[0.5% Interest Rate Era] Secondary Financial Sector Faces Profitability 'Red Light'... Will 0% Range Savings and Deposits Emerge?

Deposits Have Piled Up
But No Place to Lend, Frustrating
Low Loan-to-Deposit Ratio Raises 'Negative Margin' Concerns

[Asia Economy Reporter Kim Min-young] The Bank of Korea's base rate cut has triggered a red light for the profitability of savings banks and mutual finance sectors.

On the 28th, according to the financial sector and the Bank of Korea, the Monetary Policy Committee abruptly lowered the base rate by 0.25 percentage points from 0.75% to 0.50%. This is the second rate cut this year following the 'big cut' of 0.5 percentage points on March 17. It is the lowest base rate in South Korea's history.

The savings bank industry had partially adjusted deposit interest rates before the Bank of Korea's rate cut, but further reductions are expected. Until now, savings banks attracted deposit customers by offering relatively higher interest rates compared to commercial banks. However, currently, there are few suitable borrowers, raising concerns about 'negative interest margins.'

Earlier, SBI Savings Bank lowered its deposit interest rate from 2.0% per annum to 1.9%. From the 1st of next month, the interest rate for the non-face-to-face deposit and withdrawal product, Saida Bank, will also be reduced from 2.0% to 1.7%.

OK Savings Bank also cut deposit interest rates by 0.2 percentage points on major products such as OK Safe Fixed Deposit. Welcome Savings Bank and Eugene Savings Bank lowered deposit product interest rates by 0.15 and 0.1 percentage points, respectively.

The reason savings banks took preemptive measures to lower deposit interest rates is that after the base rate cut in March, deposit demand that left commercial banks flowed into savings banks. According to the Financial Supervisory Service, savings banks' deposit liabilities (deposit balances) increased by 811.9 billion KRW as of March this year compared to the end of last year. Compared to March last year, deposits increased by more than 7.3 trillion KRW over one year.

They had accumulated deposits expecting loan demand to increase due to the spread of the novel coronavirus infection (COVID-19), but loans did not go out as expected. Also, companies and individuals coming to borrow loans were reported to be 'at risk of default' due to low credit ratings or existing loans, resulting in many cases of loan rejections. Industry insiders agreed that this is a "speed adjustment to avoid rapidly increasing deposit balances."

A savings bank official said, "Deposits are sufficiently accumulated, but loans are not being issued, increasing concerns about 'negative interest margins.'" According to the industry, the current loan-to-deposit ratio (the ratio of loan balances to deposit balances) of major savings banks is said to be in the 90% range. Financial authorities recommend savings banks maintain a loan-to-deposit ratio of 110%, but it remains at a much lower double-digit level. If the loan-to-deposit ratio is too high, there is a risk that savings banks could be in danger if loans become non-performing, but if it is too low, profitability becomes an issue.

Loan interest rates are falling while deposit interest rates are rising, creating this phenomenon. According to the Bank of Korea, last month, the loan interest rate at savings banks fell by 0.39 percentage points from 10.18% to 9.79% in one month, while deposit interest rates slightly increased from 1.94% to 2.00% during the same period. This means the loan-deposit margin has decreased.

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The same applies to mutual finance sectors such as Suhyup, Shinhyup, and Saemaeul Geumgo. In mutual finance sectors, both loan and deposit interest rates fell simultaneously. Loan interest rates decreased by 0.01 to 0.11 percentage points, and deposit interest rates also dropped by 0.13 to 0.31 percentage points.

These mutual finance sectors tend to attract deposits well because interest rates on fixed deposits and others are higher than banks, but since they operate lending businesses based on city, county, and district areas, there are few borrowers, making it difficult to generate profits. In particular, local small-town cooperatives are reportedly facing management difficulties due to deficits.