[0.5% Interest Rate Era] Banks Hit Hard by COVID-19 and Record Low Interest Rates... Trouble on Top of Trouble

[Image source=Yonhap News]

[Asia Economy Reporter Kangwook Cho] With the unprecedented 'ultra-ultra low interest rate era' arriving alongside the novel coronavirus disease (COVID-19) crisis, the financial sector is facing deep concerns. Not only has the net interest margin, which accounts for the absolute majority of bank revenue from interest rate differences, sharply decreased, but an increase in non-performing loans is also expected due to the business difficulties of small and medium-sized enterprises and self-employed individuals caused by the COVID-19 aftermath. On top of this, following last year's overseas interest rate-linked derivative-linked fund (DLF) and Lime Asset Management fund insolvency incidents, it has become difficult even to increase non-interest income.

According to the financial sector on the 28th, the Bank of Korea's Monetary Policy Committee abruptly lowered the base interest 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 interest rate in South Korea's history.

Earlier, due to the March base rate cut and the government's financial support measures, the average deposit and loan interest rates in the banking sector in April broke records again at all-time lows. This is the lowest level since statistics began being compiled in January 1996. The phenomenon of deposit withdrawal is accelerating. As the 0% interest rate era fully sets in, about 2.7 trillion KRW was net withdrawn from time deposits at the five major banks?KB Kookmin, Shinhan, Woori, Hana, and NH Nonghyup?in April alone. Additionally, the balance of regular savings deposits at these banks decreased by nearly 1.6 trillion KRW over the first four months of this year. Analysts attribute this money movement to households' reduced saving capacity due to the COVID-19 impact and some funds moving into the stock market.

Accordingly, domestic banks' net income in the first quarter of this year recorded 3.2 trillion KRW, a decrease of 700 billion KRW (17.8%) compared to the same period last year (4 trillion KRW). The net interest margin (NIM) for the first quarter also hit a record low of 1.46%. With further base rate cuts expected, the outlook is that earnings will worsen even more in the second quarter.

The bigger problem is that it is not easy to find a breakthrough in the non-interest income sector. This is due to the dampened investment sentiment following strengthened regulations on private equity funds after last year's large-scale principal losses in the DLF incident and Lime Asset Management's redemption suspension incident. The increased volatility in financial markets caused by COVID-19 has also contributed to rising losses related to securities, derivatives, and foreign exchange.

In fact, the banking sector's non-interest income in the first quarter of this year was 1.7 trillion KRW, showing a slight decline of 21.3 billion KRW (1.2%) compared to the same period last year, indicating some resilience. However, looking deeper, securities-related income (800 billion KRW) decreased by 200 billion KRW. In particular, the non-interest income of the five major commercial banks, which account for 60% of all banks, dropped by 239.9 billion KRW (23.2%) during the same period, raising alarms.