[1mm Financial Talk] Only 0.1%p Difference... Savings Banks' Deposits Lose Appeal Sharply

The gap in deposit interest rates between mutual savings banks and major commercial banks has narrowed to about 0.1 percentage points, resulting in a nearly 10 trillion won decrease in savings bank deposit balances over the past year. This is due to the savings banks responding to the ongoing high interest rate trend by reducing their operating assets such as loans and deposits. Industry insiders expect this trend to continue until the overall business environment improves, including a cut in the base interest rate.

According to the financial sector on the 14th, the average interest rate for one-year fixed deposit products at 79 savings banks nationwide was recorded at 3.78% as of the previous day. This is only 0.18 percentage points higher than the upper range of the average deposit interest rates (3.50~3.60%) of the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup).

As deposit interest rates rise in the banking sector, the balance of savings and fixed deposits is increasing. The secondary financial sector is also consecutively raising fixed deposit interest rates. The photo shows Welcome Savings Bank in Jung-gu, Seoul. Photo by Jinhyung Kang aymsdream@

The one-year fixed deposit interest rate at SBI Savings Bank, the largest savings bank, is also 3.70%, just 0.1 percentage points above the upper limit of the five major commercial banks' fixed deposit rates (3.60%). Considering that savings banks, which do not have separate funding methods such as bond issuance, typically attract deposits with an interest rate difference of around 1 percentage point compared to commercial banks, this is an unusual situation.

Such a narrowing interest rate gap is leading to deposit outflows. According to the Bank of Korea, as of November last year, the deposit balance of savings banks stood at 110.7858 trillion won. This is about 10 trillion won less compared to November of the previous year (120.2384 trillion won), when interest rate competition in the financial sector was at its peak.

The reason this level of interest rate gap has been maintained since last year lies in the deteriorated business conditions of savings banks. As the high interest rate environment continued, savings banks, fearing negative interest margins, began reducing loan assets. Consequently, with reduced funding needs, they lost the incentive to attract deposits by maintaining high interest rates. According to the Korea Federation of Savings Banks, nationwide savings banks recorded a cumulative net loss of 141.3 billion won as of the third quarter of last year.

Negative factors continue to mount. Recently, regulatory authorities have ordered second-tier financial institutions, including savings banks, to strengthen their provision reserves to actively sort out real estate project financing (PF). For bridge loans that have not been converted to main PF for a long time, 100% of the expected losses at the 2023 year-end settlement must be reflected in the provisions. With the increase in delinquency rates and the growing burden of provision reserves, savings banks are structurally compelled to downsize further.

In a recent report, Korea Credit Rating Agency pointed out, "The provision coverage ratio for real estate PF at savings banks as of the end of September last year is generally still insufficient," adding, "For companies with high quantitative and qualitative risks in real estate PF, the burden of additional provision reserves is expected to increase financial indicator volatility."

As the situation worsens, some savings banks are caught up in merger and acquisition (M&A) rumors. The financial authorities also proposed last year to relax the approval criteria for ownership, control, and mergers by the same major shareholder, especially for non-metropolitan savings banks, allowing expansion of business areas. The aim is to revitalize M&A in the savings bank sector.

Industry insiders believe this trend will continue until the situation fundamentally improves, such as through a base interest rate cut. A financial sector official said, "The absolute scale of PF in savings banks is not large, so the burden is not very high, but the problem is the base interest rate," adding, "Until loan operations normalize with a base rate cut, savings banks have no incentive to raise funds at high interest rates. For the time being, both the business environment and deposit interest rates are likely to continue on the current trajectory."