Bank Maintains Upward Trend in Net Interest Margin

[Asia Economy Reporter Song Hwajeong] Banks' net interest margin (NIM) continues to rise. The upward trend was also seen in the first quarter of this year, leading to forecasts that the annual NIM increase this year will be greater than last year.

According to the financial sector on the 10th, securities firms estimate that banks' NIM in the first quarter of this year rose by 3 to 4 basis points (1bp=0.01 percentage point) compared to the previous quarter.

Korea Investment & Securities predicted a 4bp increase. This is due to the sharp rise in consumer prices, which caused the loan benchmark interest rate to increase by 20 to 30bp compared to the previous quarter. Baek Doosan, a researcher at Korea Investment & Securities, explained, "When market interest rates rise, NIM also rises. The March Consumer Price Index (CPI) increased by 4.1% year-on-year, exerting upward pressure on market interest rates," adding, "The average 3-month and 5-year rates of negotiable certificates of deposit (CDs) and bank bonds, which serve as the basis for loan interest rates, rose by 29bp, 24bp, and 36bp respectively this quarter compared to the previous quarter."

Hana Financial Investment estimated an average increase of 3bp compared to the fourth quarter of last year. Choi Jungwook, a researcher at Hana Financial Investment, said, "Although net income growth may slow somewhat due to sluggish household loans, won-denominated loans increased by about 1.0% on average in the first quarter, and with banks' NIM rising by more than 3bp on average in both the fourth quarter of last year and the first quarter, the trend of increasing recurring interest income will continue."

KB Securities estimated that banks' NIM in the first quarter was 1.6%, up 3.3bp from the previous quarter. Kang Seunggeon, a researcher at KB Securities, analyzed, "Although non-interest income will decrease due to non-cash foreign exchange losses from exchange rate increases, a decline in average daily trading volume, increased volatility in investment and management environments, and reductions in credit card merchant fees, and although provisions will increase due to the financial authorities' conservative provisioning recommendations, the increase in net interest income will be greater, leading to an increase in net income for financial holding companies and banks in the first quarter."

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' interest income profitability than the loan-deposit interest rate spread (average loan interest rate minus savings interest rate).

The increase in NIM is expected to be larger this year than last year. Researcher Baek said, "In the second half of last year, both loan benchmark interest rates and additional rates exerted upward pressure on NIM, but this year, the loan benchmark interest rate will lead the NIM increase," adding, "As the loan benchmark interest rate rise 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."

Concerns about a slowdown in the NIM increase due to the phased normalization of financial regulatory easing measures are also expected to be minimal. The Financial Services Commission has granted a common three-month grace period for seven financial regulatory easing measures ending at the end of March, considering extensions of maturity and repayment deferrals, and plans to gradually normalize regulations expected to cause market shocks. Regarding the banks' consolidated Liquidity Coverage Ratio (LCR), immediate normalization could shock the banking sector and bond markets, so after a three-month grace period until June, the regulatory ratio will be gradually raised quarterly. The LCR is the ratio of high-quality liquid assets to expected net cash outflows over the next 30 days. Lowering the LCR increases lending capacity. To respond to COVID-19, the banks' consolidated LCR had been eased from 100% to 85%. The consolidated LCR regulatory ratio will remain at 85% until June, then increase by 5 percentage points to 90% from July to September, 92.5% from October to the end of the year, 95% in the first quarter of next year, 97.5% in the second quarter, and finally return to 100% from July onward. Researcher Choi said, "If banks' consolidated LCR ratios were normalized immediately, a downward pressure of about 2.5 to 3bp on NIM was expected, but with the gradual normalization over one year and three months, concerns will be significantly alleviated."