New Loan-Deposit Interest Rate Spread Narrows for 3 Consecutive Months... Slower NIM Growth in Second Half

[Asia Economy Reporter Song Hwajeong] Due to the base interest rate hike, deposit interest rates have risen sharply, resulting in the newly issued loan-deposit interest rate spread shrinking for the third consecutive month.

According to Ebest Investment & Securities on the 2nd, the new loan-deposit interest rate spread of deposit banks in May was 1.66 percentage points (total loans - savings deposits), narrowing by 4 basis points (1bp = 0.01 percentage points) compared to April. Although loan interest rates rose by 11bp, savings deposit interest rates increased by 15bp. Following March and April, the deposit interest rate rose more sharply than the loan interest rate, causing the new loan-deposit interest rate spread to shrink despite the rapid rise in market interest rates. It is interpreted that the base rate hikes in April and May influenced the significant rise in deposit interest rates.

Regarding the balance-based loan-deposit interest rate spread (total loans - total deposits), which is more meaningful for bank profitability, it rose by 2bp, continuing the upward trend. The balance-based loan-deposit interest rate spread reached 2.37%, the highest level since June 2018, and has been rising for 10 consecutive months. Jeon Baeseung, a researcher at Ebest Investment & Securities, said, "Loan interest rate increases are first reflected in the balance-based rates, and deposit interest rate increases are expected to be reflected with a time lag, so the upward momentum of the balance-based loan-deposit interest rate spread will gradually slow down."

As the loan-deposit interest rate spread is expected to gradually narrow, the increase in banks' net interest margin (NIM) in the second half of the year is projected to slow down. Researcher Jeon explained, "With the balance-based loan-deposit interest rate spread maintaining its upward trend, the banking sector's NIM is expected to rise by more than 5bp in the second quarter following the first quarter, but the narrowing of the new loan-deposit interest rate spread will affect the balance-based spread with a time lag. Therefore, the banking sector's NIM in the second half is expected to rise at a slower pace compared to the first half due to increased funding costs."

Due to the rise in the COFIX rate and weak demand for housing loans, the spread on mortgage loans has been declining since the beginning of the year. With the resolution of household loan supply-demand imbalances and excessive regulatory measures to suppress the loan-deposit interest rate spread by financial authorities, the spread level is expected to continue decreasing in the second half of the year.