Core Bank Deposits Accelerate Outflow... Low-Cost Deposit Ratio Plummets

Low-cost deposits decline for 5 consecutive months... Share falls below 40%
Rising bank funding costs inevitable due to accelerated core deposit outflow

[Asia Economy Reporter Song Hwajeong] As low-cost deposits, considered core deposits with a significant contribution to banks' profitability, are rapidly declining, the proportion of banks' low-cost funding has fallen below 40%.

According to the Bank of Korea on the 12th, low-cost funding of deposit banks decreased for five consecutive months until last month. It dropped by 136 trillion won compared to the end of June. Consequently, the share of low-cost funding shrank to 39%, which is an 8 percentage point decrease compared to the end of the previous year.

On the other hand, time deposits increased by 28 trillion won last month, showing the highest growth rate since October 2010, raising their share within deposits to 42%, surpassing the low-cost funding share for two consecutive months.

Low-cost deposits are deposits with low costs, allowing banks to raise funds at a low expense, making them a core source of bank profits. The interest rate on low-cost deposits is around 0.1% per annum, so the more low-cost deposits banks have, the lower their funding costs. However, as interest rates have continuously risen this year, funds have been flowing out of low-cost deposits. Additionally, due to the economic recession and sluggish stock and real estate markets, idle funds in the market, having lost investment destinations, have rapidly flowed into banks' time deposits and savings, causing the share of low-cost deposits to decline quickly. Initially, the share of low-cost deposits was expected to fall to the low 40% range by the end of this year and to the 30% range next year, but it already dropped to the 30% range last month, indicating that the outflow of low-cost deposits is progressing faster than expected.

Kim Doha, a researcher at Hanwha Investment & Securities, said, "At this stage, managing funding costs and soundness is crucial to respond to the rapid structural changes in portfolios."

Although the recent request by financial authorities to refrain from raising interest rates has slowed the rise in deposit rates, the ongoing sluggishness in the stock and real estate markets suggests that the concentration of funds into time deposits and savings is unlikely to change easily.

The outflow of low-cost deposits is also expected to impact banks' profitability. Banks have been raising funds through bank bonds to cope with the outflow of low-cost deposits, but bond issuance has stopped following a liquidity squeeze in the bond market. Ultimately, banks' funding costs are inevitably rising. If this situation continues, it is expected to have a negative impact on financial stability. Seo Youngsoo, a researcher at Kiwoom Securities, forecasted, "Considering banks' capital strength and profitability, if the rapid outflow of low-cost deposits leading to a shift toward high-interest deposits is not prevented, financial stability risks will inevitably expand sharply again."