Deposit Balance of 114 Trillion KRW in April This Year... 6 Trillion KRW Decrease Since the Beginning of the Year
Interest Rate Competition in Major Deposit Channels
SBI, DB Savings, and Others Raise Parking Account Interest Rates
Retirement Pension Fixed Deposit Interest Rates Also Soar to the 4% Range
Savings banks are joining the interest rate competition to attract deposits, which are their "ammunition." This is because the overall deposit balance in the industry has started to decline this year. Since their funding methods are practically limited to savings and time deposits, they are increasing interest rate attractiveness to attract deposits.
According to the financial sector on the 28th, SBI Savings Bank, the industry leader, raised the interest rate on its Saida Bank checking account (for balances under 100 million KRW) from the previous annual 2.8% to 3.5%, an increase of 0.7 percentage points, starting yesterday. This marks the return of parking account interest rates to the 3% range after about three months.
Parking account products with interest rates in the 3% range can be easily found in the savings bank sector. DB Savings Bank also raised the highest interest rate on its mobile-only parking account, ‘M-DreamBig Regular Deposit,’ to an annual 3.5% (for balances under 50 million KRW) as of yesterday. Additionally, Daol Savings Bank offers the FiConnect Account with a maximum annual interest rate of 4% (including preferential rates), and OK Savings Bank provides up to 5% annual interest (including preferential rates) depending on the deposit amount through the OK Eut Baekman Account II.
Internet-only banks, which fiercely competed over parking accounts, are instead lowering their interest rates. This is due to the downward trend in market interest rates. Toss Bank, which sparked the parking account craze with its "daily interest" feature, reverted its interest rate to 2.0% annually starting in March. K Bank (2.40%) and Kakao Bank (2.20% annually) also lowered their parking account interest rates to the low-to-mid 2% range.
The reason savings banks are raising interest rates like this is attributed to the continuous decline in deposits since the beginning of the year. According to the Bank of Korea Economic Statistics System, the deposit balance of savings banks as of the end of April was 114.6159 trillion KRW, down more than 6 trillion KRW from the beginning of the year (120.7854 trillion KRW). Since savings banks have limited funding methods, they have no choice but to defend themselves by raising deposit interest rates. Another factor is that deposits attracted last year at 5-6% interest rates are reaching maturity.
A financial sector official said, “First-tier financial institutions have other funding methods such as bond issuance, and due to last year’s ‘reverse money move’ phenomenon, they are quite comfortable on the deposit side, so there is little incentive to compete for deposits.” He added, “Savings banks have limited funding sources and have experienced significant capital outflows since the beginning of the year, so they are responding by raising deposit interest rates.”
Mandatory Default Option for Retirement Pensions Next Month... Defending Customers with Interest Rate Hikes
Recently, savings banks have also raised interest rates on retirement pension products to protect deposit inflows. This is because the default option (pre-designated management system) for retirement pensions, which will be mandatory from the 12th of next month, excludes savings bank time deposits, raising concerns about customer outflows. If savings bank retirement pension subscribers do not instruct re-enrollment after maturity, their funds will move to retirement pension products of other financial sectors.
In response, savings banks are proactively raising interest rates to prevent losing customers. OK Savings Bank has increased the interest rate on retirement pension time deposits, including Defined Contribution (DC) and Individual Retirement Pension (IRP), by 0.1 percentage points from the 1st of this month, applying an annual rate of 4.3% (based on a 1-year maturity). This bank also raised the rate by 0.5 percentage points in April. JT Savings Bank has also raised the retirement pension time deposit interest rate by 0.1 percentage points this month, offering 4.2% for DC and IRP. Pepper Savings Bank has been offering an annual interest rate of 3.9%, up 0.2 percentage points from the previous month, since May. Compared to the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup), whose retirement pension time deposit rates range from 3.3% to 3.5%, these rates are nearly 1 percentage point higher.
Retirement pensions serve as a major funding channel for savings banks. According to the Korea Federation of Savings Banks, the deposit balance of savings bank retirement pensions has steadily increased from 13.4629 trillion KRW at the end of 2020 to 20.8988 trillion KRW at the end of 2021, and 30.4306 trillion KRW at the end of 2022. The Bank of Korea also emphasized the need to manage liquidity risks due to deposit outflows in its recently released 2023 first half Financial Stability Report, noting that some savings banks’ funding channels are heavily concentrated in retirement pensions and non-face-to-face deposits.
An industry insider said, “The implementation of the default option may increase volatility in savings bank retirement pensions, so we are monitoring the situation closely.” He explained, “However, since the retirement pension proportion cannot be reduced abruptly, we will need to maintain higher interest rates than banks for the time being while adjusting the proportion with general savings and time deposits.”
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