[Geuman Report] "Banks Benefiting from Rising Interest Rates... Could Become a Boomerang"

Last Year’s Bank Net Interest Income Reached 34.2 Trillion Won, Highest Since 2010
Large Profits Driven by Increased Corporate Loans and Expanded Loan-Deposit Interest Rate Spread
Concerns Raised That Falling Interest Rates Could Lead to Higher Costs

A counter at a commercial bank in Seoul. Photo by Jinhyung Kang aymsdream@

Domestic banks, which have made significant profits by leveraging corporate loans and the widening interest rate spread between deposits and loans during the interest rate hike period since 2021, may face a decline in earnings due to rising costs in the upcoming interest rate decline period, according to an analysis.

According to the "2024 First Half Financial Stability Report" released by the Bank of Korea on the 26th, the net interest income of domestic banks last year reached 34.2 trillion won, marking the highest level during the interest rate hike periods since 2010.

Since 2021, the proportion of interest income in banks' total profits has also reached 93%, significantly exceeding the long-term average of 87.8% since 2010.

The Bank of Korea analyzed that during this interest rate hike period, banks increased their net interest income through expanding corporate loans and widening the interest rate margin between deposits and loans. During interest rate hikes, the increase in corporate loans is usually distinct, and this time, combined with the COVID-19 pandemic, corporate demand for operating funds rose, and the bond market contracted due to high interest rates, leading to increased demand for bank loans.

In the case of domestic banks, the proportion of variable-rate loans is high, while deposits have a high proportion of low-cost deposits such as demand deposits, so the widening of the interest rate spread between deposits and loans during the interest rate hike period also contributed to banks' interest income.

However, the Bank of Korea warned that the corporate loans expanded during the interest rate hike period could become a factor in rising costs for banks in the future, such as increased loan loss expenses.

In the past, the greater the increase in corporate loans during interest rate hikes, the lower the profitability after the hike period, due to not only falling loan interest rates but also increased costs from loan defaults and other factors.

The decline in the interest rate spread between deposits and loans due to future interest rate decreases may also be a factor in reducing banks' earnings. In fact, recently, loan interest rates have been falling faster than deposit interest rates, causing the interest rate spread and net interest margin of banks to show a downward trend.

The interest rate spread on newly originated loans, which can be used to assess future profitability, has been declining since the first quarter of last year, mainly in household loans, suggesting that the contribution of the interest rate spread to future earnings will also shrink.

A Bank of Korea official stated, "The loan loss expenses arising from vulnerable sectors and the degree of reduction in the interest rate spread between deposits and loans will have a significant impact on banks' profitability," adding, "It is necessary to proactively reflect potential future defaults by setting aside loan loss provisions and to make efforts to smooth earnings structures over time."