"Why Are Banks Making 5 Trillion Won?"... Uncomfortable Public Opinion Triggers a 'Warning' [Bank Interest Business]

Difficult Times for Ordinary People During COVID-19, Banks Receive Interest and Achieve Record Profits with Bonus Payouts
Top 5 Financial Holding Companies Post Net Profit of 5.2362 Trillion KRW in Q1
Hard to Accept Given Public Sentiment
Political Circles, Mindful of Public Opinion, Forced to Warn Banks

[Image source=Yonhap News]

[Asia Economy Reporter Sim Nayoung] "When Samsung Electronics or Hyundai Motor earns 5 trillion won in a quarter, people applaud, but when banks earn 5 trillion won, the public feels uncomfortable. The fundamental reason the government is asking banks to disclose the interest rate spread between deposits and loans is based on the negative sentiment that 'banks seem to be making too much money.' During the COVID-19 pandemic, self-employed people barely survived and turned to banks for help, and those who borrowed to the limit are paying their salaries as interest, yet banks are earning 5 trillion won, so it’s understandable."

On the 24th, a senior official in the financial industry cited 'public opinion' as the background behind the Blue House and financial authorities issuing a warning to banks about profiting from interest. The groundwork was laid by bank earnings such as "In the first quarter of this year, the five major financial holding companies posted a record high quarterly net profit of 5.2362 trillion won" and "Last year, the five major financial holding companies (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) recorded net profits of 16.8348 trillion won." In addition, three key facts fueled public dissatisfaction: ▲ Interest income accounts for 80% of banks’ total profits ▲ Banks paid employees bonuses equivalent to 300% of their monthly salary ▲ The interest rate spread between deposits and loans is widening.

High Proportion of Interest Income, Bonus Bonanza, and Widening Interest Rate Spread

Looking at each point, there is sufficient basis. According to the report "Analysis of Non-Interest Income Sources of Domestic Bank Groups and Implications" released by the Korea Institute of Finance in May, at the end of last year, 81.8% of the total profits of seven bank groups (KB Kookmin, Shinhan, Hana, Woori, BNK, DGB, JB) came from interest income, and 19.2% from non-interest income. Considering that the proportion of non-interest income for the top 100 global financial companies is 40.8%, it means that domestic bank groups rely almost entirely on interest income for their profits.

The scale of bonuses paid to bank employees in February this year was also record-breaking. KB Kookmin Bank paid bonuses equivalent to 300% of the monthly ordinary wage, an increase from the previous year (200% of ordinary wage + 1.5 million won). Shinhan Bank and Hana Bank also paid bonuses around 300% of the base salary. Woori Bank’s labor and management agreed on bonuses of 200% of the base salary plus an additional 100% of the base salary and 1 million won as morale boosters.

In this situation, the interest rate spread (the difference between loan interest rates and deposit interest rates) has been steadily increasing. According to the Bank of Korea, the interest rate spread of deposit banks (as of April) showed that the total deposit interest rate (1.01%) rose by 0.05 percentage points (p) from the previous month, and the total loan interest rate (3.36%) increased by 0.08 p. The interest rate spread was 2.35 p, 0.03 percentage points wider than the previous month. This is the highest level in 3 years and 10 months since June 2018 (2.35 p).

Professor Kim Daejong of the Department of Business Administration at Sejong University evaluated, "In these difficult economic times, banks have become like sitting and gathering money." This is also why the public’s view of the banks’ 'exclusive party' cannot be favorable.

Banks Must Lower Interest Rates Through Competition

There is also an opinion that the negative perception accumulated toward banks over the years has contributed. A financial industry official said, "Unlike now, in the past, bank employees were friendly to high-net-worth individuals but had a high-handed attitude toward ordinary customers seeking unsecured loans, and sometimes even scolded those with poor credit ratings," adding, "There were many documents required from customers and it was difficult to get loans, so people were not very favorable toward banks."

As bank loan interest rates rose sharply throughout the first half of this year, negative public opinion intensified, prompting politicians and financial authorities to sharpen their stance against banks. What should banks do to escape this harsh scrutiny? Professor Sung Tae-yoon of Yonsei University’s Department of Economics advised, "The purpose of the interest rate spread disclosure system is to encourage banks to compete on interest rates," emphasizing that it is important to induce interest rate reductions through competition among banks so that the public can feel the impact.