite Base Rate Reduction and Market Conditions

A representative from shinhan Bank explained that these adjustments are a necessary response to the reduction in the base rate and the overall decline in market interest rates. This aligns with the broader trend observed across the South Korean financial landscape.

As of March 25th, the highest interest rates for representative deposit products (one-year term) from major banks like KB Kookmin, Shinhan, Hana, Woori, and NH Agricultural Cooperatives ranged from 2.80% to 3.10% per year, according to data published on the Bank Association’s consumer portal. This represents a decrease compared to rates from approximately two weeks prior (March 8th), which ranged from 2.90% to 3.30% per year.

Loan Management Pressures Limit Loan Interest Rate Reductions

Despite the downward trend in deposit rates,banks face challenges in rapidly reducing loan interest rates. This is primarily due to increased scrutiny from financial authorities regarding household loan management.The government has expressed concerns about potential instability in the housing market, fueled by lower interest rates and the easing of land transaction permits.

On March 19th, the government announced measures to stabilize the housing market and urged the financial sector to strengthen voluntary management of housing loans. Lee Bok-hyun, director of the Financial Supervisory Service, issued a warning on march 20th, stating that financial institutions exceeding their household loan management targets would face inspections and management plan reviews.

Net Interest Margin Expansion Expected

The divergence between deposit and loan interest rates is expected to widen the net interest margin (NIM) for banks in the short term. According to the Bank of Korea’s weighted average interest rate statistics, the difference between the new loan rate and savings reception rate for deposit banks in january was 1.46 percentage points, a 0.03 percentage point increase from the previous month. This trend suggests that banks may benefit from the current interest rate surroundings, even as depositors see lower returns.

The current economic climate presents both opportunities and challenges for South Korean banks. While lower deposit rates can improve profitability, managing loan growth and navigating regulatory pressures remain critical priorities.

Financial Analyst, Archnetys Research