Deposit interest rates at major commercial banks are rapidly declining. This is happening while loan interest rate premiums, which were raised to manage household debt, remain unchanged, causing the interest rate spread between deposits and loans to quickly widen to its largest level in over two years. However, the financial sector expects this trend to change starting in the new year as the burden of managing household debt portfolios decreases.
According to the financial sector on the 31st, Shinhan Bank will lower preferential interest rates by 0.50 percentage points on three products?Shinhan SOL (SOL) Account, Shinhan Ttaenggyeoyo Pay Account, and Shinhan Military Happiness Account?starting January 18.
For the Shinhan SOL Account, the preferential interest rate granted when one transaction among card, investment securities, or life is met will be reduced from 1.90% to 1.40%, and when two or more transactions are met, the preferential interest rate will be reduced from 2.40% to 1.90%, each decreasing by 0.50 percentage points. Additionally, for the Shinhan Ttaenggyeoyo Pay Account and Military Happiness Account, the preferential interest rate granted upon meeting conditions will decrease from 2.90% to 2.40%.
This reduction in deposit interest rates is not limited to Shinhan Bank. KB Kookmin Bank lowered the base interest rates on five types of fixed-term deposits and eight types of installment savings by 0.05 to 0.20 percentage points the day before. For example, the representative deposit product KB Star fixed deposit will decrease from 1.80?2.60% to 1.80?2.40%, a 0.20 percentage point drop. Additionally, Woori Bank lowered deposit product interest rates by up to 0.40 percentage points on the 12th, Hana Bank by 0.25 percentage points on the 20th, and NongHyup Bank by 0.05 to 0.25 percentage points on the 27th.
The reduction in deposit interest rates across banks reflects the Bank of Korea’s base rate cuts and the resulting decline in market interest rates. According to the Korea Financial Investment Association’s Bond Information Center, the one-year financial bond yield, which was 3.365% in early September, fell to 3.038% as of the 27th. The one-year bank bond yield is typically used as a benchmark for one-year fixed deposits.
While deposit interest rates are falling rapidly, loan interest rates remain steady, causing the interest rate spread between deposits and loans in the banking sector to rise quickly. According to the Korea Federation of Banks, the interest rate spread excluding policy-based low-income household loans for the five major domestic banks (KB Kookmin, Shinhan, Hana, Woori, and NH NongHyup) all exceeded 1 percentage point. This is the first time in 1 year and 8 months since March 2023 that all five banks’ interest rate spreads have surpassed 1 percentage point.
By bank, KB Kookmin Bank and NongHyup Bank saw increases of 0.09 and 0.07 percentage points from the previous month, reaching 1.27 percentage points each. Hana Bank rose 0.11 percentage points to 1.19 percentage points, and Woori Bank increased 0.21 percentage points to 1.02 percentage points. Only Shinhan Bank saw a slight decrease of 0.01 percentage points to 1.00 percentage point.
The reason behind this widening interest rate spread is that banks have maintained high loan interest rate premiums since August to manage household debt, thus not lowering loan interest rates. When the introduction of the second phase of the stress Debt Service Ratio (DSR) regulation was postponed from July to September, loan demand surged sharply in July and August. In response, authorities and banks implemented loan volume and limit restrictions along with raising loan interest rate premiums.
For example, KB Kookmin Bank’s one-year household fixed deposit interest rate fell from 3.37% at the end of July to 3.30% at the end of last month, a 0.07 percentage point decrease. However, the household loan interest rate excluding policy-based low-income loans rose monthly from 3.89% at the end of July to 4.09% in August, 4.39% in September, 4.59% in October, and 4.63% at the end of last month.
However, there are expectations that the trend of widening interest rate spreads will change starting in the new year, as the burden of managing household loan portfolios will be eased. In fact, banks have decided to lift some loan regulations from the new year.
A financial sector official said, “Since household debt portfolio management will restart from scratch in the new year, there will be some relief from related burdens. Given the political emergency and impeachment crisis, the economy is rapidly freezing, and loan growth is expected to be significantly lower than before, so there will be relative room for maneuver.”
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