Low-Cost Deposits Vanish by 87 Trillion Won in One Year... "Reverse Money Move" Again This Year

Time Deposits Surge by 163 Trillion Won in One Year

[Asia Economy Reporter Yu Je-hoon] Due to the impact of asset market weakness following the base interest rate hike, demand deposits at commercial banks decreased by approximately 87 trillion won in just the past year. As low-cost deposits, which contributed to the expansion of the interest rate spread, declined like this, there are expectations that the banks' profitability improvement trend will also slightly slow down.

According to the financial sector on the 4th, the balance of demand deposits at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) as of the end of last year was 624.5866 trillion won. This is a decrease of 87.2164 trillion won compared to the same period last year (711.8031 trillion won).

Demand deposits, which are on-demand savings, correspond to low-cost deposits. Since the interest rate level is around 0.1%, banks can raise funds at a lower cost compared to bank bonds or time deposits with interest rates in the 4% range, thus greatly contributing to profitability.

The reason for the outflow of more than 80 trillion won in demand deposits over the past year is attributed to the asset market weakness caused by the interest rate hike. Typically, demand deposits are classified as investment standby funds, but the situation of representative investment destinations such as stocks and real estate deteriorated sharply throughout last year.

The KOSPI index stood at 2,236.4 at the end of last year, down 24.9% from the previous year, and the resulting market capitalization decrease exceeded 400 trillion won. The real estate market was similar. From January to October last year, the cumulative number of apartment sales nationwide was about 260,000, which is less than half of the previous year (about 700,000).

The reduced low-cost deposits flowed into time deposits. The balance of time deposits at the five major banks surged by 163.5007 trillion won from 654.9359 trillion won at the end of 2021 to 818.4366 trillion won, surpassing the balance of demand deposits. According to the Bank of Korea, the deposit interest rate based on new deposits at deposit banks rose nearly threefold from 1.72% in November 2021 to 4.95% in November last year. Time deposits thus served as a kind of investment refuge.

This trend is expected to continue for the time being in the new year as well. The U.S. Federal Reserve (Fed) plans to maintain its interest rate hike stance at least until the first half of this year, and the Bank of Korea is also likely to follow suit. A banking industry official said, "Although time deposits slightly decreased at the end of the year, this seems to be due to corporate year-end cash demand," adding, "With deposit interest rates in the 4% range, which is a level of returns rarely seen in the banking sector over the past few years, the reduction of low-cost deposits and the concentration on time deposits are likely to continue for the time being."