100 Trillion Won at Risk in Savings Banks Deposits... Shift Towards Mutual Finance and Banks [1mm Financial Talk]

The deposit balance of mutual savings banks has shrunk to around 100 trillion won. This is because the interest rate gap with commercial banks has remained at only about 0.1 percentage points (p), leading investment-savvy individuals to shift to relatively stable commercial banks or mutual financial institutions that still offer high-interest deposit products.

According to the Bankers Association on the 21st, the interest rates for 12-month fixed-term deposit products at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) were recorded at a maximum annual rate of 3.50-3.60% as of the previous day. On the same day, the Korea Federation of Savings Banks announced that the average interest rate for 12-month fixed-term deposits at 79 savings banks nationwide was 3.70%, only 0.10-0.20 percentage points higher.

On the 23rd, when domestic market interest rates and bank loan interest rates are rapidly rising, a banner displaying loan interest rates is hung on the outer wall of a commercial bank in Seoul. Photo by Jinhyung Kang aymsdream@

Typically, savings banks have attracted deposits by offering interest rates about 1 percentage point higher than commercial banks. However, since the second half of last year, when market interest rates peaked, they have been offering deposit interest rates with little difference from commercial banks, around 0.1-0.3 percentage points. This is in a situation where deposit attraction is the only means of funding, as they do not issue separate bonds.

The reason for savings banks' reluctance to actively attract deposits lies in their worsening financial performance. The total deficit recorded by savings banks nationwide last year reached 555.9 billion won, due to loan assets deteriorating amid sharply rising interest rates. Savings banks are focusing on reducing losses by shrinking both loan and deposit assets. According to the Bank of Korea's Economic Statistics System, as of the end of March, the deposit balance of savings banks decreased by 10.6% (12.2982 trillion won) to 103.74449 trillion won. During the same period, loan balances remained at 101.3777 trillion won. Both loan and deposit balances are on the verge of falling below the 100 trillion won mark.

In contrast, the deposit balances of mutual financial institutions have shown relative stability during the same period. Credit cooperatives recorded 137.2731 trillion won, up 0.62% year-on-year, and mutual finance institutions increased by 4.85% to 494.2216 trillion won. Saemaeul Geumgo saw a slight decrease to 260.0811 trillion won compared to 262.1427 trillion won in the same period last year, but it has performed well compared to August last year (243.7195 trillion won), when it was hit hard by a bank run (mass withdrawal of deposits), showing a 6.71% increase.

The commercial banks show a similar trend. As of the end of last month, the balance of fixed-term deposits at the five major commercial banks was 872.882 trillion won, an 8.33% increase from 805.7827 trillion won in the same period last year. A financial sector official said, "There is demand for high-interest deposit products at the last minute as some expect central banks around the world to cut benchmark interest rates as early as the second half of the year," adding, "Commercial banks have the merit of relative stability, mutual financial institutions offer high interest rates, but savings banks are in a situation where they have neither."

The hardship for savings banks is expected to continue for the time being. This is because the government has announced plans to crack down on real estate project financing (PF) sites. NICE Credit Rating recently forecasted in a report that the provision burden for savings banks due to the reclassification of PF project viability could reach up to 3.3 trillion won, and the net loss for this year could be as much as 2.2 trillion won. For savings banks, this means losing incentives to secure high-interest deposits repeatedly.