Bank NIM Continues Upward Trend in Q1 This Year

Net Interest Margin Rises 4bp from Previous Quarter... Upward Trend Continues
Significant Increase in Loan Interest Rates
This Year's Increase Likely Larger Than Last Year

[Asia Economy Reporter Song Hwajeong] The upward trend in banks' net interest margin (NIM) is estimated to have continued into the first quarter of this year. There are also forecasts that the increase in NIM this year will be greater than last year.

According to Korea Investment & Securities on the 6th, the bank NIM in the first quarter is estimated to have risen by 4bp (1bp=0.01 percentage point) compared to the previous quarter. This is an additional improvement following a 5bp increase in the fourth quarter of last year. The steep rise in consumer prices has led to an increase of 20-30bp in loan benchmark interest rates compared to the previous quarter. Baek Doosan, a researcher at Korea Investment & Securities, explained, "When market interest rates rise, NIM also rises. In March, the consumer price index (CPI) increased by 4.1% year-on-year, exerting upward pressure on market interest rates," adding, "The 3-month and 5-year average rates of negotiable certificates of deposit (CDs) and bank bonds, which serve as benchmarks for loan interest rates, rose by 29bp, 24bp, and 36bp respectively this quarter compared to the previous quarter." The net interest spread (NIS) based on balance for deposit banks in February was 2.27%, up 6bp from December last year and 8bp from the average monthly level in the fourth quarter of last year.

Net interest margin is calculated by dividing net interest income from interest-earning assets (operating income minus funding costs) by the average balance of interest-earning assets. It is considered a more accurate indicator of banks' profitability in the interest sector than the interest rate spread (average loan interest rate minus savings interest rate).

By bank, KB Kookmin Bank's NIM is estimated to have increased by 3bp compared to the previous quarter. For KB Kookmin Bank, the annual interest income sensitivity per 1bp change in NIM is 41.4 billion KRW, the highest in the industry. Won-denominated loans in the first quarter are estimated to have increased by 0.7% compared to the previous quarter. Household loans were sluggish as credit loans decreased despite an increase in jeonse deposit loans, but corporate loans showed solid growth across large corporations, small and medium-sized corporations, and individual business owners.

Shinhan Bank is estimated to have improved by 4bp, with won-denominated loans increasing by 1.1%. Woori Bank is expected to have improved by 5bp, the largest increase among the four major banks. Won-denominated loans are estimated to have increased by 1.3% due to a significant rise in loans mainly to small and medium-sized enterprises and large corporations.

Hana Bank's NIM in the first quarter is estimated to have increased by only 1bp. This limited increase is attributed to a base effect from one-time recovery of overdue interest in the previous quarter, but excluding this, the normal NIM increase is analyzed to be around 3bp. Won-denominated loans are expected to have increased by 1.2%.

The increase in NIM is expected to be greater this year than last year. Researcher Baek said, "In the second half of last year, both loan benchmark interest rates and spread rates acted as upward pressure on NIM, but this year, the loan benchmark interest rate will lead the NIM increase," adding, "As the rise in loan benchmark interest rates expands further in the first half of this year, the annual NIM is expected to improve by more than 10bp this year, surpassing last year's 6bp."