Competition in Deposit Interest Rates Extends to Commercial Banks...Will It Affect Earnings?

[Asia Economy Reporter Yu Je-hoon] As the era of full-scale interest rate hikes arrives, not only the secondary financial sector but also commercial banks are launching high-interest deposit and savings products one after another, engaging in deposit competition. The financial sector expects that with this deposit interest rate competition and the financial authorities' increasing pressure against 'interest profiteering,' the banking sector's performance in the second half of the year may show a relative decline.

According to the banking sector on the 29th, major commercial banks have recently been releasing fixed deposit products with interest rates in the 3% range. Hana Bank offers an annual interest rate of 3% to customers with a maturity of one year or more, while Woori Bank introduced a 'special fixed deposit' product providing 3% interest for a one-year maturity and 3.2% for a one year and six months maturity.

Among fixed savings products with even higher interest rates than fixed deposits, products offering interest rates in the 5% range are also emerging one after another. NH Nonghyup Bank is selling the 'NH Walking Korea Savings' with a maximum annual interest rate of 5.85%, and Shinhan Bank is offering the 'Shinhan SOL Manhae Savings' with up to 5% annual interest, limited to 300,000 accounts.

[Image source=Yonhap News]

Interest rates of 3-5% on deposits were previously almost exclusive to the secondary financial sector, but recently, commercial banks' pursuit has been considerable. According to Kiwoom Securities, in the fourth week of June, the fixed deposit interest rates of banks and savings banks, based on the top three companies, rose by 0.87 percentage points and 0.3 percentage points from the previous month to 3.13% and 3.53%, respectively. This means commercial banks' rate increases were faster.

The reason commercial banks have also entered the deposit interest rate competition is attributed to the decline in low-cost deposits, which had contributed to the expansion of net interest margin (NIM). Immediately, low-cost deposits at the five major commercial banks decreased by about 8 trillion KRW in April and only increased by about 900 billion KRW last month. This contrasts with fixed deposits increasing by about 19 trillion KRW during the same period.Low-cost deposits, considered 'investment standby' funds, pay interest around 0.1%, thus having played a key role in expanding commercial banks' profitability. However, as the interest rate hike period began, the outflow to deposit and savings products accelerated, leading to competition to retain these funds.

Because of this, there is also talk of a possible deterioration in the banking sector's performance, which posted a 'record-breaking' scorecard in the first half of the year. While deposit interest rate competition is intensifying, financial authorities have publicly mentioned interest profiteering and demanded shared pain from banks. A representative case is some commercial banks lowering mortgage loan interest rates after Financial Supervisory Service Governor Lee Bok-hyun mentioned interest profiteering.

The financial sector is concerned that such deposit interest rate competition could increase instability across financial companies. If commercial banks attract market funds based on relative stability and interest rate competitiveness, the financial conditions of relatively weaker mutual finance institutions and specialized credit finance companies may worsen. Kiwoom Securities stated, "As commercial banks hold most of the market funds, relatively weaker non-bank entities such as savings banks and mutual finance may face difficulties securing liquidity," adding, "Deterioration in funding conditions for non-banks and credit finance companies will first increase the risk of insolvency in relatively vulnerable real estate project financing (PF) and other real estate finance sectors." Reporter Yu Je-hoon kalamal@